0:09

Hello and welcome to The Insight by Oaktree

0:11

Capital. I'm Anna Szymanski

0:13

and today I'll be having conversations with

0:15

three Oaktree thought leaders, including co-chairman Howard

0:18

Marks. We'll discuss topics

0:20

from Oaktree's recently published quarterly letter roundup.

0:22

We'll consider what a normal credit market

0:24

is, what a recession in 2024 might

0:27

mean for liquid credit, and what opportunities

0:29

we're seeing in life sciences today. So

0:33

for my first discussion, my guest needs

0:35

no introduction. Howard, thanks so much for

0:37

joining me. It's a pleasure

0:39

to be here with you, Anna. In

0:42

your short piece in the latest

0:44

roundup, you ask investors to consider

0:47

what's normal, and specifically in

0:49

relation to financial markets and interest

0:51

rates. Can you explain why

0:54

you think it's so important for investors

0:56

to question what people perceive as

0:58

normal? You have to be

1:02

working in this business more than 43 years before 1980

1:04

to have ever seen anything

1:09

other than declining interest rates and

1:11

ultra-low interest rates. So

1:13

it's only natural to conclude that

1:15

declining and ultra-low interest rates are

1:18

normal, but maybe they're not. You

1:20

have to understand history and understand

1:22

where the current period fits into

1:24

history and understand how it's different

1:27

from normal and what it is

1:29

that shaped those differences. And

1:32

only if you look into these things

1:34

can you make a great decision with

1:36

regard to the actions to take. Now,

1:39

it gets hard because how many people

1:41

were working more than 43 years

1:43

ago and still are, and how many

1:46

of those still have their faculties and can

1:48

remember the 70s and so forth. I came

1:50

up with something a couple of weeks ago

1:52

that I hope will help get this across,

1:54

but you know Einstein said that the definition

1:56

of insanity is doing the same thing over

1:58

and over and expecting... a different result.

2:01

I think another version of insanity is

2:03

doing something in a new environment and

2:05

expecting the same result. So

2:08

if the environment fundamentally changed, that if

2:10

in the coming years we will not

2:12

have interest rates which are A, consistently

2:15

declining and B, as low as they

2:17

were in the 09 to 21 period

2:20

when the Fed funds rate averaged to

2:22

half a percent, then maybe other things

2:24

will work better than the things that

2:26

worked in that period. I think this

2:28

is significant. Why do

2:31

you think it's so challenging for investors

2:33

and people in general to reset their

2:35

idea of normal? Oh, if you made

2:37

money doing one

2:39

thing over the last 43 years, it's

2:41

kind of hard to say, you know what, that's

2:43

out the window. And that organization that I put

2:45

together, I got to get rid of those people

2:48

because I need a new skill set. And everything

2:50

I ever told you is no longer true

2:53

to the clients. This is

2:55

complicated by our human nature, if

2:57

that's the right term. But

3:00

I've been making reference to a book,

3:02

Mistakes Were Made, but Not by Me,

3:05

by Carol Tavras. And

3:07

it's about cognitive dissonance and

3:09

self-delusion. And you have a

3:11

position, you've had it for

3:13

a while, you're convinced it's right, it

3:15

has worked. And now

3:17

you get some information coming in, which

3:19

says, no, you

3:22

have to change your position. Our

3:24

brain is very good at getting rid of

3:26

that information. But if there

3:28

are real changes, we have to respond

3:30

to them. And the great economist Paul

3:32

Samuelson once said, when events

3:35

change, I changed my mind, what

3:37

do you do? And I think

3:39

in investing, there's nothing that's permanent.

3:42

You can't say always, never, can,

3:45

can't, will, has to,

3:48

you have to be open to possibilities as things

3:50

change. I mean, I've seen a lot of changes

3:52

in my life. If I stuck with what I

3:54

believed in 1969, I'd be in big trouble today.

3:57

We're recording this in December of 2019. And

4:01

you've written four memos this year. They

4:03

are lessons from Silicon Valley Bank, taking

4:05

the temperature, fewer losers or more winners

4:07

and further thoughts on sea change. Looking

4:10

over that year of memo writing, does anything jump

4:12

out at you? Well,

4:15

I mean, it's kind of a

4:17

microcosm because you've got short-term market

4:19

type events, Silicon Valley. I

4:21

thought it was important to respond

4:23

to that, mainly to A, understand the

4:26

nature and risks of the banking industry,

4:28

but paid to make the case that

4:30

it was not systemic and

4:32

did not presage a lot of contagion.

