So what are they seeing?

First, on the consumer. Last week, the University of Michigan reported its lowest-ever reading on its consumer sentiment survey. The university has been conducting this survey for 74 years and April’s reading came in below anything registered during the global financial crisis, peak Covid or the period of stagflation in the 1980s. While inflation has fallen from its highs, price levels remain high and many respondents cite this as a reason for poor personal finances. Higher gas prices don’t help.

But what consumers say and how they behave are different. “I don’t know that we can square for you the headline surveys on consumer confidence or small business confidence, which are all not great, how we square that with what we actually see,” said Bill Demchak, CEO of PNC Financial Services Group. “When you look through spending patterns, growth in savings, activity levels, loan growth, like everything we see day-to-day in our business is almost at complete odds with the surveys you see on confidence.”

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Named Bistro – short for Broad Index Secured Trust Offering – the structure bundled 307 credits from JPMorgan’s balance sheet, spanning corporate loans, bonds, and municipal debt. A special purpose vehicle would insure the portfolio’s risk, funded by selling notes to outside investors. If all went well, investors would earn a steady stream of fees paid for by the bank to compensate them for assuming the risk. If things went badly and defaults occurred, investors would be on the hook. Because defaults were expected to be low – Moody’s estimated 0.82% per year – the vehicle didn’t need to raise so much money. On a portfolio size of $9.7 billion, capital of only $700 million was deemed necessary – enough to cover losses in all but the most dire of scenarios.

JPMorgan gave investors a choice. They could sit first in line to take losses in the event of defaults via $237 million of high yielding Ba2 notes, or they could opt for $460 million of safer, though lower-yielding, AAA notes which would only take losses once the Ba2 tranche had been exhausted. The special purpose vehicle invested the proceeds in US Treasuries, guaranteeing the money would be there if called upon. Only if it was used up would JPMorgan need to take a hit on the so-called super-senior risk it retained.1

Within a matter of days, investors snapped up all the notes. JPMorgan didn’t hang about. In early 1998, it conducted a second transaction and soon began marketing the service to others. Regulators gave the fledgling market a boost by agreeing to lower capital requirements on the super-senior slice. Against the standard 8% capital requirement for corporate loans, regulators allowed exposures supported by a Bistro structure to be backed by only 1.6% of capital. Now, not only could banks use the structure to fine-tune credit exposures, they could free up capital as well. In less than a year, JPMorgan printed five deals, transferring credit risk on $29 billion of exposure by selling $2.7 billion of securities.

“The overarching motivation for Bistro wasn’t to open up a new market or sell some funky product, but for JP Morgan to hedge its credit risk,” Bill Winters, former co-chief executive of JP Morgan’s investment bank, later recalled. “It was extremely effective in accomplishing that. It also had the effect of spawning a new industry.”

Over time, the spawned industry morphed. Bistros became known as synthetic collateralised debt obligations. Banks began dumping real estate assets including sub-prime mortgages into them while transparency eroded. Some accumulated huge super-senior positions on their books, blind to the risk building up. Others bought protection from monoline insurers that would prove largely worthless. By the time the financial crisis hit in 2007, outstanding volumes stood at $105 billion.

It took a while following the crisis for the market to recover but in 2017, after a wave of reforms, authorities in Europe published a paper clarifying how transactions would be treated from a regulatory perspective. Rebranded synthetic risk transfers or SRTs (or in the US, simply credit risk transfers) volumes have reaccelerated. Last year, banks issued $41 billion of SRTs, up from $29 billion the prior year and are on track to grow issuance by more than 20% again this year. JPMorgan has done some – in December 2023, it finalised a deal to buy $2 billion of insurance on a $22 billion portfolio – but other banks including Barclays and Santander have embraced the trend more actively.2

Alongside all the focus on private credit, SRTs are attracting scrutiny as a similarly opaque market, growing quickly. Over recent months, the European Central Bank, the Bank for International Settlements and the International Monetary Fund have all weighed in to warn that SRT-related risks could be building undetected.

This comes after the pioneer of the Bistro already sounded the alarm. Now chairman and CEO of PNC Financial Services Group, Bill Demchak ran the department that devised the structure within JPMorgan back in 1997. “I might have invented that product,” he told investors in 2024.

