SALT TALKS

[00:00:00] John Darsie: Hello everyone. And welcome back to Salt Talks. My name is John Darcy. I'm a partner at Skybridge Capital and the Managing Director of Salt, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy. Salt Talks is a digital interview series with leading investors, creators, and thinkers.

And our goal on these talks is the same as our goal at our Salt conferences, which is The next of which is coming up next week in early March in Abu Dhabi in partnership with key stakeholders there in the UAE, which we're very excited about. But our goal at those events and our goal on these SALT talks is to provide a window into the mind of subject matter experts.

As well as provide a platform for what we think are big ideas that are shaping the future. And with that i'll turn it over to my partner dan burrill to begin today's interview.

[00:01:01] Daniel Barile: Hi everybody welcome back to salt talks. My name is dan burrill. I'm partner, on the investment team here at skybridge capital today We are excited to interview two members of the executive team at prime meridian capital san francisco based alternative credit manager Notably the firm's income fund won the hedge fund us award for best credit multi strategy manager in 2022.

So congratulations there. I'm going to pass it on to Don Davis, who's a CEO and portfolio manager, and then Sean bill who's chief investment officer to talk. A bit a bit more about the their personal backgrounds and how Prime Meridian came together. And then we're going to really dig into the firm and its investment strategy.

Yeah.

[00:01:46] Don Davis: Thanks, Dan. Yeah, I'm Don Davis founder and CEO of Prime Meridian Capital, and I've been in the industry for a little over 24 years. Previously started Novus Investments in 2004, and that was a firm that, where we were an IB and a CTA, we focused on credit, currencies, metals in the futures markets, in the global futures markets, and we had some degree of success in doing so.

It was a more high volatility, higher risk strategy. We were ranked number one in the U S a few times, twice over a five year period, once over a seven year period for total return we were getting a lot of demand over time for low vol sort of alternative credit strategies and alternative income. So it was something we were exploring quite significantly beginning in 2006, 2007 we became aware of this burgeoning peer to peer marketplace lending space at the time.

In fact, my partner about coffee at that in New York. He was one of the very first lender investors at prosper. com in March of 06, and he built up a, he was also the largest individual investor there for seven consecutive years. And so we have some experience and data points with that going through the 2008 recession, we were shocked to see that, that account was up 0.

5%, while the S and P was down 56 and everything else was torched. And so that was a good data point that we had on at least that portion of the industry. And then a few years later, the unthinkable happened. MF Global, the largest futures claiming firm in the world, had been around since 1783, had suddenly gone bankrupt.

Investors eventually got all their money back, but it took a few years. And so that kind of sped up our decision to really, pivot and make a move into the alternative private credit space. And we started off and back then there were a lot of issues too with in the industry, there wasn't any bankruptcy, remote segregation of assets.

It was a mess and I was already a kind of a very risk averse guy, and I became even much more sensitive to systemic risk. After the MF global collapse, of course, what we saw in a way with Bear Stearns and Lehman. All of that just led to the the to an increase in risk aversion on my part.

And so eventually they tightened things up in the industry and they had bankruptcy remote segregation of assets with backup servicers in place. And that's when we felt comfortable in early 2012, starting the first fund primary and income fund. And we began in the peer to peer marketplace lending space.

As a foray into alternative private credit, but the intention all along was really to build a family of a few different funds covering all the verticals under the private credit space. And since then, we've we've won several notable awards. You've mentioned a couple of them. Thank you for that. We were also voted the top fund manager by Lended FinTech Conference, which is the industry's largest conference.

And that was a panel of 40 judges and industry CEOs. And they chose the prime meridian top fund manager for performance experience and contributions to the industry. And then the the few awards we won last year as well, which were pretty notable

[00:04:49] Daniel Barile: on your background and how you and Don came together.

[00:04:53] Sean Bill: Yeah it's interesting. I started out at the Chicago Board of Trade in 1994 on the floor of the corn wheat soybean floor. So Don and I have a little similar history in the commodity markets, and think in the approach markets from a similar fashion and how we think about risk and what have you.

I then went out to SoCal, went back to Southern California, joined a fixed income manager was part of a team that grew that from 800 million to 10 billion. Then spun out of there, started a hedge fund that was seeded by PAMCO with a partner from PIMCO and, did that for the next 10 years, roughly.

