Specialty Finance Masterclass with Monachil Capital Partners Founder & CIO Ali Meli
Welcome everybody to another edition of ATL Alts. And like we have in prior shows, we're doing a dual show today because we have a special guest from Monochill Capital Partners LP, which I'll introduce here momentarily. But I want to welcome everybody to the ATL Alts and Asset Back podcast. As I just mentioned, today's guest, Ali Meli, who's the founder and chief investment officer of Monochill Capital Partners LP is joining us today. He's gonna introduce himself in moment, but what I wanted to do is kind of give a setup.
Andres Sandate:You know, one of the things we're doing a lot of is interviewing and meeting and interacting with and performing diligence on managers in specialty finance, you know, which is a subset of private credit. You know, we could spend probably a whole podcast just doing an intro of and setting a framework. But really, these guys are experts in specialty finance and asset backed finance and other nuanced areas and specialized areas of private credit. So I'm super excited to have Eli on. I met the team about a month ago.
Andres Sandate:We've had a few calls. And so today we're getting a chance to have that conversation and share it with our listeners. So if you're an advisor, if you're a family office, if you're an individual investor and you're interested in what is asset backed finance? What is specialty finance? What are these areas of private credit that I keep hearing about?
Andres Sandate:Today, you're gonna get your chance to really dive deep with an expert. So with that, Ali Meli of Monochill Capital Partners, founder and CIO. Welcome to the ATL Alts and Asset Back podcast.
Ali Meli:Good morning. Thank you very much for having me on.
Andres Sandate:Yeah, we're glad to have you. Ton of really interesting topics to cover today, but I always like to ask people to just kind of give us some background. You know, how did you get started in the industry? You know, where are you from and take us a little bit back, you know, as to where you got going and kind of, you know, lead us up to what led to founding Monochill.
Ali Meli:Absolutely, I was born and raised in Iran. I did the best trade of my life in 02/2001, which is coming to United States and came here to study engineering, got very lucky to admit it to MIT. I was focused on electrical engineering at the beginning and was thinking of, okay, I'm going to be working in telecom, maybe computer science fields. And as the .com bubble burst, I started like rethinking some of those choices. And by the time I graduated, I was applying for finance job.
Ali Meli:Started at Goldman, which was very, very lucky break for me to start at such a prestigious and such a great place to start a career at. At Goldman, I was at a desk called ABS derivatives that later on took other forms, but essentially we were focused on some of the arbitrage opportunities that existed pre financial crisis at the ABS space. So that included CLOs, some of the monoline wrapped project finance paper and other parts of more esoteric parts of asset backed financing. Once the financial crisis hit, I got more and more pulled into because specialty finance was one of the spaces that was very much reliant on commercial paper, some of the structures that existed before financial crisis. And then when financial crisis happened and that market structure was disrupted, there was an opportunity for us to deploy capital into that space.
Ali Meli:And that was my intro to specialty finance.
Andres Sandate:Yeah, fantastic. So you come from Iran to The US, you attend MIT, you find your way to Goldman Sachs into, is this a space that you really knew and had sort of an understanding of at all before getting to Goldman Sachs. I'm curious what that initial sort of period of time was like, like coming right out of undergraduate in this area where you hear acronym CLO and commercial paper, all this new stuff, right? For a young banker, a young analyst.
Ali Meli:Yeah, it was definitely like very steep learning curve. I actually used to watch financial news when I was in Iran. It was very exciting. We had CNBC Asia, I think they started beaming that. But honestly, was more focused on equities, very much equities.
Ali Meli:And maybe you can like even see that is still like true till today, even if some of these other markets are sometimes much larger or at least equal in size to equities. Like, you can look at agency market, more than $10,000,000,000,000 treasuries markets, dollars 35,000,000,000,000. Similar comparable size to equities, but that was the main focus. I looked at some of, you know, being at MIT, you get a lot of exposure to quantitative finance using a static processes. I mean, was like early stages of using information theory and modeling and essentially quant based strategies.
Ali Meli:People were still recovering from long term capital management memories of late 1990s. So my perception of finance when I was an undergraduate student was more framed by that part of the market. When I was interviewing, people said, oh, like everyone is doing CLOs and conduits and if you want to get a job or an internship, just go study what they are. So that was helpful advice. I spent forty five minutes to make sure I understand at least what they are and can say a couple of smart things.