“In today’s world [it] is perhaps the cheapest way to create capital. But a complete arbitrage… If you’re actually executing and a professional takes the other side, you must presume that he’s charging you more for the risk you’re hedging than you would charge yourself internally or you never would have made the loan, you’d never be in the business. So this is a near-term band-aid to free up capital that you can double down and make the next mistake on.”

We’ve discussed emerging asset classes here before – private credit, infrastructure, litigation finance, GP stakes, supply chain finance, GPUs and more. Key to their durability is an equilibrium between supply-side factors and demand-side factors, with regulation often a pivotal catalyst.

To dig into those factors and explore how they shape the growth of SRTs – and the risks regulators fear are building inside them – read on.

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This week, I’m joined by Adam Shapiro, partner and co-founder of Klaros Group. Klaros is a specialist advisory firm that helps financial institutions navigate banking regulation from applying for a bank ch…

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An experienced investor, he’d done his due diligence. Among his calls was one to a senior executive of Visa. The company would never be able to maintain a competitive advantage, the exec told him. The big players would copy whatever it built. Encouraged by his own experience of the product – and his daughter’s – he ignored the advice and wrote a cheque in the company’s seed round, becoming a 3.3% shareholder.

Today, Revolut does much more than free currency exchange. Its product range spans savings, lending, investing and trading, business banking, eSIMs, travel booking and more. It has 70 million customers across 39 countries – up from around 150,000 at the time of that meeting, when it operated in the UK alone. Full-year results released this week show gross revenue of $6.0 billion and net income of $1.7 billion – numbers its founder and CEO Nik Storonsky reckons will grow by at least 50% this year. With a valuation of $75 billion, determined by a secondary share sale last November, Revolut is already worth more than many established banks.1

Not bad for an angel investment.

Ten years on, any scepticism shared by incumbents has vanished:

“We do observe Revolut very carefully,” said the CEO of BNP Paribas in Poland in December. “This is the most successful neo financial institution in history, and they will have their place in the landscape.”

“When you have strong, highly competitive new entrants in the market, you have to pay attention,” said the CEO of Société Générale on his third quarter earnings call.

“Our competition is all back. Wells Fargo is back, Bank of America is back, Goldman Sachs, Morgan Stanley. But we also have Citadel, fintech, Revolut, and that – so we are conscious of that,” said Jamie Dimon in May.

Even Visa has come around. Revolut recently partnered with Visa to launch a premium business card. “Titan for Revolut is a really cool win for us,” the company’s Chief Product and Strategy Officer said this month.

Since my peek inside the dashboard, I have been a happy Revolut user. I signed up immediately after leaving that meeting and – as the app still records – spent £6,438 on my travels through the remainder of that year. As an early user, I also got the opportunity to invest a small amount in the series A.

I’ve written about the company before – in Revolution in the Air in 2020 and Britain’s Newest Bank in 2024 – but, with results just released and a shiny new bank license in the bag, it warrants a fresh look. To dig into the numbers and explore what they say about Revolut’s competitive positioning, read on.

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But this was no gathering of four-star generals. The Leadenhall-based Joint War Committee is made up of senior underwriters in the marine insurance industry, whose job it is to determine regions of the world that present enhanced risk of peril. On March 1, they expanded their map of so-called ‘listed areas’ to incorporate large parts of the Gulf.

For shipowners and charterers, this had implications for insurance cover. All have policies in place to accommodate a range of risks – hull damage, cargo, crew, third-party liability. The unpredictability of war – and its tendency not to hew to standard actuarial trends – means war risk has long occupied a category of its own, but most seafarers have a policy to cover that, too.

When hostilities erupted, those policies came into focus. Commentators saw several leading insurers issue cancellation notices and concluded that war risk cover was being pulled entirely. They suggested that was a reason for the collapse in traffic through the Strait. Donald Trump promptly intervened, announcing that the United States Development Finance Corporation would step in “to provide political risk insurance and guarantees for the Financial Security of ALL Maritime Trade, especially Energy, traveling through the Gulf.”