And so we we grew that business and 2010, 2011 with zero interest rates and quantitative easing, global relative value trades started to go away. The Polish five year, five year forward versus the Euro five year, five year forward spread went from 65 basis points down to zero.

They just all collapsed on top of each other. So I was we ended up winding down and I was looking at doing a short retirement. So we came back up to the Bay area. My wife and I are both from the Bay area. So we left Newport beach and came back up here, bought a house, renovated, blah, blah, blah.

And I decided that I'd go back to Stanford business school and study innovation and kind of refresh, myself, and then just. Very coincidentally, a classmate from high school, Who was later the mayor of San Jose, Sam Liccardo said, Hey, we were having some issues with our pension funds and we could use some outside investment expertise.

And so he's could you help us out on this? And I became a trustee for the city of San Jose's pension for a dollar a year. And then I became the CIO of Santa Clara's pension. And then another classmate, Bill Coker was the CIO of San Francisco's pension, and he asked me if I could help him out with the San Francisco pension.

I sat on their hedge fund selection committee and was a senior advisor to the CIO's office and the board of administration after about 10 years it was nominated to the CIO magazine power 100 list. And I thought to myself, that's a good time to ring the bell. And move on and so try to go out on top.

And so I I rang the bell. I was going to do another mini retirement. And spontaneous collision with Don. And, Don and I actually four houses away from each other. And so while we had known each other over the years and had bumped into each other at fintech conferences and. I was investing on the equity side, Don's investing on the credit side, the debt side.

So we knew of each other and had bumped into each other repeatedly since probably 2014. And it just was pretty random serendipitous event that, Don said, Hey, I'm looking for a CIO. And would love to have a partner to work with. And so we decided to give it a shot here.

And I joined Prime Meridian at the beginning of 2022.

[00:07:26] Daniel Barile: That's great. It's just not meant to be for you to retire, Sean. It's not meant to be. Yeah. Not gonna happen.

[00:07:31] Sean Bill: My wife's hey, how much longer?

[00:07:34] Daniel Barile: I know this. All right. This great guys. So let's talk a bit. Let's get a bit into the, into the strategies, and what is, to use hedge fund jargon, like what is the alpha proposition of prime meridian, so one maybe high level define what you guys do and the different strategies. And then, what do you think your edges what makes the firm special.

[00:07:56] Sean Bill: Maybe I'll jump in real quick here.

So we have four funds. We have an income fund, which is like the name implies. It's about contractual income, monthly or quarterly pay, that type of stuff. We have a special opportunities fund, which is really opportunistic as the name implies and really going for uncorrelated investments.

And there we do stuff like litigation, finance, life settlements, specialty credit, things like that are very uncorrelated to other, Other sectors in the markets. Then we have our real estate fund, which is a senior secure lending against assets. And so there we'll do, a single family, multifamily and residential and commercial.

And then we have a new fund strategy that we launched called the non performing loan strategy which is as the name implies is distress, where we're looking for opportunities in, in, in defaulted loans. And that one just, Crossed its first year of performance there. Donald, I'll hand off to you.

In terms of our edge, I think there's a couple of different ones and let Don start.

[00:08:56] Don Davis: Yeah, and one, one differentiating factor is that, all of the funds are unleveraged. Today's day and age, everybody wants to use leverage to juice up the return, makes marketing easier.

It's the easiest thing for anybody to do. It doesn't take any discipline, intelligence, or risk management, or education to, to use leverage and increase risk. It actually takes a tremendous amount of discipline to not do that and not get tempted. By that lure and that's exactly what we've done, so sometimes the returns are not sexy We focus on high single digit net returns with very low risk And that's been primarily in a zero interest rate low interest rate environment for the past 10 years So if the next 10 if the next 5 to 10 years or higher interest rate environment, it's not the case So we should expect to see our average annual returns materially increase, you know accordingly But in either case really my number one objective is to have the highest sharp ratio that we can have, to have the best risk adjusted returns that money can buy.

And that's our number one focus.