Ali Meli:But honestly, of the learning happened once I was hired and, you know, realized that, you know, probably forty five minutes learning what CLOs was, was not necessarily the adequate amount of time. And you may need to spend a lot more time, even if like what we were doing was a little bit tangential as to what they were. You know, there is a lot that goes there. Like every deal is different. You need to look at the documentation and a lot of that culture of if you do a deal, make sure you read the documents.
Ali Meli:That's something that Goldman's culture was very good at installing at people, like attention to detail. Like first couple of years at the job is people might feel it's less glamorous, but actually it's very helpful because you have to deal with all the operational aspects, making sure cash flows are going out, coming in, you learn to calculate your profits and losses. It was a very good bootcamp that give you a good foundation on how to manage money.
Andres Sandate:Yeah, super critical. I mean, parallels to experience. I was at a capital markets desk for the first four or five years of my career and not at a big investment bank like Goldman, a couple of super regional banks now Truist and then Regions Capital Markets. But nevertheless, we learned as analysts associates working your way up through the ranks, if you will, you learn every aspect of that particular product. In my case, was leveraged finance, syndicated finance.
Andres Sandate:So your job as that professional sort of understand different aspects of the deal and you get more responsibility with more time and then ultimately you get in front of clients and you do, you learn. It's such a great place. So take us through the transition from your time at Goldman Sachs. Ultimately, now you're sitting running as the founder and chief investment officer of a general partner, Monochill Capital Partners in the specialty finance area. Help us explain What was that evolution to what we really are interested in talking about today is like what you all do the private credit space.
Andres Sandate:We've heard so much about it. As many of these global asset managers have gone public, you can turn on CNBC and it feels like there's news about one of them or multiple of them. But they're a subset of the broader capital markets, which we want to spend a lot of time on today. But take us through that transition from being at Goldman to ultimately, you know, setting up Monochill.
Ali Meli:Sure, with pleasure. I can essentially like date it back to 2014, '20 '15, where some of the businesses that I was overseeing, they included, you know, fund finance, so providing financing to other specialty finance companies, as well as other funds. And we combine that with some of our warehouse businesses like CLO warehouses, aviation warehouses. And then on one hand, could see a unified team of what you do when you risk manage those transactions. Fundamentals are the same.
Ali Meli:They are always like pools of assets. You need to make sure that the quality of pool is there. Pay attention to your attachment point, pay attention to what's going on in the market. And then I started noticing a couple of trends. One of them is that some of our clients were becoming more and more fund type clients, even some interval funds, you know, were coming and taking financing from the banks.
Ali Meli:So I saw like some benefits essentially for the banks to get in the business of providing financing to funds. On the other side, I was also seeing that there are some newer, more tech savvy lenders are coming into play. And there were, you know, initially like people like SoFi, LendingClub, some of these companies where they would come, they might get a warehouse line, their goal in life was to do securitization or do IPO. It was great business, great colleagues, but it was very like good business for Goldman because you are in the business of, well, I want to get that league table IPO. And at the same time, the same trends that created and enabled creation of Sofis also had a profound impact in terms of reducing operational cost of setting up a specialty finance lender.
Ali Meli:I would say maybe in mid two thousand, if you wanted to be a specialty finance lender, you needed to have a lot of branches, you needed to have a scale. There was barrier to entry, CIT was, you know, one of the biggest players there. And you kind of needed to have that network. GECC was another player there. And then you come into mid twenty ten, suddenly like funds are doing some components of that, middle market lending, parts of corporate lending that are closer to leverage finance are being done by the funds, but also specialty finance companies now can operate at smaller scale because you do not need to have the fixed cost of having a branch network or fixed cost of having a call center.
Ali Meli:And over time that allowed a class of specialty finance companies to exist where they are profitable. They actually focus more and more on niche products. They would never want to IPO because you never IPO a $200,000,000 3 hundred million dollars balance sheet. You can actually exist and thrive as a private company. And, you know, you might even have access to customers throughout the nation because you need the branches.
Ali Meli:Your origination channel, lead generation channel could be online, cloud based, maybe third party vendors. And that way you keep your valuable costs low, but at the same time you can create interesting portfolios of assets that no need to find a home. And I started to feel that maybe a better home for those assets could be through fund structures.
Andres Sandate:Yeah, interesting. So some things you mentioned, the tail end of my time in banking was sort of the beginning of what I started to notice was private credit, sponsor finance, CLOs were very active and our sales desk would sell part of that paper to the CLOs. Their appetite was huge for syndicated leverage paper. But then private credit and sponsor finance were small teams, at least at the firms I was with. That has obviously changed dramatically.