The reality was more mundane. Reinsurers backing a specific layer of cover for charterers had got nervous and, exercising a contractual right, excluded Gulf claims at 72 hours’ notice. The insurers, their hands forced, duly notified clients. It wasn’t the first time – the same sequence had played out after Russia invaded Ukraine in 2022, and again when Houthi attacks escalated in the Red Sea in 2024. Each time, replacement cover was on the market before the old contracts expired. The Joint War Committee was blunt: “Despite some regrettably incorrect reporting about cancellation, hull war insurance cover remains in place and available in the London market.”

What did change was price. “I think we have had in the last week a 500% increase on war risk insurance,” shipping magnate Nikolas Tsakos told investors on his earnings call a few days into the war. “I think from what we used to do it at $0.15 per deadweight ton, we’re up to close to $1 now or $0.75 to a $1. So that’s a huge increase.”

And that was just the beginning. By mid-March, cover had leaped to around 5% of a vessel’s value – roughly five times even those early-war rates. Insuring a $100 million tanker through the Strait now costs in the region of $5 million.1

But when faced with the risk of a direct hit, crossing the Strait isn’t just a matter of insurance. “Our main concern is the safety of the crews,” the CEO of d’Amico International Shipping told investors on his call last week. “It’s not that of the vessel itself – because the vessel itself can be insured in normal circumstances.”

Through the beginning of this week, there have been 18 direct attacks on commercial vessels in the Gulf, plus another five which have suffered near misses or minor damage. This is not somewhere a prudent captain takes a laden tanker, however much Donald Trump inveigles him to “show some guts”. London’s moment of apparent influence over Hormuz traffic turned out to be a misreading. The key didn’t hang there after all.

The episode, though, is a useful entry point into a market that most people never think about until something flares up. I had flagged last week that I was going to write about marine insurance, and the response from readers persuaded me to weigh anchor. To explore how the market works – and what this crisis reveals about it – read on.

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This week, I’m joined by Kunal Kapoor, CEO of Morningstar. Kunal has spent his entire career at the firm, starting as a data analyst and working his way up to lead one of the key information providers in global finance. Morningstar began as the “system of record” for the mutual fund industry, known for its star ratings, but today it’s a much broader platform spanning credit ratings, indexing, private-market intelligence through PitchBook, and wealth technology.

I’ve written recently about how AI could reshape the financial data industry — potentially unbundling traditional terminals and shifting the competitive focus towards proprietary data and embedded workflows. That makes Kunal an especially interesting person to speak with. Morningstar sits right at the centre of those changes as a firm built on data, research and investor trust.

We cover a lot of ground in this conversation – from Morningstar’s ratings franchise and the push for transparency in private markets to the economics of financial data and what AI might mean for the future of market intelligence. So it’s a pleasure to have Kunal on the show.

We discuss:

• Morningstar’s evolution from mutual funds to financial data platform [02:12]

• Star ratings, Medalist ratings, and the continuing role of human analysts [07:05]

• How AI is changing financial information interfaces [10:18]

• The value in financial information: proprietary data, research and IP [11:06]

• Morningstar’s move into private markets and semi-liquid funds [18:30]

• Private company research and venture valuations [24:00]

• Competing with larger agencies in the ratings business [29:52]

• Morningstar’s push into indexing and the economics of the index business [35:26]

• Why Kunal rejects the idea that retail investors are “dumb money” — and what worries him instead [38:11]

• Crypto, risk-taking and what still matters most in financial data businesses [40:37]

Further Reading

We’ve discussed the rise of retail money in private credit before. By some accounts, vehicles set up to cater to wealthy individuals now make up 30% of the direct lending market. Many of those investors now want out. And as others watch redemption requests go in, they wonder if they shouldn’t ask for their money back too. According to data from Robert A Stanger & Co, redemption requests are running close to 8% this quarter, up from an average 1.3% in 2024.

It’s been three years since Silicon Valley Bank reminded us what a bank run can look like. One of the lessons from that episode is that historic assumptions about the stability of retail funding need updating for the social media age. WhatsApp groups, X/Twitter and the like give retail investors coordination mechanisms with far greater reach and immediacy than ever before. The old logic that a diversified base of small investors was inherently stable no longer holds when information – and panic – spreads instantly.