[00:09:55] Sean Bill: Yeah. Dad, the Harry Markowitz, famously said there's diversification is the only free lunch in economics. And that I think is one of our strengths. We are highly diversified across our funds. Not only just at the lending vertical where maybe we're doing consumer, we're doing small business, we're doing real assets, finance, equipment, finance, specialty finance, credit facilities, et cetera, but even within those verticals, so if you look at a consumer bucket for us we may have 3000 4, 000 loans in a portfolio, and that creates, it's like the, I like to use the analogy of the Tempur Pedic mattress.

It's you can have that glass of wine on there and you can take a sledgehammer onto the mattress and the wine doesn't move. You do get a lump over there. And, you do take a hit, but overall it's a pretty damn stable, vehicle, the way we try to construct the portfolios.

And that's been, I think one of our secret sauces,

[00:10:49] Daniel Barile: I've never heard that, that used the Tempur Pedic mattress in an investment context. And I've talked to a lot of,

[00:10:54] Sean Bill: investment, Rick reader. And I were talking about that and we were talking about, you What is the analogy?

It's like a Tempur Pedic mattress.

[00:11:04] Daniel Barile: So now if he used, if I hear him use it, I know he took it from you, Sean, there

[00:11:08] Sean Bill: might be the other way.

[00:11:11] Daniel Barile: Maybe it's just sticking with the funds for a moment. What does the investor base look like at the firm? Is this a, is it an institutional investor base, institutional and high net worth?

What is how folks are interested in the products? How do they learn more? That kind of thing.

[00:11:26] Don Davis: Yeah. Historically, it's been family offices, multifamily office, asset management firms globally. We've had a couple of large institutions that we've worked with as well. And we're trying to get more involved in the, we're actually working on getting more institutional allocation and exposure.

I would,

[00:11:43] Sean Bill: I would, that was one of the things that was very exciting for me about, the firm is, so coming from the pension world, you're looking The funds that you're showing are going to be, the very big players, the Blackstones, the PIMCOs, what have you, right?

And they're going to be trafficking in kind of middle market, direct lending, very competitive space, sponsor based lending, et cetera. What's very different about Prime Meridian and what I thought was very attractive about it is I see, I see like a Blackstone or PIMCO as an oil tanker. And I see us as a little speedboat, we buttress those other portfolios.

We're doing nichey off the run stuff that those guys, it would be too small for them to really. Get involved in. They want the 50, a hundred million dollars ebitda we're looking for the $10 million ebitda, $25 million EBITDA company to finance. So very different type of niche.

[00:12:34] Daniel Barile: Yeah. And I think that's an excellent point, Sean, right? Because, I think you guys are around 250 million or so in a AUM right now. And when you think about some of the other. Players in credit markets broadly, right? You just got some gigantic players, right? And it's, they can say that they are opportunistic and they move things around.

It's hard, right? Yeah. I do management more and more capital, right? So two 50

[00:12:56] Sean Bill: size,

[00:12:57] Daniel Barile: or you can be really nimble.

[00:12:58] Sean Bill: They can do a single trade, on a real estate finance deal for two 50.

Whereas, we will, we'll have 3000 plus loans in there. If you look at our real estate fund, it'd be 300 plus loans, some very diversified book of business.

And we also, we being a smaller manager, that's very I like to, I always like to say that we try to think like an entrepreneur. With institutional resources, we're based here in the Silicon Valley. We're exposed to a lot of innovation. Our backgrounds, Don's background, my background, we come out of the FinTech world in terms of investments, right?

Me and Angel investing on the equity side, Don on the lending side. And so we do like to try to be early and think of ourselves as guys that are trying to finance the future, right? And so we've done credit facilities with companies. Where, three years later, four years later, a company like Aries will discover them and they'll do a credit facility that's much bigger, but we get in there before they get in there and we're able to capture what I'd say is a little excess excess complexity premium because people don't understand it.

And by the time they do understand it, we're moving on to the next one. I think that's one of the other things that really gives us a, an advantage against our peers.

[00:14:05] Daniel Barile: Very cool. All right. So let's talk a bit about just the overall market backdrop. So it's been, it's been an interesting several years here.

So we can, let's just, we'll just go back a few years to the, the beginning of the pandemic. And maybe, talk about how, your various strategies were impacted by that shock and credit markets, which really was, if you were involved in these markets at the time, as we were here at skybridge, right?

