Ali Hamed – An Update on Private Credit - [Invest Like the Best, EP.172]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews Ali Hamed on how COVID froze private credit, distorted pricing, and accelerated a shift to digital ecosystems. Hamed argues lenders should prioritize quality, liquidity, and careful underwriting while watching for opportunities in online businesses, deferred portfolios, and mispriced uncertainty.

Main Topics: Private credit freeze and uncertainty pricing (Priority: 5/5): COVID halted transactions because investors couldn't price unprecedented uncertainty. Short-duration assets vs. long-duration loans (Priority: 4/5): Near-term assets needed immediate action, while longer loans could be worked through. Servicers, originators, and loan-structure risk (Priority: 5/5): Specialty lending risk depends heavily on the operators that service and originate assets. Government support and consumer-credit unknowns (Priority: 4/5): Stimulus and deferments complicate underwriting, but lenders are not yet pricing them fully. Digital ecosystems as the new economy (Priority: 5/5): E-commerce, YouTube, Spotify, Snapchat, and Amazon sellers became more durable than physical retail. Venture capital repricing and bridge rounds (Priority: 4/5): VC moved faster than credit, with valuations resetting sharply and capital focused on survival.

Key Arguments: Private credit froze first because nobody underwrote a pandemic and models broke down. Lenders were selling and buying uncertainty, not classic distress, so many waited. Advance rates, not yields, became the main tool to reduce risk in private credit. Automatic repayment and strong servicers matter more when originators themselves may be fragile. Tech-enabled assets with variable costs can be less risky than physical retail in a pandemic. Venture valuations reset 50% to 70%, and fundraising shifted from growth to profitability. The biggest opportunity is in the online economy, not in returning to old retail patterns.

Data Points: Mannheim Auction Index: 11.8-ish percent down - Used car prices were down despite weak supply, worse than the prior crisis. Used car prices in last financial crisis: about 5.5% at most - Historical comparison to show current decline is much sharper. Ally Financial floor plan financing: 75% on deferment - Illustrates the level of uncertainty in auto-related consumer and dealer credit. Ally Financial consumer loans: 20-something percent on deferment - Shows how much consumer credit is temporarily paused. U.S. unemployment: 26 million people unemployed - Presented as the key input for consumer-credit stress. YouTube revenue split: 55% for the person who made it - Explains how digital content monetization works. Views across digital assets: as low as 20%, as high as 100% up - Traffic increased sharply as people stayed home. CPMs: down 50% - Ad pricing fell even as traffic rose, stabilizing total revenue in some cases. Amazon third-party seller revenue: $150 billion per year - Scale of the third-party seller ecosystem mentioned as durable. Amazon e-commerce revenue share: two-thirds - Most Amazon e-commerce revenue comes from third-party sellers. Venture valuations: 50% to 70% down - Deal pricing fell sharply versus the prior month. SaaS deal multiples in recent period: 2x to 3x revenues - Examples of downshifted pricing in venture markets. Prior SaaS growth valuation: 20x to 30x revenue - Reference point for how frothy valuations had been before COVID.

Pivotal Quotes: "no model matters anymore" — Ali Hamed: He describes why pandemic uncertainty broke traditional underwriting. "you're buying uncertainty" — Ali Hamed: His core framing for pricing risk in private credit during COVID. "the whole world just came to us" — Ali Hamed: He explains how the shift to online activity created investable opportunities.

Implications: The near-term task is to re-underwrite for deferments, liquidity, and operator strength while waiting for defaults and government support to clarify true prices.