E432: $24 Billion Investor on Private Credit, the Psychology of Winning & Fear of Failure

Is private credit really in a bubble, or are investors looking for risk in the wrong place? Theodore “Ted” Koenig is Chairman and CEO of Monroe Capital, a $24 billion private credit firm. We break down how private credit grew from a niche alternative to a $2 trillion asset class, why financing shifted from banks to private credit after the financial crisis, and the two ways Ted believes lenders can generate alpha. We also discuss the flood of retail capital into private credit, why Monroe focuses on the lower middle market, the dangers of prioritizing AUM growth over investor returns, and the personal drive and tradeoffs behind building Monroe.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Monroe Capital has grown to $24 billion firm deploying $10 billion a year. But when you started in 2001, it was a completely different market. What made you want to enter private credit?

• 0:12Speaker 01

  Excellent question. So my background is accounting and finance and law. I practiced law for about 14 years. I did M and A and bank financing law, mostly for private equity transactions. And what I noticed is that throughout my career, we worked with banks on transactions. Banks were relatively inflexible in terms of their financing because they had regulations and they had certain ways they had to do deals. The only two non-banks that existed at that time were GE Capital and Heller Financial. And they weren't regulated, so they could structure deals in all kinds of more creative ways and customize transactions for companies. They were doing larger deals.

• 0:57Speaker 01

  There was nobody really doing lower middle market or smaller deals in a non-bank format. So I thought that as opposed to working 24/7 and billing hours as a lawyer, that I could take what I learned as a lawyer, take what I learned representing PE funds and banks, and apply that to transactional finance and do it the way GE Capital and Heller Financial were doing it in a way that was more user friendly for smaller companies, more Main Street America. And I started Monroe in 2001 and managed to recruit three guys that were excellent bankers. One was a credit guy, one was an origination person, one was an underwriter that joined

• 1:41Speaker 01

  me in this new venture. They were each making $100,000 a year and had families and they were a little reticent to do it, but I convinced them that we were going to be successful and this was going to be the new form of finance as the future unfolded.

• 1:58David Weisburd?

  I'm so curious because not that much innovation is done in the financial markets. What made you so confident that you were on the cusp of a new asset class?

• 2:09Speaker 01

  I didn't. I just was tired and burnt out being a lawyer and I wanted to build something. I'm an entrepreneur at heart and I'm a business builder. And I thought that if I could get a clean shot at building a banking product, a finance product, the good news is banking's been around forever. Transaction finance was being done by banks. And I was confident that if I could come in and do the same type of financing, but with less rules and providing more creativity, that we could build a business. Now, at the end of the day, I didn't know how big of a business we could build. You know, I thought we could build a business, we could put a couple hundred million dollars, three, $400 million to work and it would be a success.

• 2:54Speaker 01

  So what happened is that I got into it and I realized that there was a big, much bigger market here than I had anticipated and that I had to realign my thinking into how to build a business as opposed to just do deals.

• 3:12David Weisburd?

  And your original goal was three, $400 million. Today, as I mentioned, you have $24 billion deployed. What gets you up every day to keep on building the business bigger and bigger?

• 3:23Speaker 01

  Another good question. I think part of that is being an entrepreneur and part of that is being afraid to fail. Every day I get up and I think about how we can grow the business, what we can do, what new areas we can get into. I was always a competitive ball player. I was a basketball guy. If I didn't do this, my first goal was to be a professional basketball player. That didn't quite work out the way I wanted, so I had to default into my next goal, which was accounting and finance. So it's the competitive spirit. It's about winning. It's not about dollars. It's not about numbers. I keep telling people that the way to be successful in whatever career that you want

• 4:08Speaker 01

  to pursue is not by being satisfied. It's always by moving the goalposts out. Once you have an achievement, don't rest on your achievement, don't rest on your laurels, don't read the newspaper clippings. One of my favorite analogies is I'm a sports guy, I'm a big basketball guy. Michael Jordan was a Chicago guy. He played basketball in Chicago, probably the greatest athlete, the greatest basketball player ever.