4:36

Fewer losers or more winners was at the

4:38

opposite end of the spectrum is what I

4:40

would consider a philosophy piece. There was no

4:42

advice in there that would make anybody any

4:44

money in the next year. But I think

4:46

that in investing, it's extremely important to be

4:48

thoughtful about what you do. How

4:50

do you intend to reach success? How do you

4:52

define success? What are the things

4:54

you're going to have to do to reach it? You

4:57

can't be a superior investor without

4:59

having either fewer losers than the

5:01

average or more winners than the

5:03

average or both. Which one

5:05

will you favor? Which one is more realistic

5:07

for you? So I thought that

5:10

was kind of foundational. Taking

5:12

the temperature was, look back at

5:14

history, also foundational, but explaining that

5:16

on the one hand, our investment

5:18

philosophy says we don't do macroforests. On

5:20

the other hand, I did

5:22

it five times in that period and I

5:24

explain how. On the third hand, all absolute

5:27

rules have to go out the window sometimes.

5:29

But the point is we did it on rare

5:32

occasion. If you wait for

5:34

the fat pitch to the market's crazy

5:36

high or crazy low, you might be

5:38

able to make contact with the ball

5:40

and they work. But I think it

5:42

was really important to show people that

5:44

it really did come from taking the

5:46

temperature of the market and not from

5:48

subject matter expertise with regard to, for

5:50

example, supply mortgages that I hadn't heard

5:52

of. So I hope there was a

5:54

good span of memos and that people

5:56

enjoyed them. I think that's reflective

5:58

of the last 34 years. rates

8:00

in 24? When?

8:03

How often? These things

8:05

are really hard to say. The answer is different from

8:07

three months ago. When people thought they

8:09

had the right answer three months ago, it

8:11

turned out it wasn't the right answer. What

8:13

makes them think today's answer is the right

8:15

answer? But the point is we're in that

8:17

middle zone, what I call the zone of

8:19

reasonableness. The market is not too high or

8:21

too low. The outlook for the economy is

8:23

not convincingly positive or negative. Nothing smart to

8:25

do today in those regards except

8:28

that given the change in interest

8:30

rates and where they are

8:32

and what the outlook is, and I think

8:34

that when we do this two years from

8:37

now, victory against inflation will have been declared

8:40

and the Fed funds rate will probably

8:42

be about three and a half, maybe

8:44

three. But that,

8:46

I believe, is going to be

8:48

the norm for the coming years.

8:50

So you'll have some stability, but

8:52

you won't have continuous declines. And

8:56

that's important. That shapes the

8:58

question of what strategies we'll

9:00

do best. The other

9:02

thing to note is still you

9:04

can potentially get equity type returns

9:06

from credit with less risk in

9:08

better companies than used to be the

9:10

borrowers, with less leveraged companies than

9:12

used to be the borrowers. And

9:14

these returns, whether they're approaching TAN for

9:17

liquid credit or above TAN for

9:19

private credit, these are fully competitive

9:21

with equities, more than most people

9:23

need, and they can be

9:25

earned with greater safety than with equities.

9:27

So I continue to think that the

9:29

opportunity is compelling. Before

9:31

we end, do you have any other final thoughts? This

9:34

has been another year like

9:37

the last 54. You

9:40

start the year, sometimes you

9:42

think you know what's going to happen. Sometimes

9:44

you know you don't know what's going to happen. And

9:47

usually it turns out that the time when you were

9:49

wrong was when you thought you knew what was going

9:51

to happen. We never really know what's going to happen.

9:53

The great Peter Bernstein once said,

9:56

essentially, we walk every day into

9:58

the unknown. It's much

10:00

more profitable to acknowledge that we

10:02

walk into the unknown than

10:04

to have a very definite opinion of what's

10:07

going to happen that heavily and take the

10:09

chance of being wrong. So, we

10:11

will enter 24 knowing that we don't

10:13

know what the future holds but paying

10:15

great attention to our individual investments. That's

10:18

what we've done to date and we think

10:20

is the way to success. Well,

10:22

on that note, thank you so much for joining me. It's

10:24

always a pleasure and thank you, Anna. For

10:31

our next conversation, we'll be discussing

10:34

liquid credit markets, where we

10:36

are today and where we might be going in

10:38

the future. For this

10:40

discussion, I'm thrilled to be joined by

10:42

David Rosenberg, co-portfolio manager of Oaktree's

10:45

Global Credit, U.S. High Yield Bond

10:47

and Global High Yield Bond strategies.