You had exceptional moves in these markets, this gapping kind of price action that happened over the course of a couple of days in some cases that more extreme than 2008, right? And talk about how that impacted. Your portfolio is short term, but then also how that created opportunities over the course of 2020 21.

Obviously the current rate hiking cycle, which is not over is one of the biggest debates out there when is it going to be over right and how much wood is there left to chop, right? And so talk about how the hiking environment has impacted the funds and then maybe we tie that together just You know, what's the outlook, what's the firm kind of outlook overall from from a macro perspective and specifically credit markets, right?

Because, spreads are still pretty tight, right? I saw a chart the other day. I double checked it. I didn't believe it. It was Goldman Sachs chart that they put out on IG, short term IG. And there's zero spread, like no spread. And now you've got, high yield is 75 ish paid for the risk you're taking.

I don't think where we are in the cycle. I don't think you guys are in some more off the run markets, right? So talk about what value looks like there, what you're nervous about given this uncertain environment. I know that's a lot,

[00:15:39] Sean Bill: yeah. Why don't you jump in Don and then I'll fill in.

[00:15:42] Don Davis: Yeah I'll start off with the backdrop on the pandemic. So when that first hit and and first off we use a discount cashflow methodology with a third party evaluation agent. That's an institutional gold standard for credit portfolios, but there's many funds out there that don't do that even funds quite a bit larger than us.

So in the month of March, 2020 the valuation agents and all of our funds did a macro valuation judge adjustment. So there were no increase in delinquencies or defaults yet at that time. But they looked forward and said six months from now things look a lot more bleak than they did the prior six months So they haircutted the entire portfolios and we had a I think in our income phone We had we were minus 1.

8 for that one month The other funds were still profitable, but they were just barely because of that adjustment But then after that the fund held up surprisingly well the the consumer market did very well I think the stimulus and the transfer payments some of the forbearance programs that were mandated by the feds I think helped that but our income fund I think finished in the ninth net So it had a, even a little bit better than average year in 2020, our special ops fund did very well.

Again that's mostly non correlated to the market. So life settlement, litigation, finance, it behaves independently to what goes on. And the small business sector was the hardest and even real estate bridge borrowers and six and flip borrowers are technically small business, owners.

Those were hit the hardest in the market and we still finished up profitable. And I think we're up 6 percent or so and in 2020 on the real estate fund. The funds were still profitable, but they were compressed. Due to increase in delinquencies and defaults.

Now fast forward in a year or two, the courts were closed for the majority of two years. If you remember. So what happens in that case, there's no enforcement, right on a defaulted small business loan or a real estate bridge loan. And because there's no enforcement they hang on the books a little bit longer.

And and we saw that. The other thing with litigation finance, never before in US history have the courts been closed. Like that and to my knowledge and looked back, I think since 1870. And for the first time in us history, we've had the courts closed for majority part of two years.

So even our litigation finance took some small haircuts, that portfolio, because of course, as IRR is a function of recovery and time, so the longer the time to recovery it lowers the IRR. So generally lit finance has no correlation at all, unless the courts are closed, then you'll get a little bit of a haircut.

So we had some compression there but overall these funds remained very low volatility and profitable and and they were out of favor, though I'll say in 2021 and the year and the entire calendar year of 2021. Everybody wanted those quote. Guaranteed double digit returns on tech stocks and crypto, right?

And nobody wanted that boring, very low risk, high single digit net return. Nobody wanted it. They thought it was too easy to get double digit returns. So in 2022, by summer of 22, we started getting a lot more looks, a lot more love, a lot more respect, for the downside protection and the low risk nature of our funds.

And now I think we're on a lot of big allocators, our radars for 2023.

[00:18:55] John Darsie: Very cool.

[00:18:56] Sean Bill: Yeah. I think when you look back to 2022, it's Martin Zweig, right? Who coined the phrase in 1970, don't fight the Fed. And we had an 18 X increase in interest rates here in 2022. It's the worst performance for long bonds.

It's the 1700s. It's crazy. If you look at the S and P down 18, the Barkley's AG down 13, we've had five years in history where both were down or negative for the year. The only years that were worse than this was 1932 and 1974. A lot of our competitors that, have longer duration portfolios that have more credit risk had a very tough, challenging period.