• 4:34Speaker 01

  He never read the newspapers. Every week, every day, people would write all these great superlatives about him. They said he was the greatest, he did this, he did that. And he just went out every game and won. And he went out and he worked hard and he practiced hard and he performed. And that's what I tell my people, that's what I tell mentor, my mentees when I speak to a lot of trade organizations. I say, don't focus on your accomplishments. Focus on the work that you've done, the effort you've put in to get there and then to keep moving your goals. Because if you keep moving your goals, you'll continue to strive and achieve. If you don't do that, you're never going to get to the next layer. You're never going to get to the next level of achievement.

• 5:20David Weisburd?

  Many of your peers, many of which I've gotten to know as well, these business builders in finance, many of them are billionaires. They all say the same thing, which is, I love the competitiveness. I love to compete. Do you think when they say that, they mean that they like to self-actualize or do they like to beat others? Where's that competitiveness really coming from?

• 5:41Speaker 01

  I think it's more self-actualization. It's not so much beating others. You know, the real people that I look at that are, have been successful and that are role models.

• 5:55Speaker 01

  What I've tried to do is I've tried to lead from an organizational standpoint and drive change and drive efficiency. And what happens is that when you focus on others and compete, you want to beat somebody, you want to do something better than somebody else. And that's not a great motivation to build businesses. What I'm focused on and what I've always been focused on is I want to lead. I want others to compete with me. I want to create space and I want to build Monroe and let others compete with me. Let them figure, try to figure out what we're doing. Let them figure out how to chase us.

• 6:38Speaker 01

  It's much more effective from an organizational standpoint if you instill that kind of mindset in your company and force people to drive and be as successful as they can within an organizational setting and then let others compete with you and don't focus on what other people are doing. We've never done that.

• 6:57David Weisburd?

  This episode is presented by Juniper Square, the operations partner for private markets.

• 7:04David Weisburd?

  There's this meme in the market about different sources of fuel when it comes to motivation. Have your sources of fuels changed or evolved over your career or has it always been about self-actualization from the very beginning?

• 7:18Speaker 01

  It's something within me. I mean, this is something that's innate, I think, in people. Some people have that desire to, to get up and go and attack and work and win. I think that's a special talent and a special gene because some days you don't want to do that. Sometimes life throws you curveballs. Sometimes you get stuck. And what I try to tell people is that every day is a different day. Get up, go at it. Whatever happened yesterday is yesterday. Don't read the news. Get out and look at the future and plot your course.

• 7:58Speaker 01

  And a lot of the entrepreneurs that, you know, you've had on your podcasts and that I've been lucky enough to interact with, they share that vision. It's not so much focus on failure. Everyone is afraid to fail, but in spite of that, they're willing to accept failure to get on to the next level. And I think you have to have that mindset as an entrepreneur and as a business leader that it's okay to fail. Failure doesn't determine who you are. What determines who you are is not getting up and trying again.

• 8:33David Weisburd?

  You might be surprised by my reference, but I had Jake Paul probably a few hundred episodes ago and I pressed him on this issue, got to spend an entire day with him. He's just so driven and I'm just so curious about why he's now driven. Now he's starting a gaming company, a consumer packaging company. And he said, he just loves playing games and winning games and he thinks business is one of the most fun and most challenging games to play.

• 9:00Speaker 01

  Everybody's got their own motivation. I'm an entrepreneur.

• 9:06Speaker 01

  I want to win. I'm a competitor. I've been a competitor since I was, you know, four years old. I competed in soccer. I competed in basketball. I competed in baseball. I competed in football. And there's nothing like a team sport. But everybody has some inner drive that makes them different. You know, for me, you know, I can tell you that my father was a Holocaust survivor. And he lost his two sisters. He lost his mother. He lost his father. He was alone at 13 years old in Poland. And he was in four different concentration camps. And he was liberated out of Dachau by the Allied Army. And there were a thousand permutations of why he should not have

• 9:48Speaker 01

  lived. He's managed to survive in the most difficult circumstances anybody could ever imagine. And he made his way to Israel. He fought in the independence war in Israel. After the independence war, Israel, he came to the US as a new, minted immigrant. They sent him to Korea. And that's how he got a citizenship by fighting in Korea. So he came back to the US. And he had been through the first 24 years of his life, one of the worst possible experiences. I was the first one to go to college in my family. So I felt internally that I was driven to do something. I was driven

• 10:29Speaker 01

  to do something that he couldn't do, that nobody in my family could ever do or achieve before. So I had a fire burning. I didn't know this always at the time. I just competed as a kid, like any other kid on the ball fields. But I had this fire that was burning inside of me that other people didn't have. And I wanted to drive a legacy for my father, because he could never do what I was able to do. So I was carrying around this baggage for a long time, until I finally kind of understood myself better as I got older, that I was different, that I had this drive that other people didn't have. And I think a lot of it was because of my background.