10:50

David, thanks so much for joining me. Thanks for having

10:52

me. In the liquid credit

10:54

piece that appears in the recent

10:56

roundup, you and your co-authors argue

10:58

that if we do finally enter

11:00

into a recession, below

11:02

investment grade credit may not behave the

11:05

same as it has in previous dislocations.

11:07

So, just to begin, can you explain

11:09

what you mean by this? Yeah, so

11:11

if you think about recession and

11:14

what that means, usually recession

11:16

is a surprise. Something

11:19

really bad happens. There's either excess going on

11:21

in a sector or maybe a commodity price

11:23

moves in an unexpected direction. It

11:26

forces everybody flat-footed, and everyone has to react

11:28

and handle it. And often, frankly, a lot

11:30

of the faults are driven by the fact

11:32

that people were planning to go and refinance,

11:34

and now the recession surprises everyone and shuts

11:37

the market down, and now they can't, and

11:39

they have to restructure. What

11:41

I think is going to be different this

11:43

go-around is the fact that this

11:45

recession by no means is any form of

11:47

a surprise. As a strategist told me the

11:49

other day, this is the most predicted recession

11:52

in history. So everybody's talking about

11:54

this potential recession, which means, by the way,

11:56

that people are preparing for it. So

11:58

if you think about... 4%

14:00

and 5% until 2020. That

14:02

changes the way the market reacts to all

14:04

this. I think that the smoothing of

14:06

the default impact is going to be

14:08

a very big driver of how things behave

14:10

this go around. What about recovery rates?

14:12

How might they be different in this cycle?

14:15

Well, that's very important. I think that

14:17

one will be to the negative, which

14:19

is when you think about recovery, I think

14:21

for bonds, recovery rates likely be very

14:23

similar as they've been historically. For

14:26

history, for us, we're calling around 50 cents on the

14:28

dollar for the market, maybe a little bit lower

14:30

on recoveries. But the story, which I think is

14:32

going to be unique this go around, is going

14:34

to be in the broadly syndicated loan market. In

14:37

the loan market, recoveries have generally been very

14:39

good. Call it north of 60 cents on

14:41

the dollar because you have a first lean.

14:43

That first lean is supposed to matter when

14:45

it comes to recovery. But the other thing

14:47

that you have is in the old version,

14:50

you think about leveraged buyouts, which is generally

14:52

where the riskiest deals come in the markets

14:54

and your typical leveraged buyout years past would

14:56

be you'd have some loans, below those loans

14:58

you'd have some bonds, below the bonds you'd

15:00

have some equity, and you'd take the company

15:02

private. The recovery from the

15:05

loans in those scenarios was buffered

15:07

by the fact that the loan did not see a

15:09

dollar of loss until the bond below it was totally

15:11

wiped out. So you have this cushion. Now,

15:14

what we've seen is the shift of what

15:16

we call loan only capital structures are very

15:18

clever in how we name things. Loan only

15:20

capital structures basically the private equity sponsors looking

15:22

at the loan market, when the loan market

15:24

moved to Covenant Light, which is another big

15:27

driver of recoveries. We'll talk about it in

15:29

a second. When the loan market moved to

15:31

Covenant Light, private equity sponsors looked and said,

15:33

well, if I can finance my leveraged buyout

15:35

with just loans, and I have

15:37

no call protecting my loans, that gives me all

15:39

this optionality. If I want to refinance my capital

15:41

structure and pay myself a dividend, sell the company

15:44

early, whatever it may be, and that's valuable. Optionality

15:46

always occurs to the value of the equity. And

15:48

so you started to see more and more leveraged

15:50

buyouts financed with only loans. And I

15:52

had this conversation with Howard Marks the other day where I said,

15:54

well, what does it mean when you have a first lean and

15:56

a structure where the whole structure is first lean? And he laughed

15:59

and said, yeah, you're senior. but senior to what? Because if

16:01

you're senior to the equity, what does that really mean?