Private credit is structured differently to banks. Without the blanket of deposit insurance, managers employ other means to push out the duration of their funding. Typically, they impose redemption limits, conventionally 5% per quarter. The problem is that those limits are now being breached. Last week, BlackRock said that it had received requests to repurchase 9.3% of shares outstanding in its HPS Corporate Lending Fund (HLEND) – “exceeding the 5% framework for the first time since inception.” Blackstone announced that redemption requests totalled 7.9% of its Blackstone Private Credit Fund (BCRED). And this week, Cliffwater revealed that investors have asked to pull 14% out of its flagship private credit interval fund.1

Managers are responding to the wave of redemption requests in a variety of ways. Blackstone upsized its offer to 7% and joined with its employees to chip in the rest, declaring proudly that it is “fulfilling all repurchase requests this quarter, as we have done every quarter since inception.” BlackRock, by contrast, stuck to its guns, imposing a 5% limit while thanking investors “for the trust you place in us as your investment fiduciary.” Its decision was applauded by John Zito, co-President of peer firm Apollo Asset Management, who said that these “products are designed to protect redeeming and remaining investors by allowing vehicle liquidity to match natural asset liquidity.” Blue Owl tried a different approach. It sold a portfolio of loans in its Blue Owl Capital Corp II vehicle to fund a one-off 30% payout, telling investors to hold tight for the rest. Rather than stick with its quarterly tendering schedule, management will return capital as and when it can.

Over the next month, other funds will reveal the scale of their outflows. Goldman Sachs estimates that the industry could see $45 billion to $70 billion in net outflows over the next two years. Yet the fear of gates going up before investors can exit may itself accelerate the outflows. Managers reference record redemption requests, but it’s not clear how robustly they have modelled these at the industry level.

For some, recent events have the hallmarks of the Global Financial Crisis. On X/Twitter this week, Jeffrey Gundlach, founder of DoubleLine Capital, posted: “A Private Credit Fund of Funds in 2026 seems to rather closely resemble a CDO-squared in early 2007.”

Many of the echoes are certainly there. In June 2007, Bear Stearns suffered debilitating issues in two of its managed hedge funds; a few months later, Goldman Sachs had to stabilise one of its own. Questions around marks and hidden leverage circulate. Whatever parallels you want to draw, the important question is whether the current issues are systemic. To explore the question with me, read on.2

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In particular, Blankfein was worried about a doom-loop of forced selling. With oil trading 70% below its average price of the prior few years and Iranian supply coming on-stream to push it even lower, energy companies faced acute pressure. Fears of defaults led to a widening of credit spreads which spilled into other sectors. Compared with where they sat 18 months earlier, US high yield spreads had more than doubled, reaching levels not seen since the European debt crisis of 2011. All this after a period of ultra-low interest rates and ample liquidity.

“Higher risk, less liquidity, hard to get out of certain positions,” Blankfein said. “And that feeds upon itself. Sometimes positions are easier to put on than to take off.”

Goldman came out of it fine. After printing its lowest quarterly revenue since 2011, profits swiftly rebounded. So fleeting was it that the period doesn’t even merit a mention in Blankfein’s new memoir (much less his meeting with me).

But the episode highlights Blankfein’s grasp of market dynamics and how to manage a business through them. “Cycles can last a long time, and you can be very severely hurt in a cycle if you don’t respond,” he told me.

Sadly, his book comes out too late for the managers of Blue Owl and others who have grown aggressively in private credit. On his marketing tour, Blankfein sounds the alarm. He thinks markets are due a reckoning and identifies private credit as a possible source. “Horses are starting to whinny in the corral,” he told one interviewer, reprising an image he uses in the book to describe the events in summer 2007 that presaged the financial crisis.

