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Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley. I'll be your host. Hey, welcome back and thanks for joining us. We've got a great podcast for you today, Insurers Investing in Alternatives, and we're joined by Armen Panossian, co-CEO and head of performing credit at Oaktree Capital. Armen, thanks for coming on, man. It's nice to see you. We've talked a couple of times, and thrilled to have you on.
Armen: Thanks. Thanks for having me, Stewart. Good to see you too.
Stewart: The thing about Oaktree is when we do a podcast, you guys come with some like rock star guests. It's great to talk to somebody that has your vantage point in a firm like Oaktree. So we've got a lot of ground to cover, but before we get going too far, I'd love to know a little bit about you and sort of where you grew up, what was your first job, not the fancy one, and tell me about how you got started in the business and how you got to your current seat.
Armen: It's a great question and it's a little bit of a long and windy road, but I'll try to be quick about it. I grew up in Glendale, California, a suburb in the Los Angeles area. I went to a public school, Glendale High School there. When I graduated, I attended Stanford for my undergraduate and majored in economics. It was a bit of a circuitous route to get to economics because both of my older brothers were surgeons and I thought it was just kind of second nature that I was supposed to become a surgeon as well. But I soon realized that as much as I liked science, I didn't like the practice of medicine because I can't stand the sight of blood. So after passing out in the middle of-
Stewart: We share that.
Armen: ... I visited my oldest brother at the emergency room at USC when he was doing his residency, and I literally passed out on the floor because of the sight of blood. And when I woke up, he said, "You'll never be a doctor." And so I gave that up. But the business of medicine, the economics of healthcare were, or continued to be, of interest to me. So I've shifted focus and studied economics and specifically health economics. I did a master's degree at Stanford at the medical school in health services research and health research policy.
I went on to doing investment banking at Morgan Stanley in the M&A group in the late '90s. That was a fancy job, but I did work a non-fancy job the year between high school and college and my first summer in college. I actually worked at the Parks and Recreations Department of the City of Glendale. I worked there essentially playing with kids, whether it was basketball or board games or whatever, but it was really sort of a community development job. I really enjoyed it. It was nothing fancy, and you definitely see the broad range of people. Your spidey sense goes up when you see some strangers walking through the park and maybe up to no good, and then you see great families as well in the same environment. You learn a lot about people in a job like that. So that was my first job, but not the unglamorous job.
I'm not sure working in Morgan Stanley M&A is necessarily glamorous either, but it was a great time to be in banking. This is the late '90s when long-term capital management failed. There was the Asian currency crisis, Russian ruble crisis. There were big, big changes in healthcare policies that resulted in some distressed businesses in the healthcare services space, like in the long-term acute care hospital space. So as an M&A, very, very junior M&A banker in the late '90s, I learned a ton across a variety of different spaces, and I wouldn't take back that experience. Even though I worked 100 hours a week for two years and it was painful at times, but it was a great learning experience.
I then went to law school. I had been deferring law school because I had gotten in in college but I wanted to work. And so I went back. After two years of banking I went back to law school. My transition from banking to law school coincided with the dot-com bubble burst. And as a Stanford graduate, I had plenty of friends who were involved in dot-coms and on paper felt quite wealthy just a year prior, and in 2000 and 2001 felt less so. And it was about as good a time as any to stay in school, so while I was in my first year of law school I applied to business school at Harvard where I was going to law school and got in. So I did the joint degree there. Again, not because I intended it, but it was kind of a circumstance of the economy and the markets. I thought, "It's going to be in shambles for a while. Why don't I stick around and learn the law, the aspects of the law that I think are interesting, learn some business, and then decide for myself what I enjoyed doing." Because I really didn't know.
And fun fact, when I was in law school, Elizabeth Warren, Senator Elizabeth Warren was my bankruptcy professor in law school.
Stewart: Wow, that's pretty cool.