• 11:11Speaker 01

  And everybody's got something in their background that drives them in some way, shape or form. And I think that the best business people can channel that drive and use that drive to, in a good way. Lots of people use adverse experiences in a bad way. And it debilitates people, or it freezes people. I'm the opposite. I look at an adverse experience, and I take that in, and I use that. And I tell people this when I speak to a lot of the younger people that we work with, that take whatever you can, and turn that into fuel to make you do what you don't think you can

• 11:55Speaker 01

  do. And certainly, in my case, I think that was part of it.

• 11:59David Weisburd?

  It's so fascinating. I'm also the son of immigrants. My parents came here when I was four years old, before I could really remember. They came here with $600. My mom worked two minimum wage jobs. So I did feel this burden of executing and being excellent from the very beginning because of my parents' sacrifice. But it is interesting, the same people in the same situation can, their interpretation, I know it sounds trite, but how you interpret something, in many ways, me and my sister kind of interpreted the situation very differently. I interpreted it as a mandate. And I interpreted as why I would be successful. And that this was this competitive advantage that I would have going forward, versus my sister kind of took a different perspective to it.

• 12:43Speaker 01

  It's real. I've got two brothers and a sister as well. And we're all different. My brothers think I'm crazy for the level of effort, the work I do. We've got today, offices in Seoul, and Abu Dhabi, and Sydney, and London, and Paris. Spend a week or so a year in each one of those offices. I spend a fair amount of time with our larger clients throughout the world. And they think I'm absolutely crazy for doing what I do. Different people, I guess, it's just a different way to motivate and DNA. And I think what I tell people is, use that however it is to motivate yourself to be better.

• 13:21David Weisburd?

  Speaking of motivation, competitive advantage, when I look at the private credit market today, there's thousands of firms. I think when you started, there was a small handful. But today, there's thousands of them. How does Monroe Capital differentiate itself in this market?

• 13:36Speaker 01

  That's another good question. There's 550 private credit firms today. Of that 550, 40% have been around less than 10 years. Four of the 550 have been around for more than 20 years, which is fascinating statistic. Which means of the 550, less than 15 were around before the great financial crisis. So it's a relatively young industry. It's been the fastest growing asset class among private assets. It's a $2 trillion market today. It'll be a $5 trillion

• 14:16Speaker 01

  market in five years. Everybody has gotten into it. Every big Wall Street asset manager, when I was going through my early days in my career, KKR, Carlyle, Apollo, Ares, those were private equity funds. Today, those businesses are two thirds private credit. And it just shows from a market standpoint, the sheer amount of volume of credit in the marketplace. When I started my business, over 20 years ago, 24 years ago, 90% of the financing for transactions for LBOs, for buyouts, was done in the banking system. 10% was done outside the banking system.

• 15:01Speaker 01

  To give you some perspective, David, today, 90% of the financing for transactions and buyouts are done outside the banking system through private credit managers. 10% are within the banking system, the regulated banking system. And the reason for that is the GFC. During the financial crisis, banks failed. They didn't fail because they had bad loans. They didn't fail because they had bad assets. Yeah, there was a subprime contagion. That was an issue. But that didn't tank banks. What tanked banks was liquidity challenges. And the liquidity challenges were that,

• 15:39Speaker 01

  at the time, banks were underwriting credit. So in other words, Apollo, or Ares, or Carlyle, or KKR, would go to the banks. They would do an acquisition. The banks would give them a commitment for $6 billion, $7 billion, $8 billion to finance a transaction. The banks never intended to hold that commitment. They intended to distribute it. So they were in origination and distribution. It was a fee income business at that time, before the financial crisis. And what happened was, it always worked. There was always pension funds, insurance companies, sovereign wealth funds, investors to buy that credit, because it was paying higher than market rates.

