A $45 billion credit fund manager says the Fed is ‘way, way, way

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Lawrence Golub helms one of the largest private credit shops in the alternative finance space. His eponymous firm, Golub Capital, has $45 billion in assets under management. That’s no small feat against a backdrop where private debt AUM is expected to total $2.7 trillion by 2026. 

While private debt has skyrocketed recently, inflation and rising interest rates could pose new challenges. Golub sat down with CNBC’s Delivering Alpha newsletter to discuss how these headwinds impact his firm’s lending strategy and where he thinks the Fed went wrong in taming inflation. 

(The below has been edited for length and clarity. See above for full video.)

Leslie Picker: Private credit is floating rates so it still may be an attractive asset to investors in a rising interest rate environment. But how does the broader macro backdrop change the way you dole out capital?

Lawrence Golub: We’re looking for resiliency in the borrower against things that could go wrong. So when you have interest rates rising, it does reduce the margin of safety somewhat, when you’re looking at the ability of the company to service its debt. That has to be taken in the broader context of what’s going on with the economy as a whole and the economy really is doing very, very well. The inflation is driven by strength, not weakness. And in this environment, our portfolio has been performing at among the best levels ever, in terms of very low default rates. And it’s been a very robust, healthy environment.

Picker: What’s interesting is that your lending covers a swath of the economy that we don’t always see – it’s private companies, middle market, increasingly larger companies. What can you tell us about their resiliency, especially in the face of inflation? Is that starting to creep into their margins?

Golub: We pride ourselves on being extremely careful in who we pick to be our partners. Absolutely inflation is feeding into the performance of companies. We segment the various industries that we lend to and we have a quarterly report. And in the industrial sector, even though there’s been robust demand, that’s one area where profits haven’t been as strong because companies, due to supply chain issues, have had trouble meeting all of their customer demands. Nonetheless, in the middle market, profits are up almost 20% year over year so it’s been very robust. 

Picker: Do you feel like the Fed is ahead of the curve here, that they are on top of the inflation picture and will be able to adequately bring it down from these levels?

Golub: The Fed will eventually be able to bring it down if it has the will but the Fed is way, way, way behind the curve. When inflation was 1.7% versus their target 2%, the Fed expressed great concern, “Oh, my, we’re not at our targeted levels. We’re not going to raise rates until we actually see the data with inflation over 2%.” Now that inflation is over 7%, the Fed is going slow. It’s not taking the…