You could look at pretty much any of the big names. I think what helped us was that our portfolios are pretty short duration by nature. We're generally not going beyond a three year. Loan a lot of our consumer debt and stuff like that cashflow is very quickly in terms of payoffs.

So it enabled us to I say dodge a bullet on duration where a lot of people got hit on duration and lost, your Barkley's ag was down 13, we were actually able to stay positive and protect capital and grow assets in 2022. And I think short duration and the high yield of nature of our portfolio.

We, we did start to see there's a, of course, there's a little lag. But we have seen where credit spreads have begun to widen, stuff that we used to get 8 percent on, we can get 11 or 12 now in the real estate and real asset space and the specialty credit area where you might've gotten 12 in the past.

You can now go, call it 15, 16. Another thing that really helped us in 2022 is that because we don't use leverage on the fund, we were in a very good position to, to take advantage of other funds that did have leverage that did need to sell some securities to meet redemptions and what have you.

And so we were able to buy some secondary paper, one year paper at a 14 percent yield, different names and stuff. That was our general bucket, but we, we got, gravel companies and. In Canada that, face municipalities. That aren't going away. You still got to put the gravel down when the winter ice thaws and get the roads back up.

And, we are lending to those types of folks with strong asset coverage, we've got some clean energy plays that are really interesting and the fracking space to help those guys clean up a little bit again, one year paper in that 14 percent neighborhood basically distressed sellers.

Need to get out and get some liquidity for their investors. So again, leverage cuts both ways. We definitely have gotten a lot of questions about leverage and people chasing returns. And, I think one of the things that Don, I try to point out is. These funds that have done seven or 8 percent over the last decade are doing that in a zero interest rate environment, and we certainly would think that we will capture some of that spread increase in the future and that the rates will, and the returns will move up as well.

So I think those are some of the takeaways from 2020 and the pandemic and 2022. The federal rate hikes.

[00:21:43] Daniel Barile: And yeah a naturally short duration portfolio, obviously a good thing in 2022, anything are, is anything structured as floating rate in your book, Sean, or not typically not typically,

[00:21:53] Sean Bill: Typically we write out fixed maturities generally speaking, Yeah, a little bit in specialty credit, but I'd say 75 percent of the portfolios are going to be pretty fixed on that.

The try to think of I think. Typically one year to call it three years, consumer stuff is all going to be pretty much fixed rate. The real estate loans that we do are usually fixed rate for a 12 month term you know the specialty credit stuff where you get some floaters Got

[00:22:17] Daniel Barile: it.

Got it. Okay. And so maybe, so last part of my, my long question, it's market outlook right now. High level and then also as it relates to your portfolio, when we look into 2023, there's a lot of uncertain environment, fed's obviously not done.

Inflation still has a six handle on it, unemployment stubbornly low GDP growth continues, it's just this. Interesting time we're in right now,

[00:22:43] John Darsie: right?

[00:22:43] Daniel Barile: So what's the house view for how the market evolves from here and also how the rate hike cycle evolves. And where do you potentially see opportunities down the road?

[00:22:53] Sean Bill: You want to go first down or?

[00:22:55] Don Davis: Yeah, sure, sure. The we're seeing a lot of incredible opportunities in the specialty credit space right now. But even in our real estate bridge loan space, we're seeing, as John mentioned earlier, about 300 basis points higher for the exact same level of risk.

For the exact same borrower, literally about 12, 13 months ago, it's about a 300 basis point increase for a 12 month loan. So an eight is now an 11, a nine back then is now a 12 and in specialty credit, we're seeing a lot of stuff and 14, 15 range. And litigation finance is is always interesting.

And so those are the areas where we're seeing, I think, the highest alpha relative to risk.

[00:23:38] Sean Bill: I think on the fed and that stuff, we we do think that the inflation is pretty sticky and, it's going to be higher for a longer, in the past I think that, the slogan was, lower for longer, but the fed, and I think now it might be higher for longer The the retail sales number that came in this week, CPI numbers that came in the employment numbers that came in, they're all quite strong.

So I think, uh, that You know that the fed will probably, we wrote a letter last month. We said, basically it's like the fed versus the capital markets, right? And the capital markets want the rates to come down so we can get things going in the equity space and growth investments again.