Andres Sandate:Non bank lending, private credit, the rise of all these different iterations of private credit over time. It's fascinating to talk to somebody that was also in the midst of that just at different firm in a more specialized area. So I know we definitely want to help educate folks around the areas of private credit and sort of give some overview perspective. But I want to give you an opportunity, Ali, to sort of explain why you set up Montechill. You gave a great background and the backstory, but I to give you an opportunity to explain why did you set up the firm?
Andres Sandate:How did you set it up? Who's involved? All those types of things. And then I'd love to jump into what you all do at Montichill and provide education and context around private credit as we narrow in around things like specialty finance during the conversation today?
Ali Meli:Absolutely. So motivation was exactly that, that there were these smaller specialty finance companies that were less served by the banks, because not through any like bad intent, but if you are not someone who is going to do securitization or who is not going to have an IPO, you might be less attractive customer for a bank. So even if you are willing to pay much higher rates. And we especially felt that in a specialty finance area, there is a win win where you might be able to offer capital to consumers that might have less access to capital or to businesses that have less access to capital because now your technology for underwriting allows you to cast a wider net and do a better job of essentially risk management and also get compensated for it. But some of these specialty finance companies did not have the right capital partner to help them grow.
Ali Meli:And we want to be the capital partner for the specialty finance companies that would allow them to grow. So we, to some extent, are a lender to other lenders. We are not a lender to consumers. We actually like to work with other people who want to be in that business. We like to be source of balance sheet for them.
Ali Meli:And, you know, there were two, I guess, phenomenon happening at the same time. One of them was people were starting with peer to peer lending. And some of the peer to peer models, on one hand, they had a lot of positive features. On the other side, some components of that business model of peer to peer had challenges. So some of the peer to peers wanted to become, you know, essentially use their own balance sheet so we can provide them by giving them essentially lines of credit.
Ali Meli:We can allow them to grow and thrive. And when we saw essentially this whole combination of demand for capital being there, we said, okay, let's start a fund that focuses on that part of private credit. And private credit is a vast market. There are different ways of like looking at private credit and different sectors of private credit. The biggest part of that is direct middle market lending.
Ali Meli:And there are a lot of our funds that are focused on that. A lot of our peers focused on that. We wanted to be a little bit differentiated from that. So we put our emphasis more on private credit focused on a specialty finance transactions. You
Andres Sandate:should be a podcast host because you do good segue, good transition there. You at Monochill wanted to set up a specialty finance platform, if you will, and be a solution, it sounds like to this emerging group of companies that were using technology to originate, there were better and more advanced ways of underwriting, if you will, risk and pricing that that were being developed and are constantly being developed to say consumer or auto or student loan or other different asset classes. But these groups maybe one is it fair to say one of the things about them is that they just were not sizable. They were not IPO candidates in the near term and they were not consuming enough capital to maybe be on the radar for these bigger financial institutions?
Ali Meli:That is absolutely correct. They are. But essentially when you look at them as lending for the sake of lending, they are very good borrowers because their technology not only helps with their risk management, their technology helps us with our risk management.
Andres Sandate:Yeah, for sure.
Ali Meli:Going back to the days of, you know, earliest days of CLOs or leveraged finance, you would wait a few months to get a report on, okay, this quarter, this CLO performed, you know, in X, Z manner, X portion of our loans are doing well, Y portion are doing bad. If you're dealing with some of these more tech savvy consumer platforms, they give you a lot of insight into their own risk management because you can actually be in sync with them. It's a win win for them and win win for us where you can rely on their well maintained data to see how these portfolios are doing effectively on a real time basis.
Andres Sandate:Yeah, it's huge. I mean, the data part of this business as we're going to unpack is massive. So as we set the frame, if you will, let's talk about just private credit in context. So, you know, ATL Alts and asset backed very purpose driven conversations around on the one hand at ATL Alts helping educate advisors, investors, some of whom are working inside of a family office or some of whom are doing it themselves. But all of which the content is really geared around educating people around the private markets and alts and really digging in less about the business and the phenomenon of private markets and how it's growing.
