So tell us a little bit about this firm, Situational Awareness.

Well, it's a hedge fund that was started by a, a guy in his mid-20s named Leopold Aschenbrenner, and he had this really interesting background.

He had worked for, um, the nonprofit foundation attached to FTX, then was one of the early engineers at OpenAI, which is, you know, obviously one of the foundational AI startups.

And he began to raise money for a hedge fund based on, like, let's play this trade.

And, uh, in addition to just buying the stocks, he had relationships with the largest banks on Wall Street to provide him extra leverage to amplify the bets.

And then heading into July, the trade wobbled, and so some of these stocks that could have, could have been up five times or 10 times or 15 times this year, they began to fall.

And when you use leverage, significant but not, like, catastrophic drops in a stock can start to get very painful.

Tell us what we know about it.

So, uh, Antoine, what does this data tell us?

Well, we first thought it was good to actually just go get numbers, right? So we know that there's been this boom in evergreen funds, which are these sorta perpetual private funds, and they're very popular among wealthy individual investors who now have access to some of the world's largest, most successful investment firms, to their funds in a pretty easy to understand format.

But also, what we keep hearing in our reporting is, well, these are pretty lucrative products for the people who are distributing them themselves, i.e., the banks who have large wealth management operations.

So these evergreen funds, they've paid about, uh, two billion dollars in just servicing fees.

That's a pretty big number for fees on funds at a time when, like, the whole world has moved into very low-cost index funds that carry almost no fees.

Antoine, what would you say is the one big thing that you've taken away from this story?

I think, uh, when I talk to wealth management people, what they say is that there's a real question that's entering a lot of people's minds on, like, "Am I getting a good bang for my buck in going into more complex, higher fee private market alternatives than broad indexes, which is just basically capturing the market return?" And a lot of advisors are now starting to say, "I'd rather just, you know, have my clients be in, in indices and, uh, and things like that." It's hard to beat the market after fees.

Interestingly, they're also saying in the age of AI, people can really understand fees and the different expenses much quicker than they, they could have in the past, where they would've been reading some pretty dull sort of fund literature documents that, you know, may be hard to parse.

What exactly did the Trump administration do yesterday?

Sure.

So last summer, Trump issued an executive order in which he basically wanted to get, uh, private assets into retirement plans.

So think private equity deals, private credit deals, and even things like cryptocurrencies.

So basically just everything that wasn't in your 401(k) before, which, you know, 401(k)s mostly are public stocks and public bonds and funds for those.

And, uh, so what came yesterday was the actual rule from the administration that basically tries to offer new rules of the road on how this would happen.

And it's basically trying to provide the people who administer 401(k) plans, like a Vanguard or something, a kind of checklist of things to do when you're making decisions on the types of private capital firms you'll allow people to invest in.

So why does the White House wanna make these changes?

But I think another important question here is, is there something deeper or more concerning going on with these loans underneath the surface that people should be worried about?

There's a fundamental question that people are beginning to raise on Wall Street.

Beyond AI disruption, which is out in the future, there are some really smart investors who are also saying, let's go look into these loans with a bit more of a magnifying glass.

And what they're arguing, basically all the problems are here.

We've looked through these loans.

They have way more leverage than people realize.

The cushion that's supporting the loan, that cushion is a lot smaller than people realize because the actual equity is worth less now than what people thought it was when the deal was originated.

But we're not talking about the crumbling of the financial system because of some bad loans.

[laughs]

So y- you have it right, though.

So there were these defaults in the summer.

There was even a big argument, is this private credit or not? Because a lot of the defaults were from loans that had been actually originated by banks like JPMorgan and, and Jefferies.

So, so the private credit industry was saying, you know, screaming actually, "This isn't private credit." But it gave people in finance the general sense that, okay, we've just come out of this environment where money was really cheap, and maybe a lot of people made a lot of bad loans, and we're starting to see that.

So there was a vibe shift.

Whether it was private credit or not seems like it's kind of besides the point.

Uh, Antoine, how confident are you around that narrative?

Walk me through what we've seen in terms of investors getting wary of private credit lately.

Yeah.

So you've seen publicly traded credit funds called BDCs or business development companies, which are basically filled with loans financing private equity takeovers.

You've seen those public vehicles trading at sort of substantial discounts to their assets.

So it's telling you that the public market is kind of skeptical of what's inside the BDCs or whether those BDCs will be earning as much money as they have in the past.

And then the second thing that's happening is there's this whole other fast-growing crop of credit funds called non-traded BDCs, which are essentially, uh, credit funds that aren't listed on the public market, and they instead allow private investors to get out on a quarterly basis up to a limit.

Most funds allow investors to pull up to five percent of the fund's net assets every quarter.

So, Antoine, what are the real term effects if the private credit market were to really struggle? What would that do to markets and the wider economy?

Every single problem.

When you compare Europe to the US, really a lot of the key economic, uh, issues that all developed economies are facing, you know, every issue is accentuated in Europe versus what's happening in the US.

So, this all stems from, uh, Mario Draghi, the former head of the European Central Bank.

A few years ago, he put out this explosive report on the, the sort of lack of competitiveness of the continent.

And he said basically Europe was facing an existential challenge, and if it didn't improve its productivity, it would really, like, fall structurally behind places like the US with, with a better business environment.

And so, he laid out, like, 400 kind of key recommendations for Europe to adopt to improve its competitiveness.

What does that evidence look like though? I mean, what-what do Rowan's thoughts tell us about how private capital firms are handling Europe?

Well, it's interesting.

Antoine, what is Ackman's plan to get Howard Hughes, the company, to rival Berkshire? I mean, that is a really lofty goal.

So what he's done was last year he raised a billion dollars against his management company, Pershing Square Inc, and he's using about 900 million of that money to buy additional Howard Hughes shares and essentially put $900 million in Howard Hughes' bank, and then he's also agreed to this deal with Howard Hughes where he and his investment team will now kind of direct their investments just like Warren Buffett and Charlie Munger and all their lieutenants did at Berkshire.

And their initial goal is to stand up an insurance company, which in the Berkshire mold would generate, you know, sort of excess cash that they can invest, and he's also said he wants to then go buy businesses outright and sort of create a diversified holding company where they could kick off profits over time.

I'm assuming that this doesn't come without challenges? I mean, what are some of the problems that Ackman's going to face expanding Howard Hughes like this?

Howard Hughes currently has a high sort of cost of capital, which means that when it goes and acquires things, the hurdle for it to earn an excess of what it would cost to buy things is fairly high.

So they need that to go down over time to lower the kind of hurdle on sort of investment return.

And then the other point is that, you know, Ackman's got a somewhat mixed record on M&A-driven investments, and so he has done very well on things like restaurant brands where he was acquiring a bunch of different sort of restaurant operating companies like Burger King and Tim Hortons.

That's worked out very well.