16:04

I think that's what the market's going to have

16:06

to realize, this go around, is that when you

16:08

have a loan only capital structure, the recovery should

16:10

be no different than the bond in the previous

16:12

years when there was a bond below you because

16:14

there's nothing to cushion you. The other

16:17

reality is with Covenant Light, back when you

16:19

used to have Covenants, you had the ability

16:21

to pull the rug out early. If things

16:23

are going wrong, the lenders were able to

16:25

stop the music and say, I'm hoarding all

16:27

this cash, you can no longer pay coupons

16:30

to your bond holders, your dividends, your equity

16:32

holders, because I'm hoarding all this cash for

16:34

my recovery. That was a very powerful tool

16:36

to improve recoveries for loans. With Covenant

16:38

Light, you can't do that. The lenders

16:41

have to sit on their hands until eventually the

16:43

company has a maturity or runs out of cash.

16:45

When that happens, that means that as all that

16:47

time is playing out more money is being paid

16:49

out in coupons to bond holders if there is

16:52

bond holders or potentially leaking to equity holders and

16:54

that dilutes your recovery. The combination

16:56

of those two, I think you're going to see

16:58

a much lower recovery rate in the defaults that

17:00

you do see in the loan market

17:03

this go around. They've touched on a few

17:05

really important trends. Another trend that we've obviously

17:07

seen over the last second has just been

17:09

the dramatic growth in credit markets overall. What

17:12

impact do you think this increase in scale

17:14

could have on the opportunity set that credit

17:16

investors see if there is a recession? Yeah,

17:19

I think it has a big impact and I think

17:21

opportunity set is the right way to put it Anna,

17:23

which is I'm a performing credit guy. I

17:25

go around the world talking to people about performing credit and

17:28

I get the question all the time, how

17:30

can you talk about performing credit when you

17:32

also have this other side of Oakview that's

17:34

all excited about distressed credit? The answer, quite

17:37

frankly, is the market is so much

17:39

bigger that we can all look at it from

17:41

different angles but yet be very happy, which is

17:43

I'm very happy to look at a potential recession

17:45

where you can say, hey, the default rate, it's

17:47

around 2 percent today. Could it go to 4

17:49

percent for bonds, maybe 5 percent for loans?

17:51

Somewhere in that zip code seems reasonable. But

17:53

the 30-year average default rate for bonds is

17:56

4. So that's nothing dramatic as we said,

17:58

it's not the 10. For me,

18:00

I've got 96% of the market that

18:02

I think is going to perform and there's a lot for me

18:04

to do. For a distressed

18:06

investor, that 4% is

18:08

a small sliver of a much larger pie. So

18:10

there's plenty for them to look and do and

18:13

there's a target rich environment for them as well.

18:15

And so as the market grows, it

18:17

allows us all to be a lot more thoughtful about how

18:19

we want to deploy our capital, is a lot more to

18:21

pick from. So

18:23

let's switch topics now a little bit.

18:26

We are recording this in early December

18:29

and we recently saw a pretty meaningful

18:31

rally in a number of asset classes,

18:33

especially high yield bonds. What

18:36

would you say has been the primary cause of

18:38

this and how durable do you think this rally

18:40

might be? Yeah, I'm

18:42

always a pessimist or cynic. I like to

18:44

say professional pessimist, but people call me cynic

18:46

when it comes to these kind of things.

18:48

But there has been a dramatic rally and

18:50

I think there's two things driving this rally.

18:52

One is this concept of a no landing,

18:55

as everybody's been talking about. It's funny, early

18:57

in my career, soft landing, I always thought

18:59

meant no recession. Now soft landing means benign

19:01

recessions, they've made up no landing, have no

19:03

recession. The market always has to have its

19:05

terms. And so that

19:07

no landing camp is getting louder and louder,

19:09

that this might be the first time ever

19:11

that the Fed and the US, for example,

19:13

is fighting inflation to this degree without pushing

19:15

the economy into recession. And I suppose there's

19:17

a first time for everything, but I'm not

19:19

a believer that this is going to be

19:21

that case. As the market

19:24

thinks about that possibility, risk assets rally, as

19:26

everyone's looking for risk and ways to benefit

19:28

from the fact that this may play out.

19:30

The other part of the rally, I think,

19:32

is driven by this narrative of a pivot.