Armen: It was pretty interesting. I had some great professors at the law school, including Arthur Miller who was a civil procedures professor and very kind of larger than life. There were movies that kind of depict him, essentially mirror him as the prototypical law professor. So seeing it in person was actually pretty fantastic.
But after going through law school and business school, I realized that stuff that I enjoyed the most was actually distressed debt, reorganization, securities law. It was inefficient parts of the market that skill, hard work, speed really determined, or we really separated strong performers from weaker performers. And I thought that that's what I really wanted to do. And so when I graduated in 2004, there really wasn't that much distress to go around. From 2000 to 2004, we went through a little bit of a cycle there, and you saw Enron and WorldCom and the dot-com bubble burst, but by '04 things were pretty okay. And so I stuck to it.
I went to a distressed debt shop called Pequot Capital Management. It was actually a big hedge fund at the time in Connecticut. I was in their distress team in Los Angeles and worked for that team for three years until '07 when Oaktree was hiring because they saw cracks in the markets and the economy and were in the midst of raising about $14 billion in distressed debt funds. I joined Oaktree in the distressed group in June of '07, was part of that team until 2014 and through the financial crisis and coming out of the financial crisis.
It was in 2014 that I left the strategy to go do other things around the firm, initially in broadly syndicated loans, senior loan management, which morphed into structured credit, which then morphed into multi-asset credit. We built a multi-asset credit business at the firm. And with the benefit of being a little bit of a person that had touched a lot of parts of the organization, in 2019 I was asked to oversee all of our direct lending businesses as well. We do a lot in direct lending between non sponsored lending and sponsored lending, first lien and mezzanine, a lot of rescue lending as well throughout the firm. So there was a lot to do and a lot of capabilities at the firm that were in different places, and I spent the better part of the last four or five years bringing that together and really harnessing the power of the platform, both in opportunistic credit and in performing credit, to do some pretty interesting transactions, sometimes in partnership with the opportunistic credit group and sometimes leveraging their capabilities and the relationships to kind of do some interesting deals. That's kind of my background on how I landed where I did.
Stewart: That's super interesting. I was reading your background. I'm like, "That says JD and it says MBA, both from Harvard." You also were at Stanford, I mean, some amazing educational institutions. And having talked to you, you're also a very approachable guy. So that's an interesting combination. I'm kind of an academics geek and I really think that background is super interesting and very helpful.
When we think about today's market, from your vantage point, how would you summarize the current market sentiment?
Armen: The current market sentiment is it's been a little bit volatile because people are trying to make short-term predictions about rates. And when information comes out in one direction or next, you see volatility in the equity markets or the debt capital markets as a result of that uncertainty. The way we think about the overall picture in terms of sentiment is we look at technicals and we look at fundamentals, and then we also look at regulatory back. So maybe we could talk about each of those three separately.
In terms of the fundamentals, how are businesses actually performing? The best 80% or 90% of businesses that are either publicly traded or have debt that is publicly traded and therefore files with the SEC, when you look at them, you would find that their performance is reasonably okay. It's nothing great. Nobody is crushing it, other than maybe the NVIDIAs of the world and related companies and service providers in AI and data centers. There's definitely some push happening in these thematic areas. But by and large, it's not like the regular industrial business is having a 15% up CAGR on revenues for the last three years. I mean, generally speaking, companies are seeing a little bit of modest revenue growth, some stable margins, maybe slightly positive, slightly negative year over year, but nothing heroic. I think when investors look at that, they say, "Maybe we are going to orchestrate a soft landing here, or a no land." Maybe the economy went through a period of volatility through COVID and then with inflation, but the best 80% or 90% of the businesses out there that I could invest in look like they're going to be just fine. And so from a fundamental perspective, I would say most people feel that way.
