Conference Presentation, Fireside Chat, Panel
Global Capital Markets The Search for Value
Milken InstituteLaura Deal Lacey, Michael Milken, Gordon Fyfe, Lawrence Golub, Omar Lodhi, Larry Post
- Compounding and low return assumptions (7%–7.5% for U.S./European corps, 3% for Norway's fund) contrast with the goal of achieving a 6.25% to 6.5% long-term target, necessitating significant effort over the next decade due to current valuations and a low-growth environment.
- Market expectations include potential overvaluation in equities and bonds that could trigger a 20% to 30% correction, viewed as a favorable opportunity to deploy capital, supported by the fund's cash flow positivity allowing asset purchases during crises without forced selling.
- Emerging markets are projected to drive two-thirds of global growth over the next 20 years, with specific focus on India for immediate excitement, Africa for a 10-to-30-year horizon, and Brazil for near-term infrastructure deals driven by current turmoil.
- Golub Capital anticipates a structural shift where banks remain absent from middle-market lending despite regulatory changes, creating an opportunity for lending programs with modest leverage (2:1) to generate 11% to 13% net returns.
- Investment strategies for emerging markets include entering countries with reform momentum regardless of democratic maturity, focusing on defensive and consumer sectors, and factoring in annual currency devaluation rates of 6% to 7% since long-term hedging is deemed impossible.
- The fund plans to reduce fee structures by shifting from the traditional "2 and 20" model and increasing internal management from 50% upward to capture value, while requiring partners to commit real capital alongside fund cash to ensure alignment.
- Risk mitigation focuses on short-duration high yield bonds (under three years) to avoid the volatility associated with 10-year government bonds, emphasizing loss prevention over raw return generation.
- Specific geographic allocations include Turkey, where over $1 billion has been invested and exited across sectors like banking and education, and Indonesia, which is viewed as having potential to replicate China's tenfold GDP growth over a decade.
- Operational strategy involves prioritizing manager selection over asset selection, aiming for total transparency and avoiding high operational leverage in portfolio companies, with Golub Capital targeting 50% to 80% business growth over the next three to four years.
- Long-term expectations include a continued decline in bank lending capacity due to compensation and training misalignments, allowing private credit firms to maintain low loss frequencies and high recovery rates that banks cannot replicate even without federal regulations.