19:35

Everyone's waiting for rates to go back down. It's funny, I

19:38

think over the last year, the most

19:40

common question I've gotten from investors is

19:42

when's the Fed going to pivot? Talk

19:44

about fundamentals, you talk about markets, all people want to talk

19:46

about, oh, that's all well and good, but when's the Fed

19:48

going to pivot? And I joke and tell people, the Fed

19:50

doesn't know when the Fed's going to pivot, so how am

19:52

I supposed to know? But what I've really come around to

19:55

tell people is, look, I can't tell you when the Fed's

19:57

going to pivot. I can't tell you how the

19:59

Fed's going to pivot. But I can tell you

20:01

why, and I find it fascinating that

20:03

the market is on the side of why. Because

20:05

the Fed doesn't pivot to prop up the stock

20:07

market. As much as everybody wants that to be

20:09

the mandate, it's not actually the mandate of the

20:12

Fed that's supposed to prop up the economy, and

20:14

those aren't always the same thing. And so I

20:16

tell people, the Fed will pivot when

20:18

something bad happens, when there's a crisis. We

20:20

have a global pandemic, and the world is

20:22

shutting down. They will aggressively pivot in order

20:25

to keep things operating and keep the economy

20:27

from shutting down. And that means, if you

20:29

think about this narrative that's driving the rally

20:31

in the market, the narrative is simply

20:33

this. We're going to have a

20:35

recession, but it's going to be benign. Nothing really

20:37

serious to worry about, as we talked about the

20:40

false pickup, but not to any really scary levels.

20:42

And despite it is benign recession, we're going to see

20:45

interest rates go down 100 basis points

20:47

before halfway through the year 2024. And

20:50

I understand why everyone wants that to be true. It would be

20:52

amazing. Benign recession, 100 basis points drop

20:54

in rates, all risk assets would rally. Debt would trade

20:57

up, equities would trade up. We can all high five

20:59

and talk about how smart we are and count all

21:01

the money that we've made. It

21:03

just doesn't make any sense, because if we

21:05

do truly go through what is a benign

21:07

recession, there is no reason for interest rates

21:09

to go down 100 basis points. Everything's fine.

21:11

The recession was benign. And conversely, if you

21:13

have 100 basis points drop in rates before

21:16

we get to the summer of 2024, then

21:18

there was no soft landing. Something really bad happened.

21:20

And so I think that's the part that the

21:23

market is seizing on, is the market's gone through

21:25

this schizophrenia of the pivot is going to happen,

21:27

if it's not going to happen, it is squarely

21:29

back in the camp of the pivot is going

21:31

to happen. And that is a big driver

21:33

of the rally. But to me, part of

21:35

what may make this rally sputter out or

21:38

even go the other way is the reality

21:40

that the Fed may very well not pivot.

21:43

What I remind people is the goal of

21:45

the Fed isn't to touch 2% inflation, claim

21:47

victory, and then bring rates back down, which

21:49

by the way is inflationary. The goal of

21:51

the Fed was to stay at 2% inflation,

21:54

which may require them to keep rates where

21:57

they are for a little while. And if

21:59

that happens... and

24:00

the opportunity investors have going into

24:02

24, when you

24:04

have a potential recession. Because you think about

24:06

it, at Oaktree you always say, look, there's

24:09

no great bargain if you're going to make

24:11

more money by taking more risk. Anybody can

24:13

do that. You want to get more return,

24:15

more risk, there's really nothing exciting about that.

24:17

The art of this business is to manage

24:19

the risk down. That's where the value add

24:21

comes in my opinion. What we have right

24:24

now, which is so unique, is the market

24:26

is handing investors this opportunity to say, I

24:28

can sell my equities and go buy debt, which

24:31

is bringing my risk meaningfully down,

24:33

but actually preserve the same expected

24:35

return. That's to me, one of

24:37

the more exciting trades I've seen

24:39

in my career. In the investment

24:41

world, we call this a no-brainer,

24:43

this trade. The ability to bring

24:45

your risk down without having to

24:47

meaningfully impact your expected return is

24:49

very valuable and something that's really

24:52

exciting. For

24:59

our final conversation, we are going to

25:01

be zeroing in on one specific area,

25:03

life sciences lending. For this

25:05

discussion, I'm very happy to be joined by

25:07

Amman Kumar, co-portfolio manager of

25:10

Oaktree's Life Sciences Lending Platform.