Andres Sandate:Much more focused on what are the practitioners actually doing to deliver alpha, to generate returns, to manage risk. So it's sort of a let's go two point zero or three point zero. So I really appreciate you in the context of that audience, helping them understand private credit and specialty finance as a subset. On the other hand, asset is really, and sometimes we find a guest like yourself who can talk about both, But Asabact is to really talk about the subset of private credit that I believe and started the show last year is growing and has the potential to be massive as it relates to investment opportunities for individuals, RIAs, etc. The same audience listening to ATL.
Andres Sandate:And the reason is probably something you can best articulate, right? When we get into asset backed finance and specialty finance as a part of that, what are some of the things that are driving that? But let's take a minute and talk about private credit. You mentioned one of the biggest areas, Ali, is you know, the sponsor finance or direct lending. So there are a lot of different areas of private credit.
Andres Sandate:Would you just take a minute and just sort of explain maybe some of the bigger containers or buckets within what is called now today private credit?
Ali Meli:Absolutely. And everyone has different ways of like categorizing them and labeling So there is no standard, but what sponsored finance as may, as you say, or middle market lending, direct lending, which is really a close cousin, if not even a brother of leveraged finance. Like leveraged finance started as, you know, bigger companies and then you can go down the spectrum of the size and EBITDA of the companies and you get to middle market lending, but there is no bright line between where middle market lending starts and where leveraged finance ends. And actually it's a good thing because people who have the skill set in one area can transfer their skill set into another area. Really the first direct lenders were people who were running leveraged finance desk.
Ali Meli:They set up assets managers and they grew that business. And it was also driven by the fact that regulation, especially like after the crisis, there were some limitations on leverage finance and regulators wanted to get leveraged finance, leverage out of the system. So if something was viewed as leveraged loan, it needed to have certain criteria. And it, I think rightfully so encouraged private capital as opposed to bank balance sheet to be the end place to take that risk. But that's one bucket.
Ali Meli:There are, I think of it as, you know, five other buckets in addition to that big bucket. One of them is a specialty finance, which is in my view like working with smaller niche lenders, small business or consumer typically that you can be a lender to those lenders. That's one area of focus for us. Another area of focus for us is asset backed. And again, those lines are not as bright because looking at CLO like asset backed itself is there are sort of public asset backed like 144A or reggae securitization.
Ali Meli:And there are funds that specialize for example, in managing CLOs or managing other types of asset backed paper. And they are, I call it semi private, but they have some features of private markets, which is they trade less frequently and they might become less liquid. That being said, there is a lot of overlap between what's essentially like you can sometimes think of lending to a specialty finance companies as doing a private asset backed transaction. And you use a lot of technologies like using waterfalls for example, making sure that you manage the cash flows, cash flows go to lockbox, all of these structural features that you see in CLOs or you see in other type of public asset backed can come to a specialty finance. But I would view asset backed paper as category three.
Ali Meli:And then category four is special situations, tactical opportunities has its own place in the credit spectrum. Then bucket number five is private credit real estate. Again, it's not something that we deal with, but you know, there is a lot of need for, you know, private credit to come and provide solutions to real estate. Again, as banks I think might have less appetite to deal with, for example, multifamily housing. Some of the multi family housing loans, especially for transitional properties went to CLOs, whether essentially within the rating agency framework you can process them or you need more creative capital that might be more patient, less constrained the way bank capital is constrained, but then can provide solution to real estate sponsors.
Ali Meli:That's the fifth category. And then the sixth category is, you know, infrastructure and hard assets. That's its own, essentially you need to have its own knowledge and expertise to use private credit to provide capital solution in that bucket. Of these six buckets, we are really in buckets two and three, which is specialty finance and asset backed.
Andres Sandate:Yeah. And that's a really helpful overview. Each and every one of those buckets has different asset managers, different types of originations, different structural features, but there are some commonalities, right? Like as a credit investor, you could be going into arguably more of the private side of that versus if you were to go in the public markets for credit or debt exposure or fixed income exposure, you're going into an investment grade to a high yield bond manager portfolio. And then there's managers that do both.
Andres Sandate:But for the purposes of what we want to talk about, that specialty finance bucket, that asset back bucket, these are really nuanced markets. What I believe really is where you merit finding managers if you're going to offer exposure to clients or if you're going to seek exposure in a portfolio, you don't have to do one or the other. I'm seeing and hearing more folks when constructing portfolios talk about having maybe exposure to direct lending, but also having exposure to some other areas of private credit. But for the sake of specialty finance and asset backed finance, let's talk about specialty finance in particular. How do you define that at Montechill?