And the fed is geez, we got to choke off inflation and, going to try and keep rates high. And it's going to be really data. It's going to be driven around all the data. And I think in the last month, the data definitely says that the fed. Is going to be sticky and stay higher longer. So now for us, that's a good thing because short term rates have moved up to 5 percent on one year treasury bill.

And so our, investments that tend to be that one to three year bucket are seeing a nice improvement in the yields that we're capturing. So we're pretty, pretty positive there. I think we also have a pretty contrarian take on housing. We do feel like that the consumers have the homeowners have a lot of equity.

They have very low fixed rate mortgages locked in. And we don't think you're going to see a lot of supply in the market, come to the market from sellers looking to move and that's going to keep this shortage of housing will continue to be a problem and will be an underlying supporting factor in the market.

So we're, we actually, we were pretty positive. I think that's the second half of 2023 story there. And then we've. We are looking at, areas where there's blood in the streets and people don't want to approach it, and so we've got a deal that we're looking at that is a data center for crypto miners.

And rather than having direct exposure to crypto, we would be doing equipment finance deals for them. So we will be financing the transformers and the cabling and the substation, and we'll have, three to one asset coverage on that stuff. And. A lot of equity underneath us and we're trying to take that approach of okay.

Nobody wants to touch it but we understand digital assets pretty well. We've been involved for a long time And we think here we can participate through the picks and shovels take the levi's approach we don't have any direct exposure to the underlying but we'll finance those transformers We'll finance the stuff that they need to power the data centers

[00:25:57] Daniel Barile: All right, cool.

Okay, maybe we take a step back and from macro back into kind of just, portfolio and how you guys build things, right? Take me through portfolio construction, how you put it together, right? So that's everything from sourcing to, sizing and then portfolio management as well.

Don, Sean, I'm not sure he wants to take that one, but

[00:26:17] Don Davis: sure. Yeah, I'll start off. Yeah, we, we take a top down approach first. So first identify objectives, create the investment policy statement and figure out how to get there. And so we always looked at it. We have 23 different counterparties that we work with for assessing bill flow, accessing bill flow, picking and choosing loans.

Sometimes we're a JV, sometimes we're a participant, on a facility and sometimes we're the lead and only lender on a deal like the the crypto data center that, that Sean just mentioned. So we're really agnostic to how we get it. That's all we care about is really having Best risk adjusted returns for our investors whether that comes through a marketplace lender or buying directly from a bank or buying a distressed distressed asset, it's really just how does it mix and fit in with our investment policy statement.

We have a ton of risk limits and concentration limits built into that investment policy statement, everything from geographic concentration to concentration on loan type. So like on the real estate fund, for example, we have a single family, multi family and commercial, and we do a minimum of 25 percent in each category, a max of 50%.

In each category, for example, we also cap the exposure to no more than 1. 25%. Of the entire portfolio for a single loan, and most of the time it's even less than a half a percent. So that gives us lots of loans, as Sean mentioned, 300 loans in 40 different states. So we'll partner with FinTech platforms and anybody and everybody, to really get the types of deal flow that we need.

We have a credit modeling overlay. We have our own box that anything we look at goes through. For a pass or fell in early years, it was an API sort of Mars race. So they used to call it lending club and prosper, whoever had the fastest servers and API, and and we were certainly, uh, among the top of our co location, it was a game in the system, how to get in there first and things have changed since then, but we really have a great record, a great reputation.

We have very deep connections between Sean and I both. And so we really have access to to, a lot of different types of assets under the private credit umbrella. You want to add to that, Sean?

[00:28:28] Sean Bill: No, I think that really covers it pretty thoroughly. I think, I'd say there's a couple layers, the first layer is the originators.

And as Don mentioned, we really do try to be a good partner to the originators. We may be doing a credit facility with them. We may be buying loans off their platform. Or maybe doing a direct origination deal like the one that we just talked about in the power space. And so with the platforms, it's great because we get a, an initial filter, right?

They, they may get a hundred loans that come in, a hundred loan applications. They may decide to process, seven of them. And then we have our own filters on top of that. From what we can see, we've done 100, 000 loans over the years, for about a 1. 8 billion in origination.