25:12

Amman, thanks so much for joining me. Thanks

25:14

for having me, Anna. To begin our discussion,

25:17

I want to talk a little bit

25:19

about the Life Sciences Public Equity Market.

25:21

Can you discuss some of the

25:23

significant shifts we've been seeing here over the

25:25

last few years? Yes, it's certainly

25:28

been dramatic. I don't think it's an exaggeration

25:30

to say that in the last four years,

25:32

we've witnessed some of the most severe volatility

25:34

actually in the history of the life sciences

25:36

industry. Company valuations

25:38

soared during the pandemic. This

25:41

is due to both elevated patient

25:43

demand as well as breakthrough medical

25:45

technologies like mRNA vaccines, which were

25:47

disseminated both widely and quickly. What's

25:50

interesting though, is that the S&P Biotechnology

25:52

Index, also known as the XBI, hit

25:54

its all-time peak in February of 2021.

25:58

But since then, biotech valuations

26:00

have declined quite sharply. To

26:03

put this into context, the XBI index through

26:05

the end of September 2023 is still almost

26:07

60% below that February 21 peak, having declined

26:12

double digits for each of the last two years. What

26:15

has been behind this weakness? I

26:17

think there are four main reasons

26:19

behind the volatility. Firstly, we've seen

26:21

a reversal of some of the

26:24

COVID pandemic era spending trends. Secondly,

26:26

we've had some changes in the

26:28

regulatory environment, particularly by the FDA

26:30

and the U.S. Thirdly,

26:32

we saw a collapse of the

26:34

SPAC market, which had provided an alternative

26:36

source of capital and an avenue to

26:38

a public listing for some earlier stage

26:40

companies. And most recently,

26:42

there's been a direct and indirect

26:45

impact from rising interest rates. In

26:47

particular, we've seen generalist investors pull

26:49

back from investing in companies with

26:51

limited free cash or generation, but

26:53

ongoing R&D needs. This

26:56

public market weakness that you're describing, how

26:58

has it impacted the opportunity sent for

27:01

life sciences direct lenders? It's

27:03

led to a significant increase in non-dilutive

27:05

financing opportunities. For example, at

27:07

Oak Tree, we've been a top three lender in

27:09

life sciences over the last four to five years.