Andres Sandate:Because it is a term I'm hearing more and more people are reading about. You're seeing a lot more white papers out there. People are inundated with, you know, prospectuses and offerings. How do you all think about defining specialty finance? What does it entail?
Ali Meli:Very good question and very, very tricky question to answer. I think of it as non bank lenders that focus more on niche markets and where does it begin and where does it end is obviously up to debate. You can think of maybe for places like Affirm and Klarna as a specialty finance companies, because at the end of the day, they are providing BNPL solution, they are non bank lenders. But I would say most of the specialty finance companies that focus on niche products are on the smaller side of the balance sheet. They look at, you know, a specific type of, you know, consumer.
Ali Meli:They might be, for example, looking at, I specialize in subprime auto, or on the other hand, I might specialize in making loans to exotic cars, or I might specialize at making loans to, you know, businesses like MCAs, I think fall into another merchant cash advances or another category within the specialty finance. And there are unknown unknowns. I think as people look at, okay, what can I do with technology? If I can, for example, give loans to someone based on earned wages that they have and I can charge them very little, so I can avoid, for example, having them to go to a payday lender, which might like charge huge
Andres Sandate:Hundreds of percent. %. I mean, that's a really, really important like use case, right? That I'm familiar with. Like the earned wage access idea of saying the wages have been earned by the worker, but he or she needs the wages a week ahead of the normal payroll.
Andres Sandate:And so they're able to get access to capital to pay for bills for life emergencies, vehicle breaks down. Right? And there's a way to build a credit solution for the employee, for the employer, right? And somebody has to provide that capital.
Ali Meli:Exactly. And it is feasible, I think because of technology, because fifty years ago the only way you could do it is if someone would make a phone call to the employer because people wouldn't like there was no internet for people to like look at their earning statements online. But now you can do a lot of these verification that someone actually has earned and it's earned their wages and it's just a matter of time that hits their bank account by how like online platforms and data is there. And it's a lot easier and it's a lot less risky because at the end of the day, as a credit investor, you don't get anything in your portfolio that 10Xs your money. Your success is determined by avoiding losses.
Ali Meli:And that technology piece of it has made it a lot easier to avoid losses. You know, that to me essentially, we are probably at the early innings of what specialty finance could be and what level of, you know, essentially like, I mean, it will disrupt obviously some other buckets of finance because I think, you know, probably there is less and less use cases for payday lending. Probably the best credit quality people will not need to rely on those kinds of short term loans. Instead, they can rely on some of these more products that are win win because you end up paying, if you're lending to someone based on the basis that they have earned, you don't need to earn a lot at all. The product is short term, but you don't need to like have high interest rates to be profitable because you know these people are going to make their payments.
Ali Meli:And there are going to be a lot of cases like that because now we can monitor performance and monitor cash flows and manage cash flows with a lot more efficiency. And, you know, people who have better data and better credit decisionings are going to end up winning that battle among the specialty finance companies. And that technology piece is going to cause specialty finance to become, to take bigger and bigger part of the market share on one hand from banks, the other side, from some of these, what I call brute force lenders, that their only tool that they had was charging high interests.
Andres Sandate:Right. And just they were around the corner, right? And you could go get a loan that same day. So maybe we spend a little bit more time talking about specialty finance and just how Monochill differentiates itself because I've looked at a lot of different platforms, right? Or a lot of different sponsors and you hear the most fascinating examples of where they're finding opportunities to partner with originators, right?
Andres Sandate:So these are folks that have built the customer acquisition apparatus, or they've found ways to embed their technology and their solution at the point of sale or at the point of a decision with a borrower, but they need a balance sheet. They can have great tech and they can have a really good user interface, but they need a balance sheet in order to ultimately make the loan. And so that's where a group like you all at Monochill come in. Maybe you could just talk a little bit further about the space. When people think about specialty finance and you all, what are either additional areas where you're seeing innovation, where you're seeing opportunities, where banks are being disintermediated or where brick and mortar businesses or traditional businesses really didn't have competition.
Andres Sandate:But now all of a sudden you look up, last ten years, the game has changed.
Ali Meli:Yep. I think, you know, I think every aspect of finance, like we are seeing big transactions like home improvement loans, for example. It is an interesting, you know, area. It's not, as of now we have limited exposure to that. So maybe I can speak more freely because I wouldn't be talking about books, but it's fascinating where, you know, if you are a vendor, if like who is the end customer?