• 16:21Speaker 01

  What happened during the financial crisis is, all of a sudden, the music stopped. And it stopped within a 30-day period in late 2007. When that music stopped, these banks had tremendous amounts of commitments out to private equity funds, that they couldn't fund, because nobody was buying. And when nobody bought those, the government had to step in. And we created this thing called TARP at the time. And that provided liquidity to the banks. Government provided liquidity. The taxpayers provided liquidity under TARP. And that TARP money went to the banks, so the banks could digest their commitments. Otherwise, banks would fail. And we had a number of banks fail

• 17:04Speaker 01

  at the time. Wachovia Bank failed. Citibank failed. Wells Fargo almost failed. So the government came in, and they protected the banks by giving them all this TARP money, so that from a liquidity standpoint, they would survive. So what happened? The Fed, Congress, and everybody else that was a regulatory body said, we're never going to allow this to happen again. We're never going to allow taxpayers to have to bail out banks because of LBOs, and all these private equity firms that were committing big dollars. So they passed a bunch of legislation and regulations that said, there's, banks can't do this. We don't want banks to be in this business. We're going to put very

• 17:45Speaker 01

  high capital requirements on banks to do leveraged buyout loans. We're going to put very low capital requirements to do accounts receivable financing, inventory, equipment, real estate financing, because those are good loans. We're going to put very high capital requirements, regulatory capital requirements on banks to do leveraged buyouts, which are quote unquote, bad loans. So what happened after the crisis? Exactly what the regulators thought would happen. All of that business went out of the banking system, and it had to go somewhere. It went into the institutional market that was better able to digest that. And we needed asset managers to asset manage that, because pension funds and insurance companies weren't set up to underwrite and to manage those

• 18:30Speaker 01

  loans. So asset managers got into the space. And slowly but surely, from about 2010 to 2017, about five to seven years, we saw a tremendous influx of asset managers into private credit. And the big private equity firms said, look at all this capital flowing into the space. Let's get into the act as well. So we saw all the big asset managers get into it. And then, private equity firms, we saw insurance companies, we saw worldwide asset management firms get into the space. And what's happened is that because more and more credit was being provided, the

• 19:14Speaker 01

  buyout business got bigger and bigger throughout 2000, and from 2010 to 2020, we saw more and more credit available. And it became the hottest and fastest growing private asset class. But it all came from the financial crisis, where the regulators kind of changed the rules. I was there for seven years, six years before the financial crisis. So we had a little bit of an advantage. We had already built the business. We built our model. We knew what we wanted to do. We knew the market we wanted to play in. And I just stepped on the gas in 2010. And from 2010 to 2020, we grew our business at probably 25, 30% a year, compounded. And there's no other

• 19:57Speaker 01

  industry or business that has done that. I laugh. I tell people, we're not a finance firm. We're a AI chip company. We're like Nvidia. We've grown our business during that period of time. Now, people laugh at me when I say that, because the business has slowed a little bit, but it will continue to grow, only because banks today are still burdened by a lot of the regulatory challenges from the financial crisis.

• 20:24David Weisburd?

  You've said that there's only two ways to generate alpha in private credit. What are they?

• 20:30Speaker 01

  One is to make more money than the next guy. And the other way is to lose less money than the next guy. Private credit is a fixed income, not making 2X, 3X, 5X your money. What we get paid to do is generate returns, safe, stable, consistent returns. Pension funds need that because every year pension funds have retirements. They have health and welfare benefits. They have member benefits. They need somewhere between eight to 9% of their capital liquid, and it has to go out to members. Insurance companies write insurance policies for on lives, probably average 40, 50 years.

• 21:11Speaker 01

  And they need to know that they have liquidity to pay out those insurance companies. On an actuarial basis, insurance companies need about 6% a year to pay out. So if you look at that, insurance companies and pension funds, which make up the largest segment of the institutional investor segment throughout the world, they need a product and they need a product that provides consistent, stable returns, irrespective of inflation, deflation, recession, COVID, financial crisis, wars in the Middle East, wars in Europe, problems in Asia. And those institutional investors depend on those returns.

• 21:53Speaker 01

  The one place that there's been a consistent history of returns throughout all different economies, throughout all different interest rate environments, throughout all different pandemics, has been private credit. And insurance companies and pension funds come to rely on that and making their own plans and in making their own allocations. So private credit has become an institutional staple for portfolios because of the return. So as that has continued to be dependent on, it's become a much more important asset class. And within the private credit universe, there's all kinds of private credit. There's upper market private credit. There's middle market private credit.