I think the technicals move a lot. The technicals that support the equity markets are different than the technicals that support the debt markets. And in fact, the technicals that support the public debt markets are different than the technicals that support the private credit ones. So if we take, for example, credit in particular, the public credit markets have had a nice rally this year, a better than coupon rally. So if the coupon is 7% on public debt, we're already up 9-ish percent, 9.5% on bonds for example, and the year's not even over yet. Now why is that? It's because in the case of high yield bonds, the high yield bond market a year ago was nicely discounted, so you actually had convexity in that market. You had fixed rate that was stable. You were going to get that contractual rate for a period of time, several years. And rates were high, the treasuries were high. And when they were high from a technical perspective, the bond market fell and created this discount. But people said, "The fundamental picture is okay, so why don't I just buy these discounted bonds and get a nice pull to par?" That might be something like 8% to 10% annualized for the next three years.
We have seen that technical uplift in high yield bonds this year. And at the same time as funds have been stable or flowing into high yield this year, there has been a pretty muted new issuance. Companies are not really issuing a ton of high yield bonds, or didn't for most of this year. Now the reason they did was because base rates were pretty high, and up until maybe two or three months ago, spreads were kind of average to maybe even on the slightly high end of historical averages. Today, high yield bonds spreads are lower than 300, which is on the low end of normal. So you are starting to see a little bit of new issuance. But with base rates high, people are saying, "Maybe I could give it another six months or give it another 12 months, and maybe I could issue this bond at 6% rather than 7%."
So there's a little bit of wait and see. But the technical backdrop for high yield bonds has been positive because the performance of these businesses has been good, the discount on the market has been pretty good, and the contractual return has been attractive, and frankly, more attractive than equities. When rates are high, equities perform worse. A bigger chunk of the corporate pie goes over to creditors rather than equity holders. And so credit is kind of a more stable contracted income stream versus buying equities that might have more volatility. So there has been a little bit of rotation.
And then broadly syndicated loans, the technical picture there has been strong because CLO buyers have been very active, including insurance companies and banks in buying CLO AAA. So that's lifted loan prices this year, and the best 60% of the loan market is trading at par.
Then finally on private credit, because you get the liquidity premium in private credit, and because there are structures that have been put in place like rated feeder notes that are good for insurance companies, there's been a lot of fund formation from high net worth from insurance and other institutions supporting just growth in the private credit markets broadly. So the technical picture is very, very strong.
Stewart: That's super helpful. It's interesting to me that when you think about high yield borrowers and you would think that the productivity of the use of the proceeds of that debt that 1% wouldn't make a difference. If you can't earn more than 7% of the money you're borrowing, like a lot more deploying it. But it's still interesting to hear you say that that's part of the technical backdrop, which makes a lot of sense. It's just interesting.
Armen: Yeah, in high yield bonds they are typically seven to 10 year bonds, so the CFOs, they're kind of locking in a liability at that fixed rate for a fairly extended period of time. So they try to some extent on the margin to time this.
Stewart: Yeah, it makes sense. When you look out, and we have podcasts on a wide spectrum of topics, private credit's certainly been one of them, particularly of late, where do you think the best risk-adjusted returns are? Or put another way, the greatest growth opportunities? Where do you think that is right now?
Armen: Private credit's a very broad category. There's corporate direct lending for sponsors to sponsor owned businesses. There's corporate direct lending for publicly traded companies or non-sponsor owned businesses. There's rescue lending at times as businesses have some sort of liquidity crunch. And then there's specialty areas of lending, for example, an asset-backed finance, which you lend not to a corporate borrower but to a box that has assets, contractual cash flow streams that you lend to. So it's a very broad category.
I think the most interesting parts of private credit where you could get real alpha and it's where, again, skill and hard work is a differentiator, it's usually in specialty areas of lending. For example, life science is direct lending. That's an area where you got to understand science, you have to understand or have discipline when it comes to structuring, you have to have the right relationships to be able to source. And if you have all of those assets, you can force deals that are structured really well and priced very attractively in the teens. So we really like those areas of specialty lending where skill and knowledge of an industry matters.