He’s smarting, of course – he recognises that private credit and private equity financiers have usurped him as kings of Wall Street. There were four of us in that meeting room in Miami. One, his chief financial officer, went off to become CEO of Carlyle; the other, his head of investor relations, became chief administrative officer at KKR. In his book, Blankfein acknowledges the flow of talent to firms like these – though he warns that their recruiting advantage will last only until the next crisis, “when the younger institutions will come under the yoke of regulation and the next generation of unregulated financial firms begins its rise.”1

Still, there’s a lot in the book for his former colleagues to digest. Blankfein talks about the mark-to-market “theology” that was core to Goldman’s risk management framework. When dedicated risk controllers came up with marks that were in conflict with what traders thought they should be on illiquid securities, management always sided with the control people. Contrast that with the opaque, sometimes inconsistent marks that exist in private credit. We’ve spoken about private credit vehicles like Ares Capital Corporation (ARCC) and FS KKR Capital Corp (FSK) here before. Last week, a similar vehicle, BlackRock TCP Capital Corp (TCPC), wrote down the value of one of its holdings to zero from 100 cents on the dollar three months earlier. What would the Goldman risk controllers have made of that?23

Blankfein also highlights the elevation of reputational risk as a key focus. In August 2007, he saw that losses were beginning to show in a hedge fund managed out of his asset management business. In order to handle redemptions, he decided to put more money in. The firm ended up investing $2 billion of its own capital and raising an additional $1 billion from independent investors. It’s a tactic Blackstone has cloned, first in its private property fund, BREIT, when it brought in University of California money to help out; more recently in its private credit fund, BCRED, when the firm and employees put more money in. In neither Goldman’s nor Blackstone’s case was there an obligation but, as Blankfein notes, it’s not a good look to be high-fiving your way through a record year at the parent company while investors struggle.4

He doesn’t dwell on it in the book, but there’s another risk in private credit his experience attunes him to: expansion into retail. Goldman was traditionally wary of expanding too much into consumer segments. On his marketing tour, Blankfein explains why. “The government sector cares, but not that much, if institutional investors lose money – they’re smart, they can afford it… But when you lose money for individuals, for consumers, i.e. taxpayers and citizens, people in government get very, very upset; regulators get very, very upset.” He views the risks in private credit as less about the assets themselves than where they’re ending up, and wonders why private credit firms that have already done so well in institutional segments would take on that risk at this point in the cycle.5

Of course, his successor, David Solomon, may disagree. Goldman itself is now a large private assets firm, managing $420 billion of third-party alternative investments. Indeed, Goldman has changed a lot since Blankfein retired in 2018. Fittingly, days before his memoir appeared, the firm’s latest 10-K dropped – telling its own story of where things stand today. To dig into those changes and explore how Goldman Sachs is positioned – as well as to test Blankfein’s hypothesis that if Goldman Sachs appears in a headline, an article gets a multiple of the number of clicks it would get without a mention of Goldman – read on.

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My guest this week is Sarah Quinn, Associate Professor of Sociology at the University of Washington and author of the book, American Bonds: How Credit Markets Shaped a Nation. I first read American Bonds i…

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When I joined Credit Suisse First Boston in London in the early 2000s, the firm had already been in its gleaming new Canary Wharf office for almost a decade. Most of my first few weeks were spent getting to know my way around the equities floor – meeting colleagues, learning the rhythms of the place. It was only when I ventured onto the fixed income floor that I realised something was off. It was bigger. Noticeably so. At the time, this seemed odd. Equity markets were ascendant, the focus of the firm’s attention. In the few years before I joined, equities had consistently dwarfed fixed income in revenue.

The explanation lay in the building’s history. When CSFB moved in during 1991, bonds were where the money was and the floor plan reflected that. It was the same across Wall Street. Michael Lewis recalls that at Salomon Brothers, “the equity department wasn’t on 41, the principal trading floor, but on the floor below. The fortieth floor had low ceilings, no windows, and the charm of an engine room.” Inside Salomon Brothers, he writes, “the men from equities were second-class citizens.”1

By the time I arrived, status had inverted. The great bond massacre of 1994 wiped an estimated $1.5 trillion off global bond markets – equivalent to almost 10% of OECD countries’ gross domestic product. Meanwhile, equity markets boomed as retail participation grew and a new economy formed. The tenants of the 41st floor at Salomon (and the third at CSFB) had their reckoning.