• 22:38Speaker 01

  There's lower middle market private credit. There's real estate private credit. There's venture debt private credit. There's specialty finance private credit. There's asset-backed finance private credit. And it's a very large universe. What we've tried to do at Monroe is find our space that we're really good at and build a moat around it. And we've focused on the lower middle market. We love the 35, $40 million EBITDA sized companies and below. The reason why we love that is because Wall Street's not focused on it. Wall Street wants the bigger private credit. They want the larger companies, the upper middle market. The lower middle market is the largest segment of the US population.

• 23:21Speaker 01

  50% of the workforce of the US employment is in the lower middle market. It's Main Street America. There's 200,000 middle market companies in the US. It's a third of the GDP of the US. And we've focused on this market from the start. And we've tried to do is build the biggest and best firm in that space.

• 23:46David Weisburd?

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• 24:30David Weisburd?

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• 25:15David Weisburd?

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• 25:59David Weisburd?

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• 26:43David Weisburd?

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• 27:26David Weisburd?

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• 28:11David Weisburd?

  Check the show notes for your exclusive discount code. I look forward to seeing you there. Call out the elephant in the room. A lot of people believe private credit is in a bubble. And you referenced this earlier. It's not as hot as it was a couple of years ago. In what ways is private credit in a bubble? And in what ways is it not in a bubble?

• 28:31Speaker 01

  The good news is when there's a lot of growth and there's some success, the media picks it up, the Wall Street Journal, Financial Times, Bloomberg. They do a lot of interviews, do a fair amount of TV and radio. And it's just gotten on everyone's attention. Institutional investors have always been in private credit and they will always continue to be in private credit for the reasons that I said. The reason why there's been much more attention devoted to private credit is that the retail investors, the high net worth investors have found private credit. About five years ago, for the same reasons the institutional investors

• 29:13Speaker 01

  have come to depend on private credit, high net worth individuals, doctors, dentists, lawyers, plumbers, electricians, people like you and I, put private credit in their portfolios today because they want a safe 10, 11% return. When interest rates were zero five years ago, there was no better investment in the world than private credit. You went to buy a treasury, US treasury, it was paying 2%. 1.5%. You go to put your money in a bank account, it was getting 10 basis points. So what happened was... First, it started with the retirees, people that were living on fixed income,

• 29:53Speaker 01

  older Americans and others. And then it went down into the 40s and 50 year olds. Today, private credit is in most people's portfolio for the same reason of institutional. So we saw the hottest area of growth over the last five years in private credit has not been from the institutional market. It's been from the high net worth retail market. We started a fund about six years ago for just high net worth people. And the reason why we did it is I was playing golf with a couple of money managers and they said, Ted, how do we get into your funds? You know, all the institutions are in Monroe, but how do we do it? And I said, well, we've got three or $4 million minimums and you put in for that and we can add you as an investor. They said, no, no, no, no.

• 30:38Speaker 01

  We've got investors that want to put $100,000 and we get 250 regular investors to be able to get a piece of this. So we came up with a 40 act vehicle that allowed for individual investors, changed our business. And we started that about six years ago. Today, that fund's got about $8 billion in that. 15,000 individual shareholders that average about $100,000 per investment. So if you think about that, that's massive. And I'm just one small piece of the market. Look at them, a lot of the big money managers, you know, I've got probably 15 people selling that product. The RIA firms around the country,

• 31:21Speaker 01

  Apollo, Ares, they've got 300 people selling that product. So what's happened is there's been a tidal wave of money that's come into private credit from high net worth individual investors. And when that happens, I told the Financial Times a few weeks ago, high net worth individual investors are like fish. They all swim in a school. So they all come in together into a product. And when there's some adverse reaction, AI, let's say, or software concerns, or the market blips, which it has in software, they all tend to swim out at the same time in schools. So what we saw over the last 12 months, which was

• 32:03Speaker 01

  a phenomenon I'd not seen before, is that over the last five, six years, we've had all these high net worth investors pour into private credit as an asset class. And then about a year ago, almost a year ago, we saw the war, we saw AI come to fruition, which cast a lot of doubt on software companies, are software companies going to be replaced? Are they going to, is AI going to take it over? Are they going to change? Are they going to be obsolete? And 38% of private credit of the market, the M&A market, is software. And that's just a fact. So when we saw the software concentration, we saw the AI,