And we have a lot of data too. And so we can see what has worked in the past, what hasn't worked in the past and adjust our buy boxes around that. And so we get, a double layer of what I would call a tech enabled investments, where we are really trying to be using the data analytics to our advantage, I'll give you an example, in the consumer space, one of our platforms that we work with talks a little bit about the default differentials between somebody that goes through an application with a mouse.

And the person that does the tab button and the person that does the tab button tends to be a more savvy borrower who is a little more tech enabled and has a lower default rate. Little things like this, can make a difference on the edges, and helps us as a lending fund, helps us collect.

Capture that coupon longer, right? And increase the runway on that return by avoiding those maybe what are borrowers you, you don't necessarily want to be lending to. We have a lot of different tools that we can access through our partners and internal models that we have here.

[00:30:08] Daniel Barile: And then once generally speaking, across your portfolios, I think, based on the strategy and given that these are generally short duration exposures, it's the risk management is really upfront, right? On the underwriting. And there's probably limited turnover in the portfolio, but do you guys ever sell anything?

Do you ever hedge, do you put on market hedges or, talk through that a bit?

[00:30:33] Sean Bill: Yeah, we had one really interesting transaction we did a couple months ago. When the markets were just, really going sideways, we have a lot of investments that are really uncorrelated, right?

And people want those exposures. And so we took a small piece of our life settlements portfolio, And put it out for the bid and the bid came back very strong, much stronger than where we had been holding it actually. And we were able to monetize that sell a portion of that portfolio at a, what we would consider a pretty strong premium to where the market was valuing it at the time.

And then we use those resources to redeploy to take advantage of some of the distressed sellers in the secondary markets. So we can move the portfolio around a little bit. We don't move it a ton. There are opportunities like that come up with the life settlements and other deals that you would think would be very less liquid.

But they are so uncorrelated that there is a very strong demand for those products.

[00:31:26] Daniel Barile: Very cool. All right. I think we've been going a little over half an hour or so now, so I guess, guys, if we'll we'll wrap it up shortly, but any, any closing comments you'd like to make about the firm or the current environment or whatever, floor is yours.

[00:31:44] Sean Bill: Yep. Yeah, I think, as I started with the, at the beginning, one of the things that was very exciting to me about joining prime Meridian is I do feel like the firm is very well positioned to, to help institutional investors with their private credit portfolios. Most of those investors have, pretty generic exposure.

In the private credit markets with a very large shops. And I think what really differentiates us from the competition is not only our size, but our kind of innovative nature or DNA where we are trying to, pursue markets that are less efficient. Less well understood they're smaller, and it creates a great alpha source, I think, for those investors.

I think we're an interesting play for the institutional crowd.

[00:32:24] Daniel Barile: Very cool. Don, any closing remarks?

[00:32:28] Don Davis: I think I think that was very well said. We're very excited about 2023. There's certainly a lot of risks in the markets and the world. There generally are, we have a war in Europe right now.

We have we have a high inflationary, high interest rate environment. I do think there will be some some accidents with some financial firms and investment funds out there here in the next few months. Because every time the fed raises interest rates, there's blowups, somewhere even in the taper tantrum of 2018 there was some big blowups the first big blowup has happened already that's FTS, but there may my, my educated guess is a couple more coming.

It certainly won't be prime meridian and we're really excited about this year We think we're going to get some big allocations. We're going to perform. Very well in my opinion

[00:33:11] Daniel Barile: All right, very cool. All right, don davis sean bill. Thanks so much for for joining us for another salt talks Take care everybody

[00:33:17] John Darsie: Thank

[00:33:18] Daniel Barile: you,

[00:33:18] John Darsie: Dan.

Dan, for hosting a great interview. And thank you to Sean and Don for joining us today on Salt Talks. Just a reminder, if you missed any part of this episode or any of our previous episodes, all of the episodes of Salt Talks are available on demand on our website at salt. org backslash talks. We're also on social media.

Twitter is where we're most active at Salt Conference. But we're also on LinkedIn. Instagram and Facebook as well. And please spread the word about these salt talks. It's always great to hear from great investors and portfolio managers like Sean and Don, but on behalf of Dan and the entire salt team, this is John Darcy signing off from salt talks for today.

We hope to see you back here again soon.