Similarly, this is not an industry focus, but asset-backed finance which I talked about, there's a regulatory shift happening, and this kind of goes back to the regulatory comment I made earlier. There's a regulatory shift happening where Basel III endgame is coming to the US, and banks are stepping away from legacy areas of lending to specialty originators of debt. It's creating an opportunity for investment managers in the private asset-backed finance area. These are private asset-backed securitizations or structures supported by these portfolios of assets. I think that is a massively growing, rapidly growing area over the next two or three years driven by this regulatory shift. And that market is so huge and so varied. It includes aircraft finance; the copiers in offices, financing those; student loans; braces at the dentist. There's so many different end markets that touch asset-backed finance, and there's varying degrees of comfort and knowledge around those areas of collateral. So it creates a great opportunity for investment managers to really jump in and the investors that we have to benefit from that skill and hard work.
And then finally, the last thing I would say that I think is going to be very interesting, and maybe it's not there at the moment, is rescuing. As we look at the size of the markets, so just to give you a few data points. If you look at BBB rated bonds and then below investment grade bonds and you added direct lending to it as well, the totality of that market was less than $4 trillion in 2007. Today on those same metrics, it's almost $13 trillion. There's a lot of capital that meets that description. And there is a growing amount of maturities really kicking in in 2026 and 2027, that some portion will be challenged. I'm not saying it's going to be 10% of that number that's challenged, but even if it's 2% or 3% or 4%, given the size of that market, there is a multi multi-billion dollar capital solutions opportunity in private consensual rescue lending over the next two or three years.
So it's something that we are preparing for and we're kind of boiling the ocean and looking at a lot of these types of borrowers that are going to need capital. We have the capabilities and the history in this space to really capitalize on it.
Stewart: That's super helpful. Let's just go back for a second. So this Basel III endgame coming to the US, banks stepping away from these areas is not temporary; it's a structural shift. Right? This is my words, not yours. It seems to me that there is a really nice fit for insurance companies who have predictable liability durations, not always, but for the most part. And you can buy private credit, you can fund private credit in a way that has... And this is me talking, I'm asking, when you think about the way banks lend, what do they do? They take overnight deposits, lend them out long term, and they got the FDIC backstop in the mismatch. In insurance, you can have a beautiful risk offset that creates a stable and growing funding source for a lot of businesses here.
It seems, and I realize that there's people out there that's saying, "There's going to be distress," and I want to talk about that, but it just is a really nice setup that you have. It is a less risky approach than the banks with the FDIC backstop. I mean, that's just to me. What do you think about it? Is that how you think about it too?
Armen: That's spot on. Effectively what happened is the regulators in wanting to de-risk the banking sector especially, and just by the way, that became very topical because of the Silicon Valley Bank collapse and some of the other collapses that happened, to take out that systemic risk and to prevent these calculating failures, the regulators did a few things to help banks out, but they also said, "You're going to be more conservative going forward." So let's talk about that second part, the you're going to be conservative going forward means you can't lend at those same loaned values that you used to lend at. Certain types of lending will require more equity risk capital placed against them, so it becomes less efficient for your business.
So historically, a regional bank in the Southeast, for example, would have relationships with specialty lenders. These lenders would provide loans to parents paying for braces at the dentist. They would provide subprime auto loans, or equipment leases, or aircraft leases, or different types of royalty finances. And the banks would provide lines of credit that were pretty short to these specialty lenders. And now those banks are going to those specialty lenders and they're saying, "Look, this regulation is coming. I know I do business with 500 of you. I'm only going to do business with 100 of you. And the 100 that I do business with, I'm going to reduce my loan to values. You're going to need to find capital loss for the rest."
And so what that's cracking open an opportunity set for investment managers and insurance companies across that risk adjusted return spectrum. Insurance companies will care about investment grade rated securities or privately placed securities that have a spread that is as good or better than the publicly available, similarly rated tranches out there. The below investment grade investors like pension funds and endowments, family offices, sovereign wealth funds that are not rating sensitive will buy the next tranche of exposure below investment grade asset-backed finance. And then there are equity players and opportunistic players that say, "This specialty lender in the subprime auto space could use another $100 million of equity capital. I'm going to provide them that and earn what I think will be a 20% return."