Ali Meli:The end customer you can think of it as it's either someone who is going and doing the home improvement project, let's call it HVAC, someone's upgrading the HVAC. In order to increase their sales volume, they can have more successes, they offer financing to their consumers. On the other side, you know, you have very good credit protections because you can have liens on the houses. So if someone comes and installs the HVAC and ideally like they do a good job with installing the HVAC, but the customer doesn't pay, there is a lien. So there is less incentive for people not to pay that back.
Ali Meli:So it's a very good asset class from a performance perspective and probability of default perspective. And again, it's a win win for as long as people in this ecosystem act ethically, it's a win win for everyone. It's a win for the end consumer because they can get more efficient HVAC and save on their electricity bill. The installer can sell more volumes. The lenderfinancier can earn a healthy interest.
Ali Meli:And, you know, everyone in this equation wins. Now giving, there are a lot of, at least maybe not a lot, but there are a few essentially companies that are set up that are active in this space and they need capital. So for a firm like us, we would like to become capital partners for some of these essentially companies that want to create these niche products. And again, of it is that if you are in the business of selling HVAC upgrades to consumers, you cannot live in a world where, oh, I worked with a bank and wait for like two weeks to get a yes or no decision from a bank credit risk. Versus you have an online platform where consumer data is uploaded, you do your credit check, you can look at other attributes, you can even, as from a lender perspective, you can even look at the HVAC contractor's history.
Ali Meli:How many times they have installed HVAC and the customer was happy? How many of the HVAC systems that they installed resulted in some type of dispute where someone said, oh, I'm not going to pay this loan. So you can aggregate all of that data, all of the, even if you don't have perfect data, can go and look at, you know, with the advances in data science, what are the indicators that correlate with someone being a good HVAC installer or someone being a good customer. You can do all of these type of statistical inferences if you have good data. And it can be maybe something as simple as FICO score, which is the oldest way of doing things.
Ali Meli:Or it could be that, well, if I know someone has a FICO score and is within this range and they have children and their kids go to this school and they live in this zip code, that's probably a good, you know, customer for us. All of those credit decisionings makes these products more interesting, makes these specialty finance companies more competitive. And as a result of that credit scoring, they can offer better rates to the borrowers that are higher quality. And I think of it as win win for everyone.
Andres Sandate:Yeah, mean, and ultimately we can't forget investors, right? Because at the end of the day, if you're going to be providing a warehouse facility or a balance, some type of a balance sheet solution to a FinTech originator or some type of specialty finance originator who's doing, whether it's home repair, home remodel, SMB, auto, elective medical, I'm just going down the short list that comes to mind, right? You go in to get a cosmetic dentistry, right? A lot of people are not going to pay out of pocket, you know, the tens of thousands of dollars for that cosmetic dentistry solution, but if they could finance it right through the provider, that's a win win, right? And then you have the investor for a group like Monochill or others, right, who are able to earn interest margin or spread on the financing you're providing that's ultimately being financed to the consumer.
Andres Sandate:As long as everybody in that ecosystem is getting repaid, people are acting ethically. It's an alternative income solution in the portfolio, which I think is fascinating. Any other areas where you're seeing disruption or innovation out there, whether you're working with them in your current portfolio or just areas you're monitoring where you see specialty finance potentially being a bigger player going forward?
Ali Meli:Sure. We are looking at autos has been a big sector for our current asset allocation. It was one of those things that actually like data helped us a lot. We started investing in autos before COVID. And then when COVID hit, we were seeing that performance data doesn't show deterioration, even though markets for that two months after COVID were falling out of the bed and you had health bankruptcy just then, and people were initially a bit pessimistic about in a world where no one is moving around, what would be happening with autos.
Ali Meli:But then you saw the data, you realize there is a discrepancy between what the sentiment is versus what the data is showing. And as an asset manager, you can use that to go and say that, okay, I'm going to scale up my exposure here because I see opportunity in this sector. I'm getting the data here that shows that maybe the market prices are too pessimistic compared to opportunities. Or it could be the other way around as well. Obviously we haven't had seen that because credit environment has been fairly benign.
Ali Meli:But again, a data driven approach where if consumers stop making payments or if default and delinquencies go pick up, you can get that data quickly and then react and adjust your portfolio. That's another way where the data driven approach could be helpful. And, you know, more and more as banks are retrenching, by banks I mean commercial banks are retrenching and for the right reasons, I think. Because if you look at again like twenty years ago, a bank bought some, a place that had deposits and customers wouldn't touch their deposits generally, like going to the financial crisis. People viewed Bear Stearns and Lehman were bad because they didn't have deposits.