But tensions persisted across what remained a gaping cultural divide. Bond traders saw themselves as more serious than their lower-floor colleagues. They prided themselves on a less emotional outlook, one grounded in numbers rather than narrative. Their bias was to avoid losing principal while equity traders went in search of upside.

Bill Gross embodied the disposition. Even in his firm’s early days, when he shared a floor with the stocks guys and was yet to become the “Bond King,” the disdain was barely concealed. As his biographer Mary Childs recounts, he could “hardly help himself, looking down his nose at their foolhardiness, their brash optimism. He couldn’t help it; it always came out.”

For an equities guy, I’ve always had sympathy for the bond view of the world. Probably because as a banks analyst, I covered the sector where the two markets intersect. One way of looking at a bank is as a transformation engine for turning debt into equity. Its balance sheet embeds a portfolio of fixed income instruments – loans and bonds – which it funds partly through issuing equity to shareholders. The trope of a bank as a hedge fund isn’t far from the truth.

To understand banks, then, it pays to make the occasional trip to the fixed income floor. So when Matthew Mish, head of credit strategy at UBS, projects that in a tail scenario of rapid, severe AI disruption, high yield defaults could rise to 3-6%, leveraged loan defaults to 8-10% and private credit defaults to 14-15%, it’s worth investigating. For reference, we’re currently at 0.9% in high yield, 1.6% in leveraged loans and 4.5% in private credit, so these estimates reflect quite a shock. They take levered loan defaults back to financial crisis levels, and private credit defaults beyond anything we’ve seen before. “Contagion risk to public credit markets is real and underappreciated,” he goes on. And “this raises concerns about capital adequacy and loss absorption [at financial institutions] in a downturn, particularly if defaults spike and valuations collapse.”

These days, it’s not just banks that are exposed. Credit is disbursed through private credit funds, business development companies and other vehicles, and the equity of some of them has already begun to rupture. Boaz Weinstein, a former resident of Deutsche Bank’s bond trading floor, now founder of Saba Capital Management, a credit-focused hedge fund, reckons “there’s a nasty storm brewing and public credit is oblivious so far.”

We discussed business development companies here last year. The sector has moved on since then – not in a good way. What follows is a closer look at where the cracks are appearing, and what they might portend. To join me on the bigger trading floor, read on.

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Before this month, the last time I wrote a piece of software was 40 years ago. It was a school project to design something linked to the history syllabus. Inspired by a popular TV quiz show, I made a game that allowed players to progress around a board by getting questions right – a kind of 1980s Quizlet, though with fewer questions because memory was scarce back then. It marked the pinnacle of my software achievements. After that, my programming skills atrophied and I spent the next few decades deep in Excel instead.

Until last week.

I’d read about Claude Code, Anthropic’s AI-powered coding assistant, but I previously dismissed it as a tool for engineers. As a newsletter writer, most of my software needs are met: Google Docs for drafting, Substack for email management and website hosting, Stripe for payments.

But one part of the stack that I’ve struggled to leverage is idea generation. Indeed, how I come up with a topic each week is the question I most often get asked by readers. So, freshly installed, I set Claude Code a task: fully index my back catalog of Net Interest issues and then, on a daily basis, skim financial news and research papers and other content across a range of sources and flag anything on brand. For the past few days, I’ve received a morning email with a curated list of stories I should consider. It’s been remarkably well attuned.

I have an advantage here: 250-plus issues going back over five years. They serve as a data repository for my bespoke software application to straddle. The model has learned my patterns – what topics I cover, which angles I take, how I frame financial market events. Could I add a module to get Claude to write the whole thing for me? Perhaps – but it isn’t (yet) able to surface information hidden in private repositories like my personal experiences or those of my network of contacts or draw connections using them. Nor can it write in my voice. (Let that sink in.) That doesn’t stop it from providing assistance in other ways.