• 32:45Speaker 01

  there was a lot written about software going to be obsoleted by AI. A lot of the high net worth investors, retail investors, all of a sudden paused their allocations to private credit, thinking that it was going to be an issue. Now, we're nine months later, hasn't been an issue. There was a lot of talk about it. We haven't seen it. Institutional investors are getting in more now because they're taking advantage of the dislocation. I think that the individual retail investors will start coming back again now, fourth quarter, because they've now seen nine months of good performance. And it's much to do about nothing. But that was a blip. And that's why that's lot has been written in the last six months

• 33:30Speaker 01

  about is private credit in a bubble? Are we seeing a change of pace there? Are we seeing some type of a market shift? No, I don't think that's the case. I think it's just a normal cycle. And private credit, we're 50% loan to value in our deals. So if you think about it, we're at the top of the capital stack, we're senior secured. You know, the real risk is in the equity side, private equity market. You're not seeing a lot written about, you know, private equity risk. But that's where the real risk is owned today, is the private equity. Private credit, the debt is going to get paid first and events before the equity. So I think the market's going to come to understand that there's

• 34:12Speaker 01

  some private equity risk in these companies and the market's going to digest that.

• 34:18David Weisburd?

  We spoke last time about the retail channel. Mark Rowan, one of your competitors at Apollo, has pledged $1 billion of firm investment, not of capital into investments, but just from the balance sheet to go after retail. How much have you invested in the retail channel? And how much do you expect to invest?

• 34:37Speaker 01

  Mark is a great guy. He's a good friend of mine. Mark's balance sheet is much bigger than my balance sheet. They go after the upper part of the market, but we go after the lower part of the market. I'm very, very focused on returns. From my standpoint, we are putting as much resources into high net worth RIA retail investing as I can. We're using as much of our balance sheet in this area because I believe today we're about, if you look at us, we're about 30% in Monroe, high net worth retail, 70% institutional. My goal is to get to about 50/50 retail institutional within the next three or four years. And that's a big move. I think the retail market will continue to come our way.

• 35:22Speaker 01

  I'm not a public company like Mark's. I don't have to chase, I'm lucky, I don't have to chase quarter over quarter earnings. I don't have to chase quarter over quarter growth. I don't have to report that to shareholders or analysts. I like where I am in that. I can look at long-term investments. I can make long-term decisions for the firm. And that's how we've been successful, is, you know, focusing on long-term strategies and not getting caught up into comparing my quarter over quarter growth, or my spending, or my asset management, or AUMs to the next guy.

• 35:57David Weisburd?

  You mentioned earlier this 25% compounding growth in your asset management firm. Has this grown come by compounding year after year? Or were these dislocations in the market where you kind of had this spurt of growth at times?

• 36:15Speaker 01

  Yeah, no, it's year over year. The last 15 years, we've grown our firm at a 25% CAGR, compound annual growth rate. That's unheard of. Other firms have grown as well. But what we've tried to do is we haven't had acquisitions. We haven't done this with inorganic growth. It's all been organic growth. And we've done it through, I tell people in our business, it's like a baseball game. Every inning, the score is on the board. You can't hide. Your returns drive your business. If you're generating good returns, you're going to get good growth because institutions find you, pension funds will find you, consultants will find you, the phone will ring, one of the largest. And

• 37:00Speaker 01

  we're in the Middle East. We've got a bunch of sovereigns in the Middle East. So it's all about performance. And it's all about your score. This is not a business you can hide in. There's some businesses and investing that you can hide. You can say, well, I've got a seven year period, I'm a private equity firm, and all my realizations will come seven years from now. So hang in, don't worry, everything's great. And then the clock will tick in the last, basically the last year for your results. We're not like that. We pay returns every quarter. So every quarter of every year, we're sending out return money,

• 37:40Speaker 01

  dividends to our investors. So in our industry, that's the key. You can't afford to be short-sighted. The firms that take risk and try to outperform, taking some strategies that are not long-term strategies, don't tend to be around. It's the most Darwinistic portion, I think, of the investment business, because every quarter, we've got to disclose what our returns are and pay our investors. So for us, it's playing the long ball. It's the long term. It's making sure that our systems, infrastructure are what needs to be. I mean, I've got 350 people in a firm, you know, managing $24 billion today. Many of my competitors that are five,

• 38:25Speaker 01

  six, seven times my size have half the amount of people because they just do things differently. You can do bigger transactions, put out much more money with less people. Ours is more of a blocking and tackling and a people intensive business. So we've had it operate that way.