So there's an opening of capital need across the entire range, and the end markets are so big. Aircraft finance, rail, car finance, locomotive finance, medical royalties, life sciences royalties, music royalties, consumer finance of a variety of types, student loans; there are so many different types of end collateral that has some sort of opportunity for structured finance. And if an insurance company can do it individually and work with a bank as an intermediary or an insurance company could partner with an investment manager to provide the IG, the investment grade part of that capital stack, it's going to be a tremendous investment opportunity for them to earn excess spread with risk under control and still get that IG rating. And matching their liabilities with the asset stream. Some of those assets are really long haul.
Stewart: Yeah, and that's the part that it ends up being... Obviously a lot of this is going to ride on the quality of the underwriting. It stands to reason from my perspective that the underwriting is going to be a lot more carefully administered if it stays on your balance sheet than if it gets passed down the line. It's just the nature of the beast. And at the end of the day, I believe in the insurance industry and the asset management industry's ability to price risk. I think they're very good at it. Both sides of the table are very good at that.
You mentioned it a moment ago, but someone said to me that this is potentially going to be the best class of distressed debt ever because of the distress. Usually it's the business is not going well, and in this case it's a 550 basis point increase by the Fed to try to combat inflation that was the result of overly aggressive fiscal stimulus. Right. So when you take that and you say, "There are, it appears to me, some headwinds there," and you mentioned the opportunity potentially for rescue lending, what do you see as the most important short-term headwinds? And what tailwinds do you think there are for private credit?
Armen: The short-term headwinds for businesses are that most capital structures that are in place right now were not built for that 500 basis point increase in rates. And the longer that this is sustained, something other than zero rates, that means businesses are under-investing in themselves. They're going to have some challenges with refinancing. Not every business, by the way, because some businesses did actually well during COVID and they did well during inflation. But it's really we're talking about the businesses that didn't necessarily grow as a result of inflation or as a result of COVID, but the cost of their debt went up significantly and now they're going to face this refinancing that needs to happen, and all of a sudden there's at least 200 or 300 basis points increased cost of that refinancing.
That's really the headwind. It is how will a capital structure that was put in place at zero rates be refinanceable at today's rates if the business has not grown enough? And that leads to an opportunity. Risk and opportunity are opposite sides of the same coin. The opportunity is if you do have equity-like capital or rescue lending capital that can slot in and de-lever these businesses and make the debt portion of these capital structures refinanceable, then you as a new investor can step in and get some outsized equity-like returns as these businesses do sort of grow with the benefit of time. Obviously it's a little bit of a rate bet. That's a longer term bet. So it's a rate bet, but it's also a bet on the actual businesses that you're underwriting. So those are the headwinds.
I think the tailwinds, look, private credit, I think it's here to stay. I think as in 2022 when the banks stepped away from the market, it created a very apparent need for a strong and dependable private credit market. So investors want it, private equity sponsors want it, borrowers want it. They like the ease of use, the certainty and the speed of private credit. So I think there's long-term tailwinds to that industry. And over the short run, it'll ebb and flow based on opportunity versus AUMs looking for that opportunity. But over the long run, there's a tremendous amount of dry powder in private equity that needs to get deployed, and not enough private credit, frankly, to match it over sort of a medium term. So I think there's going to be a lot to do in private credit going forward.
Stewart: Let me ask you a different question. What questions are you hearing from your existing and prospective investors when you talk with them about investing in this sector? What are you hearing from them? Which is something that honestly, it's bad on me that I haven't asked this question prior because it's a really good question, of what are you hearing from insurance companies are how they see risk in the market?