27:12

We've seen an increase of approximately 50% in

27:15

the pipeline for direct lending opportunities in

27:17

the last just 18 or

27:19

so months. I think one of the

27:21

reasons for this is that the life

27:23

sciences sector has always been a capital

27:25

intensive industry with companies continuously investing in

27:27

clinical trials to bring new products to

27:29

market or investing in outright topics. Historically,

27:32

this financing came almost exclusively from

27:35

the equity markets via follow on

27:37

rounds or IPOs. However,

27:39

for these fast growing companies, the cost of

27:41

equity is very high. And over

27:43

the past 10 to 11 years, you've

27:46

started to see a select group of

27:48

knowledgeable lenders who can provide non-dilutive financing

27:50

to these companies instead. And

27:52

While that non-dilutive financing space has

27:54

been growing at a double digit

27:56

Kega in its own right, the

27:58

recent equity market volatility.. He has

28:00

actually pushed more companies to look for other

28:02

solutions given that the I markets have either

28:05

been shot and follow and rounds have actually

28:07

been very difficult. It's. Interesting,

28:09

Even large companies today that will once

28:11

five billion or ten billion in market

28:14

size maybe down sixty percent and share

28:16

price today. So we've been seeing more

28:18

management teams and boards looking at these

28:21

alternative direct lending options. As

28:23

I think everyone knows, in recent years we

28:25

settling seen a slowdown in and then a

28:27

activity in any areas and I'm curious with

28:30

everything you're describing. Hear, what have we seen

28:32

with and an activity in Biotech over the

28:34

last year? and Twenty Twenty Three. And what

28:36

do you expect to see in Twenty Twenty

28:38

Four? We started to see a

28:41

pick up and I mean I actually

28:43

by strategic and life sciences focus private

28:45

equity firms in specific subsectors on. I

28:47

believe there are two key drivers for

28:50

this. one is low valuations on the

28:52

second is substantial dry powder on the

28:54

sidelines. In. Terms of

28:56

what we expect to see and twenty

28:58

twenty four given valuations remain low. For

29:00

example, they're still over two hundred companies

29:03

with negative enterprise values And importantly given

29:05

the length of time this volatilities actually

29:07

been going on. For now, I do

29:09

expect continued emanate on more opportunity for

29:11

private debt financing is a lot of

29:13

these companies seek to extend their forward

29:15

liquidity runway. And. What

29:18

would you say? Id types of

29:20

life sciences companies that are most

29:22

attractive to sponsors or large pharmaceutical

29:24

companies right now. Currently we're

29:26

seeing a lot of interest in

29:28

the oncology space. On the Cns

29:30

space see it as being Central

29:33

nervous System. For example, companies bringing

29:35

products that would treat migraine, dementia

29:37

Schizophrenia to market for sponsors was

29:39

seeing more platform plays whereby they

29:41

will look for an initial chorus

29:43

of platform. And can then

29:45

both on additional complimentary products over. For.

29:48

Strategic is a little bit different it seems.

29:51

They. Are more back filling to their

29:53

pipelines and product offerings. Interestingly about seventy

29:55

percent of all us to a pools

29:58

in the Us are actually now how

30:00

from small to mid sized companies as

30:02

opposed to large farmer or device companies

30:04

and give any large companies typically have

30:07

very strong balance sheets. I

30:09

would say it's an attractive time for them to

30:11

buy some new assets as opposed to always developing

30:13

in house which has a very long lead time.

30:16

That makes sense. We. Been talking a

30:18

little bit about opportunities, so let's switch

30:20

briefly to risks. What would you say,

30:22

are some of the biggest risks for

30:25

private investors in Biotech today? There

30:28

are three main risks that we deal with. A

30:31

nice all and no particular order. Regulation.

30:34

Reimbursements and competition.

30:37

To manage these risks. I think you

30:39

need to do two things really well. The.

30:41

First would be very careful structuring of

30:43

the credit agreements with bespoke covenants for

30:45

each company Does This allows us to

30:47

set an early said the company deviate

30:49

from its managed from based plan. And

30:52

allows us to work with management seem to

30:54

effectuate a remedial action plan if needed. And

30:58

then the second important element to mitigate risk.

31:00

Is. Careful selection of companies and assets to

31:02

lend against in the first place. For.

31:05

Example: We eliminate a lot of regulate

31:07

we risks by only focusing on companies

31:10

that a post regulatory approval. So that

31:12

means with commercial assets already on the

31:14

market. Similarly, One

31:16

of the key pillars of the

31:18

Oh Pre licensed platform is the

31:21

focus on innovative need to have

31:23

a lifesaving products which often have

31:25

limited competition during the tenure of

31:27

alone, but are less impacted by

31:29

changes in regulation or reimbursements. Is.

31:31

The come to the end of this conversation

31:34

just anything else. Any final thoughts that you

31:36

have about. What we've seen in this area

31:38

in Twenty Twenty Three and what you expect

31:40

to see And Twenty Twenty Four. I

31:43

think that the current opportunities both

31:45

vast and growing. we have a

31:48

number of secular tell wins within

31:50

life sciences, supporting this growth including

31:52

aging population, increased health care spending

31:54

in most western countries, and breakthrough

31:56

technologies. this is not

31:59

commodities lending We don't compete

32:01

with banks in this space and given

32:03

the structuring and science complexities involved in

32:05

each deal, we can generate better pricing

32:08

and covenant protections. So

32:10

overall, given that life sciences spending isn't

32:12

really correlated with what's happening in the

32:14

wider economy, I expect the

32:16

next few years to be very busy and

32:18

attractive from a lending perspective, regardless of whether

32:20

there's a softer or hard landing in the

32:22

economy. Well, Aman, that was super

32:24

interesting and thank you so much for joining

32:26

me. My pleasure, thank you. Thank

32:30

you. Thank

33:00

you. This

33:30

recording contains information and views as of the

33:32

date indicated. and

34:00

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34:02

without notice. Oaktree has

34:04

no duty or obligation to update

34:06

the information contained herein. Further,

34:09

Oaktree makes no representation and it

34:11

should not be assumed that past

34:13

investment performance is an indication of

34:15

future results. Moreover, wherever there

34:17

is the potential for profit, there is also

34:19

the possibility of loss. Certain

34:22

information contained herein concerning economic trends

34:25

and performance is based on

34:27

or derived from information provided by

34:29

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34:31

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34:34

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34:36

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34:38

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34:40

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34:44

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35:03

2023 Oaktree Capital Management, LP.