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00:00Talk to us about over the last couple of weeks both here in Vegas and last week in Los Angeles we heard have credit investor after credit investor after credit investors say there is no value in public markets the only place we can make any real money is in private markets. Why do you agree. Well you have to two types of arbitrage that are available. You have the regulatory arbitrage right. If the banks pulling back from the market. Yeah G.E. Capital Nine had eight hundred billion three hundred billion and now selling their business and it creates an opportunity so that so the regulators created an opportunity in credit and the other side is the illiquidity of the middle market even the corporate bond market. I mean the quotes that you get from the banks are not right when we try to sell out of the hedge fund and it's quoted ninety four ninety five. The real quotes eighty three ninety six or something really wide . Well the quote is ninety four ninety five the price is very different and that's a real problem for transparency right . There's no there's no actual transactions no reporting of transactions. So you can take that and be in the inside spread like to think about it New York Stock Exchange market maker. So what we have and what you're saying is really interesting because again going back to these credit specialists they've all been warning about a liquidity problem that's right and the credit you're saying there's already a liquidity problem there is a great liquidity problem. Only 5 percent I think of corporate bonds trade in the middle market. It's very trade by appointment where the agent on a billion six transactions you have to call the agents say I'd like to sell Who should I sell to. It's like nineteen eighty three again. Isn't that amazing that this is the last market really. And the other problem is Wall Street can't take it up smart right. They can't put up capital to the equity ever. You know they did a little bit . They took some on balance sheet but when now it was worse . That's a very good point when the market just locates its illiquid anyway and that illiquidity really it's incumbent I think on alternative providers hedge funds and others to zig when the market would zig when others zag. So in other words the market just locates it's guys like us that'll come in there by a fundamentally good credit at 70 even though it may be worth 100. Right after the financial crisis if someone said Maitland he does direct lending. He's in the Cielo business. He loves private market. Right. I would say Are you kidding me. Why would he ever do that. I may ask forward five years and you are right back in that jam are you not worried that we are facing a bubble and how are you going to get out. So we have a micro bubble. I'll point out in 2008 we took our company. We took one of our companies public 5th Street Finance Corp. two financial services firms. We were one of them. We had capital and no one had capital and that was really one of the reasons I was able to build Fifth Street to the asset to the credit asset manager it is today. Today I totally agree with you the upside is limited. There's significant downside. You have to wait for the fat pitch in order to swing and it's coming but for the credit alternative providers we're going to have real real edge in the market. We can really capture Alpha when it does look at is there no risk though in the migration of credit investors like yourself from the public markets to the private markets . Yes the credit analysis right that you bring to the problem is the same whether you're buying a debt security or whether you're buying a derivative instrument or whether you're underwriting alone. But the characteristics of that investment and the way that they perform the liquidity that they offer you a totally different. Okay liquidity the offer is different but let's let's just say the public markets are in a bit of trouble. How many your covenant lite or seventy five percent in art and I think the Fourth and Fifth Street Finance Corp. our larger BDC less than 1 percent are confident like we have Providence in all our deals because we control them we structure them and when the market does locates if you don't have confidence boy you're a CAC lover better about the loans you're underwriting directly than the ones that you would buy some kind of a package or a wrapper and a public market. Besides the fact that really the debt to beat out the public markets are really expanded and high yield market. The hedge that the hedge fund idea is short by J then knowing the high yield bankers are facilitating deals that are covenant lite. Yeah knowing that liquidity is so poor knowing that you have taken businesses from banks because of regulation. Yes. Would you ever invest in a financial ever again. You know it's funny people when we talk to institutional clients people say all right. Can I understand your business . And I said it will take a lot of work. I mean David Einhorn wrote the book fully some of the people all the time about the Allied Capital collapse which I'm an acknowledgment section I'm privileged to be acknowledgment section and in reading his book you could see the level of detail that you need to be able to go through and the analysis that you have to go through to understand financials and understand even business development companies. So I say unless you're really going apply the time to understanding them it's probably very difficult to invest in them. Last question for you credit ETF. Yes tremendous innovation or bomb waiting to explode. You know I think a credit ETF is just another vehicle so that people who are not doing the full fundamental analysis of what's going on can put a variety of credits and call it something. I think the fundamental analysts right real credit houses is what you want to invest in. Whether it weathers Fitz street or another credit house then there's several of them that actually originate structure and create loans. That has true alpha but the credit ETF solve the liquidity problem for those who want to get into the credit game and simply can't navigate those waters not when their markets turn right. Because long only isn't generally talked about the role of alternatives. Yesterday at our panel in salt and it was really great because what's the role of alternatives in the market. The role of all terms in the market are to act as shock absorbers to zig when others act. And without the alternatives there's no way in a dislocation we're gonna be able to have any liquidity .

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Is There Value in Public Markets vs. Private Markets?

Fifth Street Asset Management CEO Len Tannenbaum discusses his alternative investing ideas. He speaks on "Market Makers" from the 2015 Las Vegas SkyBridge Alternatives Conference.(Source: Bloomberg)

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