Armen: I think investors generally, and this includes insurance companies, when they talk about private credit and when it comes to corporate direct lending, especially sponsor-backed corporate direct lending, they say, "Hey, I have experience here. I'm looking at sort of rating-sensitive structures like these rated feeders." They for the most part get it and understand what it is, and some of them feel comfortable with them, some of them don't. But what they ask about the risk is they say, "I know that 18 or 24 months ago, the equity checks for new LBOs were bigger and the spreads were wider and rates were higher." And that was what a lot of people were saying was a golden age of private credit at that time. Are we past that golden age? Is the opportunity still as attractive now as it was back then? And the short answer is no, it's not as attractive now as it was back then if you solely look at returns. But it is more attractive when you look at relative returns to public credit. Both public credit and private credit have tightened over the last two years, and I would say that they've tightened about the same amount. So you're still picking up the same premium, the same illiquidity premium as you were before. So that's, I think, a positive.
On an absolute basis, even though the rates have come down on a relative basis to other asset classes, they still look pretty good. But I think the other positive is two years ago when rates were really high and spreads were really high, there weren't that many deals getting made. If you had to invest capital only in, let's say, the back half of 2022, you probably only did three or four deals and that was it. There is no ability to have developed a fully well-diversified portfolio at that point in time. Today, deal flow is back and so you are able to build a well-diversified portfolio across a variety of regions, across a variety of sponsors and industries. And that's good. That's a great thing from portfolio management perspective.
But yeah, they do ask that question is are you sort of no longer in that golden age of private credit? I think separately on asset-backed finance because it feels like the market is wobbly and everything's opening up. I think a lot of investors, insurance and non-insurance, are just trying to figure out how they want to play. Do they want to do consumer? Do they want to focus on an aircraft-only opportunity? Do they want to talk to managers that do a lot of different things and maybe they get a broader range? So there's a lot of discussions around that. What is your skill set in asset-backed finance? Where do you like to invest? What end markets and why? So those types of questions we're being asked a lot by insurance companies and other institutions in asset-backed.
Stewart: That's super helpful. What factors do you think are going to have the greatest impact on this sector in 2025? These do not get any easier. Armen. I've only got one more and it's easier than this one.
Armen: I wish my crystal ball went out to 2025. In 2025, I think there are a couple overarching factors and they relate to one another. For example, in August, the 10-year Treasury was less than 4%, like 3.7%. Today it's closer to 4.2%. What's happened in that period of time that would cause that to occur? The Fed came and hammered rates down 50 basis points.
I think what people are struggling, and it's going to create volatility that's going to create challenges in 2025, is will the Fed always come and do a bunch of 50 basis point rate cuts? After it did the 50 basis point rate cut, the conventional wisdom was that there was going to be another 100 basis points or maybe more over the next 12 months. And as the market realizes that the Fed's not going to just cut rates for the sake of cutting rates; it's going to cut rates because there's some sort of recessionary impact or employment issue. It's causing people to revaluate or recalibrate what they think forward rates look like. Then you have the election in there too that's causing a whole bunch of other noise, and both candidates want to do some pretty meaningful deficits. That's also weighing on rates to the upside, pushing rates higher.
Now as that happens, people have to say, "Well, what does that mean for these maturities that start kicking up in 2025 and then more in earnest 2026 and 2027? Does that create a bigger issue?" The answer is yes, it does. And it also weighs on the forward impact or the forward look for equity returns.
So a lot of this is sort of predicting rates, predicting the Fed. The factors that come into it are deficit spending, how are we going to handle the debt ceiling, all the related legislative considerations that come with deficits effectively. It creates uncertainty and noise around rates, which then have a knock-on effect of, how are you going to handle these maturities? I think that's going to be the biggest uncertainty, the biggest issue in predicting how does 2025 go, if SOFR or fed funds rate doesn't go, let's say, to 2.5%, 3%, is that going to be okay? And as investors weigh that vacillation, are they going to sell and buy and sell and buy and create a bunch of noise in the markets?
Stewart: How do you think insurers should be thinking about the opportunity set in today's credit markets? Different insurance companies are at different stages. Some are very familiar and major players in this space; some are trying to figure out where to play. And there's varying sophistication levels too, for sure. What would you say to a CIO today that is trying to figure this out?