Ali Meli:Like people like Morgan Stanley or Goldman, they were encouraged to become deposit taking institutions. And then people who had deposits like JP Morgan, where people said, okay, fortress balance sheet. And there's a lot of that is there because they have very clean balance sheets. But when we come to a world where twenty years later online payments are increasing the velocity of essentially how deposits function. If you look at Silicon Valley Bank, they had a lot of deposits, but just that because of the fact that they had very good technology, people could move their money so quickly, then deposits are behaving more like commercial paper or repo lines, or some of those things that existed before financial crisis where suddenly like they stopped functioning.
Ali Meli:There is a broader recognition among regulators as well as the banks themselves that I should only use deposits for certain things and I may not be able to use deposits to make illiquid investments that might take a while to pay. So now investors on the other side, and it would be the same person, the same person who was a depositor in Silicon Valley Bank could become an investor in a fund through their RIA. They just go and say that look, for five or 10% of the portfolio that I have, I don't need next day liquidity. Let me use that to like get into this space, but then I get a premium because the banks are exiting the same space. And again, I think of it as it's not one person losing, one person winning.
Ali Meli:It is probably a better place to host the risk of illiquid investments are savers, retirement accounts, where, you know, someone doesn't need to touch their money for ten years. So if you can get a premium over like more liquid investments by locking in your capital, that might be a good give and take for someone who has a longer investment horizon.
Andres Sandate:Yeah, I mean, has to be a real education, right? Around how the vehicle works, how the strategy works. There are always going to be trade offs. I think it's famously said there's no free lunch, right? So you get mark to market when you're in a public fixed income portfolio, right?
Andres Sandate:So up and down. Are the underlying assets moving up and down that much? I don't know. It's a whole another separate conversation. On the other hand, you get more illiquidity in the private markets, but you're ideally getting paid for that, right, in the form of that illiquidity premium, right?
Andres Sandate:So the targeted yield or distribution or whatever it's called, right, should theoretically be higher relative to a public market equivalent. So really, really helpful sort of construct around specialty finance. I think anybody listening would say we have our head in the sand to talk about all this though without talking about the macro environment, the environment we see ourselves in, find ourselves in here recording this on April 2025. New administration, right, in the middle of a, whether it's a trade war or just trade discussions, trade differences, right? We see that.
Andres Sandate:We see a Fed that's trying to sort of navigate unemployment, inflation, interest rate environment. People always want to talk about that. They want to talk spreads. They want to talk about are we getting compensated for the risk we're taking in private? So you have this macro backdrop that's quite complex.
Andres Sandate:And so I don't ever like to ask a manager what's their crystal ball, but just give sentiment, give a sense for at Monochill, what's the investment committee thinking through and sort of when looking at deploying capital, backing a specialty finance originator or one of these originators you described? What are some of the variables that come into play in the macro context?
Ali Meli:Sure. So the first philosophy that we have is looking at hard data over sentiments. If you look at economic measures, some of them are hard data. Inflation is a hard data. Inflation expectation is a sentiment.
Ali Meli:So, distinguishing between the two and we are actually not seeing more gap. Like one of my favorite metrics is looking at TruFlation, which is a tech driven essentially benchmark for measuring real time inflation. Their thought and philosophy is, well, a lot of prices are available online so I can use that to come up with a real time measure of inflation. That has been below 2% in March and we are entering April again at a very benign reading. So that's one aspect.
Ali Meli:The other aspect on the other end of the spectrum is that we felt from December and November and less to do with administration, more to do with markets. That the markets were very much overpriced. If you look at valuation, all sorts of cyclical measure, adjusted for cycle, PE ratio, or case Schiller metrics, or all of the CAPE stuff, all of them they're saying that across different assets classes, the markets are overvalued. Equities are overvalued, spreads are at all time high, all time tights. So in December we actually started de risking.
Ali Meli:We got some of our asset backed exposure done. We sold some of our CLOs that we had in our portfolio done in some of our funds, we just started de risking that. Now, our view is that it is possible for the markets to get worse more because of valuation. But we also think that there is a scenario that the third component is that we also don't think the tariffs are all doom and gloom. It sounds like the administration has a policy mix of let's use tariffs to raise revenues, but let's like adjust the energy policy to keep the inflation in check.