• 38:43David Weisburd?

  It's interesting that you use this analogy of the scoreboard, because your public competitors are also looking at the scoreboard. Their scoreboard is just a different scoreboard, which is AUM and asset growth. So everybody's driven by these incentives, but you are more aligned with your LPs than some of your peers.

• 39:00Speaker 01

  It's fascinating. And that's one of the reasons, David, that we've grown, in my opinion, is that our alignment is purely with our investors. If I would be like some of my Wall Street buddies, you know, they're aligned by AUM growth and revenue growth. If you look at the analyst reports, nowhere does it say what their investor returns are. And I think it's a fascinating way to look at the business.

• 39:23David Weisburd?

  It's even worse where their public shareholders only value them on their management fees, or primarily value them on their management fees. They basically see as carry as this almost weird thing that they don't know how to value.

• 39:37Speaker 01

  Carry is an impossible thing to value because it can be there or cannot be there. There's no trend line on that. It's all about performance. So if you have a down year, which has happened with a lot of the asset managers, you can blow up your carry and you can blow up returns for investors, but you can still grow. If you've got 300 people selling products, guess what? You're still growing because you're adding AUMs, you're adding management fees. So it's a way different business depending upon what seat you're in. In my seat at Monroe, I've tried to do everything we can to align our business with our investors. And our growth has only grown through generating returns. It's not

• 40:20Speaker 01

  because we're some publicly held company that's an AUM machine that is an aggregator of assets.

• 40:27David Weisburd?

  If you were to build the perfect private credit investor from scratch, so you have this blank canvas, what characteristics would you give him or her?

• 40:36Speaker 01

  Oh, man, that's a great question. When we first started the business, I was an investor. I was an underwriter. I underwrote deals. I did due diligence. I checked every detail, cash flow, asset value, employees, distribution, met with management. The business has really changed over time. We've had to do what you said is we've had to become, and as a leader, I've had to change. In some areas, I was good at it. In some areas, I needed improvement.

• 41:16Speaker 01

  And I've had to become better as a leader, as a motivator, as a strategic thinker. Today, I've got to think really three to four years out in our business. You know, my head can't be today where we are, but on the other side, I've got to make sure that we're operating properly. So I've had to build infrastructure. It's become much more of a strategic management

• 41:42Speaker 01

  business than it is an investing business. So what we've had to do is through hiring and bringing on good people and making partners. I've got 24 partners in my business. And my view in asset management, there's two ways to build an asset management firm. There's two philosophies. You can be a slice manager or you can be a pie manager. And if you think about it, I tell people it's like a pizza. I mean, you can, a lot of firms are focused on their slices. Everybody is, gets a slice and everybody's focused on their own particular slice. I haven't run our firm that way. I'm a pie manager.

• 42:24Speaker 01

  I tell people that the only way that your slice is going to get any bigger or that anything good is going to happen to your slice is if the pie gets bigger. So we all have to focus on the pie. And over the last 10, 15 years, I've been focused on the pie. And I've had to morph into a manager and a leader that is able to focus people on the pie. And I think the greatest firms and the best managers do that. It's hard to do that, granted, when you're in a very large business in a public vehicle, because everyone is focused on their individual slice. And that's how you motivate people with their individual slice. But when you have a firm that's growing so fast,

• 43:08Speaker 01

  it's very hard to do it that way unless everybody is rolling in the same direction and has the same motivations and there's one asset management firm, there's one P and L, and everybody shares in that one P and L instead of having 20 or 30 or 40 different P and L's within a firm and everybody's vying for that P and L. So if you look at kind of the perfect organization, you need all kinds. I have a best-in-class underwriting group. I have a credit group. I have a portfolio management group. We have finance, accounting, treasury. We have business development, institutional sales, institutional product management. We have high net worth retail sales, high net worth retail product management.

• 43:53Speaker 01

  So it's become a business of parts. And you have to, as a leader, make sure that you've got the best people in each of those parts that share the same culture. Because I can drive culture at the top, but I'm not driving the culture among 350 employees. I've got my 27 partners or so. I've got my 60 or so, you know, lead business leaders. They have to be driving the culture every day throughout the firm.