Armen: As I mentioned earlier, private credit means a lot of different things. There's a lot of subcategories. The biggest part of private credit where an insurance company could have a diversified portfolio is lending to sponsor-backed companies on a first name basis. That's where there's the most activity across a variety of industries, including in Europe and the US. I would say as a result of that diversification, there are structures that could be put in place that help to make the insurance companies' investment in that asset class as efficient as possible from a ratings perspective. So effectively these rated note feeders, they structure the investment in an A note that's investment grade, a smaller B note that might not be investment grade in its equity, which is obviously not rated, but in doing so it helps to bring down the redcap requirement for the insurance companies.
I would say do work on those rated notes and your level of comfort around them, because it helps to deliver some better efficiency for your capital with a very attractive return. And you could only really get it in that most diverse part of the private credit market, the corporate first lien sponsor-backed deals. So I would say take a look at that. You should get efficiency that way.
Now separately, I think you got to do a lot of work on the specialty areas of lending where you might not get the most efficient capital usage or capital treatment, but you could get outsized return. So opportunistic credit capital solutions that really come in a year or two or three from now that are going to deliver. That's kind of hybrid equity, hybrid credit. You're not going to get great capital treatment on it, but that's a huge opportunity with a great return. And for some insurers that will work for some it won't. Maybe it's maybe a bridge too far. But I think it's worth a look.
And then I think with asset-backed finance, it is absolutely probably the easiest and most efficient way an insurance company could play that space because they would be buying securities that are rated by a reputable rating agency that are investment-grade in an overall structure that's put together by an investment manager. That should be a staple of an insurance company's allocation over the next five years, asset-backed finance. It's going to give you diversity. It's going to give you levers you could pull in terms of duration. For example, if you lend to an aircraft securitization, a private aircraft securitization, those leases can be very, very long, and it can match your liabilities. The set of your liabilities is very, very long. But there are other asset classes that pay down much more quickly. For example, equipment finance or receivables finance, those are much, much shorter. And for every payment that you receive, you're getting some return of capital and some return on capital. And so that the duration of that investment might be materially shorter. So if you have shorter liabilities that you're trying to match to, asset-backed finance could give you a ratings-optimal solution even for the shorter liabilities that you have.
So really working with an investment manager that understands what insurance companies are looking for in terms of risk, return, duration, it's critical to figure that out over the next few years. It's a huge opportunity and I think going to be the best risk-adjusted return from an insurance standpoint over the next few years.
Stewart: That's really helpful. I do think it's worth noting that not every insurance company is capital constrained, right? There are many particularly mutuals that have a considerable capital cushion, and so that capital "inefficiency" isn't an impediment for them. I'm glad that you brought that up. Some insurance companies are super concerned about how capital efficient each investment is, but others aren't. It isn't a constraint, and because of that, they may be able to take advantage of some of the opportunities that you talked about.
I've gotten a phenomenal education today, Armen, and I can't thank you enough. I've got a couple of fun ones for you out the door if you're willing.
Armen: Absolutely. I'll try my best. You've given me some zingers so far, so let's see if I can ramp it.
Stewart: I was speaking to a class at LSU the other day, and when you look out at fifty 20, 21-year-old folks, I asked them, "How many people have a job lined up in May?" A couple of hands went up, but a lot of other hands didn't. What advice would you give the group whose hands did not go up? For finance students that are looking for opportunities in May of next year?
Armen: That's a great question and a very tough question. The hard part, first of all, I think anybody looking for a job now coming out of college should view that first job or even two first jobs as education just as much as employment. They really need to learn skills in finance that are really only built through practice. I'm sure there's great educational programs that could teach finance and accounting, but you really fine tune your skills and your speed and your accuracy on the job. So be open-minded to learning. Don't chase necessarily the highest compensation. Chase the place that you're going to get the best education and the best sort of stepping stone to the next job. That would be my advice.