Ali Meli:And then if you look at how at least they want them to work together, there is a risk in implementation and doing, but their theory is we might impose tariffs, we raise tax revenues, we do cut government spending that pushes down inflation because there is less spending by the government, there is less inflation. And by the way, if we impose tariffs, we are going to reduce the trade deficits, which is a boost to GDP. Look at what GDP measures, it's not gross domestic consumption, it's gross domestic production. So, imports minus exports or trade deficit is a reduction or hit to GDP. And the timing may not work.
Ali Meli:We might get hit in consumption immediately benefit from reduction in trade deficit in the future that could cause negative GDP growth. But there is a scenario where those things work together and then investments, if tariffs policy triggers investments, that could possibly be a boost to the economy. So a lot of it remains to be seen category, but we are seeing a world where maybe they can keep inflation in check, at least based on hard data that we are seeing from TruFlation. And then we will keep an eye on employment. Again, not less sentiment, but more like how would tomorrow's job report look like tomorrow being, not tomorrow, sorry, this Friday's job report look like two days from now.
Ali Meli:Are there layoffs or not? ADP numbers that came, which is again hard data, have been fairly benign in the job market. And then you can get to a place where inflation remains benign, rates come lower and investment picks up and they maybe be able to cut the deficit. I'm not necessarily sure if they can cut the debt, but they can cut the deficit which will push the rates lower as well.
Andres Sandate:Yeah, fascinating. Well, one last question, as you think about positioning Monochill for an environment where you can support the specialty finance space and some of the originators that you described and some of the opportunities adjacent in the asset backed finance space. In light of that backdrop, you talked about volatility, valuations, true inflation. How are you all thinking about the second quarter, the third quarter? I mean, deploy capital just like it overnight, right?
Andres Sandate:There's an underwriting process, there's a sourcing and origination process and such. So how are you thinking about with that environment, the macro environment you described, you know, the rest of '25?
Ali Meli:Sure, we are very much focused on origination. We like raised some cash. We converted some of our positions that we felt had rallied too much to treasuries. We have dry powder to go and start originating and, you know, keep executing on the pipeline. And one benefit that I see is that when you are focused on something that we think is a secular trend, the idea of these online lenders taking market share or just creating new asset classes, it becomes less about timing the market.
Ali Meli:We are not in the business of timing. We are in the business of risk management, but we are not in the business of timing the market. So for us, if we can find good risk and we think we can find good risk and market disruption, if anything can be helpful to finding better opportunities, we believe that it's a very ripe environment. Our pipeline is active. We transactions that have room to grow.
Ali Meli:And, you know, we think newer and better things are going to come as the technology does its and you can have more operationally efficient lenders that then can look to us as a partner to expand their balance sheet.
Andres Sandate:Fascinating. Well, were delighted to have this conversation. Like I said, ATL Alts, Acidback, really just this perfect intersection to sort of educate and hopefully inform people around just a lot of things to think about as they diversify in private credit, diversify into alts and private markets. So it's really great to hear from experts and from people that are in the trenches, right, in deploying capital. Tell me, and more importantly, our listeners, how can they learn more about Monochill?
Andres Sandate:How can they get in touch and just better understand where they can interface?
Ali Meli:Absolutely. So we have our public fund, which is accessible to all investors. People can go to monitor funds and they can look at our fact sheets, prospectus, and they can always get in touch with us and learn about our offerings. But we, you know, a lot of information about our fund, especially our interval fund, which is a registered product that is accessible to investors is on Monochill Funds website.
Andres Sandate:Fantastic. Well, Ali Mele, Founder, Chief Investment Officer, Monochill Capital Partners, I want to thank you for joining me today on ATL Alts and Asset Back to talk about your firm and specialty finance in this growing area that I think we're going to hear more and more about. So I appreciate that. I look forward to sharing more information with our clients at Gramercy Park and folks that are interested in learning more. And then a really important and helpful announcement.
Andres Sandate:Hopefully for those of you that listen to the show, we've been getting a lot of inbound inquiry about how the folks can learn more about our guests and how they can learn more about the things that they're doing. And so we're gonna be announcing this spring a platform that is gonna be super exciting and it's gonna provide a lot of resources and education from those folks that are on our show and how they can interface and interact more with our guests. So more to come on that, but we'll leave it there for today. Ali Mele, Founder, Chief Investment Officer, Monachill Capital Partners. Thank you for joining me today.
Ali Meli:Thank you. Thank you very much for having me.
Andres Sandate:Take care.
Ali Meli:Cheers.
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