• 44:23David Weisburd?

  You mentioned different functions. Do you find that the best people are very spiky in certain qualities and very weak in other qualities?

• 44:31Speaker 01

  I don't know that I can say that. The best people are detail oriented and focused on what they're doing, but recognize that they're a part of a team. What we've gotten into trouble with people over the years and we've had to make changes are when people feel that their individual area or their individual responsibilities somehow

• 44:58Speaker 01

  take precedence over the goals of the firm and the goals of the team or the group. And that's been my experience. What we try to do in terms of our hiring, and we've been pretty good at it. We've had no turnover among our senior level employees, executive level employees and our senior managers. And that's one of the keys to our success at the firm. We've had turnover at the lower levels, but that's natural. That's going to happen anywhere. And what we've tried to do is always upgrade. Whenever there's an opportunity, I tell our management teams and our people, always raise the bar. If you're hiring and you have an opportunity to hire and fill a position,

• 45:42Speaker 01

  make sure that that person that you're hiring in is better and will be better than the person that is they're replacing. Because by doing that, you're always raising the bar at the firm. And if you do that as a firm,

• 46:00Speaker 01

  you'll continue to be successful.

• 46:03David Weisburd?

  I'm assumed to be a father for the first time. What lessons and maybe what regrets do you have about being a father that I could learn from?

• 46:12Speaker 01

  I wish, I would have asked that question back when I was, at the time, I've got four kids and they're four wonderful kids, 34, 32, 30, and 26. And all of my kids have decided to, to follow in the financial services area and they're all in private equity business. I can't get any of them to come to work with me at Monroe because they all tell me that they don't want to be nepo babies. And I don't kind of, I don't quite get that.

• 46:45David Weisburd?

  That's a mark of a good kid.

• 46:47Speaker 01

  It's terrible because as a father, I feel like I failed. None of them want to come to me, but they said, Dad, you did this on your own. You had nothing. And don't make us come in and be a nepo baby and work and get the benefit of what you've done. We want to create our own plot. What I would, my regret, and I say this and I feel bad about it, is that I worked so damn hard in building my business. And a lot of entrepreneurs will share this view because I talk about this with a lot of the chairman and CEO of asset management firms.

• 47:24Speaker 01

  I worked so damn hard that I wasn't there for a lot of the Monday through Friday things. I tried to be good on the weekends. I was a good weekend dad. And, but during the week, my wife really carried in the load. And I was not there enough and I didn't realize how quickly it goes. You're going to see this and people are going to tell you this and you're not going to believe it because you'll say, oh, I got 15, 18 years with my kids before they go to college. But the time goes by so quickly in the back end of it. And I look back at all that those periods were, you know, days and nights. I was traveling around the world or I was traveling around the US or I was recruiting people or I was talking to investors.

• 48:10Speaker 01

  As a parent, I would say that there's no substitute for, you know, time. And it's time, it's attention to the details of the little things. And if I had to do it over again, so we've built, I think, if not the best, one of the very best asset management firms in the marketplace today. But I didn't do as good of a job with spending time with my kids as I did with spending time with the business. And, you know, thankfully, my kids get it and I don't think they hold it against me too terribly today. But they all turned out to be good kids. So in the long run, it all worked out. But that's the one regret that I would pass along to you.

• 48:55David Weisburd?

  Just to push you on that, is that a regret or a trade-off? In other words, having everything over again, would you lower your ambition on the firm in order to spend more time with your family?

• 49:06Speaker 01

  I think it's a trade-off. And I think at the end of the day, it's that you have to make that decision. I think if I would have made a different decision, I think Monroe would be different than it is today. So it's a function of, again, I go back to my DNA and my wiring. You know, I've got different wiring than the next guy because, you know, I've had different life experiences. And as much as I would like to tell you I would do it over differently, I don't know if I would have been able to do it differently. I know that in retrospect, I would have liked to have had the opportunity to think about doing it differently. But you don't always have that choice.

• 49:50Speaker 01

  You know, the business was there. The business grew. I'm a very competitive individual and I wanted to win.

• 49:59David Weisburd?

  Ted, you're an absolute legend. This has been a masterclass. Thanks so much for jumping on.

• 50:04Speaker 01

  My pleasure. Thanks, David. It's been a lot of fun.