I think where people have made mistakes, young people have made mistakes in their careers, is when they go after a get-rich-quick scheme, a startup that might sound great but doesn't have execution capabilities. For every one of those that works, there's thousands that fail. I think the educational output of such a failure can be good, but it's quite varied. A company could fail because there was fraud, and there's nothing you learn from being involved with a fraudulent business. So I would be cautious about really swinging for the fences unless you really, really are going with a proven team that even if the business did fail, you would learn something. So even when you take a risk, try to think about education as a big part of that. That would be my advice.
The other thing is, I think that there's a medium to long-term risk in a lot of industries, including in finance, related to AI. AI will make the employees of firms like Oaktree and others more efficient and more capable. So with fewer people you could do more with AI is the short of it. What that means is if you think about firms, whether it's a law firm or a financial firm, these firms are set up like pyramids. There's people at the top, and as you go down it gets wider and wider in terms of the resources that they need. And at the bottom is really the junior ranks that tend to be the largest. AI sort of cuts the tails off of that pyramid. It makes it less broad at the bottom. Because with fewer junior resources, with fewer mid-level resources, you could do just as much work. And so I would be careful and cautious about the career you choose and overlay what a future in AI would look like for that industry, and how you would actually use AI in your job.
A lot of people that I talked to that are in college, so maybe not quite exactly the scenario you're laying out with someone graduating in May, but who are in college and they're freshmen or sophomores, I tell them, "Take an interdisciplinary approach." Study bio or study econ or whatever it is, but also study data science or computer science or industrial engineering or maybe even electrical engineering, something where the nexus of two studies creates a unique skillset for you. Whereas if you just studied one thing, then the potential application to a changing global environment, it can be more limited. So I think that interdisciplinary approach is pretty critical, and data science to me is an important part of figuring out how to use AI to your benefit rather than getting hurt by it.
Stewart: That's super helpful. Fun one quick. Lunch table of four, you can invite up the three guests alive or dead. Who's coming to lunch with you, Armen?
Armen: Wow. First I would say my wife, because if I don't invite her, I don't have enough opportunities to have lunch with her so I would want to have my wife. My family is very important to me, I have four kids. So I can't invite my kids because then my wife wouldn't be able to stay. But definitely my wife. And then Howard Marks, who is the co-founder of Oaktree and just both an equal parts brilliant equal parts down to earth person to talk to. He is able to take very complicated subjects, whether they be political or economic or business or regulatory, and deduce them to very simple and understandable terms. I find that I learn something every time I talk to Howard, so for sure him as well.
The others, I wouldn't mind having Donald Trump and Kamala Harris at the table too. I would love to see in a more private setting how the two of them either clash or align. And maybe that's more right now. But to me, I am put off by the personal political attacks that they appear to be engaging in against each other. I'd really like to understand where they truly are when it comes to real issues, because there are real, real issues to tackle in this country. There are real issues geopolitically that we need to have a view on and strong leadership with. And I don't think, at least personally, that either of the candidates is doing us a service in the specificity with which they're discussing topics. I would like to get closer to that and understand which of the two is more reliable.
Stewart: I'm with you. I think I wholeheartedly agree. I had the opportunity, Howard Marks joined our event last year. He joined virtually. We're hoping that he's going to join us in person this year, but it remains to be seen. But I've had the opportunity to hear him a couple of different times and I couldn't agree more. And I really agree with you on the importance of the geopolitical environment that we're in. There are some really complicated situations that we need to have our A game on and get serious about addressing, both domestically and internationally.
I've really enjoyed getting to know you. I appreciate very much you coming on, and thanks for sharing your insights with us.
Armen: Thank you, Stewart. I really appreciate chatting with you and the opportunity to speak with your listeners.
Stewart: We've been joined today by Armen Panossian, co-CEO and head of performing credit at Oaktree Capital. Thanks for listening. If you have ideas for podcasts, please shoot me a note. It's Stewart@InsuranceAUM.com. Please rate us, like us, and review us at Apple Podcasts, Spotify, Google Play, or wherever you listen to your favorite shows. My name's Stewart Foley. We'll see you next time on the InsuranceAUM.com podcast.
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