For a newsletter writer, I may be late to Claude Code. Tech substack has been all over it since the start of the year. But according to Anthropic, the median session on Claude Code is still only 45 seconds, and for only 0.1% of users does a session last longer than around 40 minutes. And that’s among its active users – of which there may be no more than a million. In fact, within the more regulated financial community, I may be early. In a survey of 150 quants, research analysts and data scientists across Europe and North America, Bloomberg found that 54% had yet to start their “generative AI journey” (at least between April and November last year). Another survey finds that among research analysts at banks and brokers in 2025, 58% use AI “a little” with an average rating of 1.77 on a scale of 1 (none at all) to 5 (a great deal).1

There are exceptions. Norges Bank Investment Management – which we’ve profiled here before – worked with Anthropic to establish AI literacy across 600+ employees through comprehensive training programs. It now claims its employees save more than 20% of their time weekly on AI-assisted tasks.

Multi-manager hedge fund Walleye (also profiled) is another early adopter. “As a hedge fund, we should be ashamed to leave money on the table by ignoring tools that make us faster, smarter, and more effective,” CEO and Chief Investment Officer Will England said on a podcast last year. “There’s a non-applicable idea from academia where using AI to do homework or take tests is actually cheating. In the real world, using AI is like taking a magical elixir that makes you 20% smarter instantly, or a lot more. So why wouldn’t you use it? From the very top, we are building a culture around AI.”

Seems that 20% is the efficient frontier in finance AI.

We spoke about the enduring distribution power of Excel two weeks ago and the challenge faced by data providers as AI enables new channels. My next project is to use Claude Code to build my own Bloomberg knock-off. What does that mean for the terminal’s competitive moat – and for the data providers scrambling to position themselves in an AI-first world? To explore with me, read on.

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I’m joined this week by two guests. John McDonald and Brian Foran are both research analysts at Truist Securities where they cover the US banks sector. I’ve known each of them for a long time. John has bee…

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Most hedge funds cultivate exclusivity. Try getting capacity in Chris Hohn’s TCI without a private bank relationship or an endowment pedigree and you’ll likely hit a wall. Many have skeletal websites or none at all; the one where I used to work didn’t even put its name on the door. Scarcity enhances the brand.

Pershing Square is different. Since losing most of its legacy assets after four consecutive down years between 2015 and 2018, the majority of its funds come from a London-listed entity, Pershing Square Holdings. Of the $16 billion in equity capital the firm currently manages, $14 billion sits in London. And anyone can access it: a single share of Pershing Square Holdings trades on the London Stock Exchange for £44.06 ($60.11). As a result, the firm’s investor base includes everyone from pensioners to pension funds.

This week, hundreds gathered at the firm’s annual investor presentation at London’s Chancery Rosewood Hotel, housed within the former US Embassy on Grosvenor Square. Descending several stories below ground level into what was formerly a CIA safe room, shareholders settled in for a two-and-a-half-hour presentation. Bill Ackman couldn’t attend due to a family medical emergency but he joined remotely, leaving CIO Ryan Israel to lead in person alongside a team of analysts. Having delivered 20.9% after fees last year (even if down 5.4% so far this year), they faced a largely satisfied room.

Yet even as the fund has shed its exclusivity, so has its portfolio. The team presented a largely unchanged portfolio of 13 stocks, all of them known and readily accessible to investors. The latest addition – a 10% position in Meta – adds to Amazon and Alphabet to push exposure to Mag-7 above 30%. No shorts, few special situations beyond stakes in Fannie Mae, Freddie Mac and a 2% position in Hertz. Just a handful of liquid, mega-cap names.

Ackman explained that while mega-caps had historically been out of reach for the fund due to high valuations, sudden selling waves had created opportunities. He pointed to structural changes in markets: the growing weight of index funds reducing tradeable float, and the rise of multi-strategy hedge funds focused on short-term events, both amplifying volatility. His focus on intrinsic business value and what he calls “time arbitrage” gives him an edge when mispricings emerge. They don’t last long, but liquidity in these names means he can act quickly – particularly given the firm’s library of accumulated research. The team bought Alphabet at 16x earnings amid AI disruption concerns, a 40% discount to its current multiple, and Amazon at an all-time low valuation during the tariff sell-off.

Ackman echoes Chris Hohn’s view, too, that bigger can be better. “We believe most of the top ten companies have sustainable competitive moats and long-term secular growth characteristics,” he states. He expects Amazon, Alphabet and Meta to grow earnings at 18-20% over the medium term, versus 8-9% for the S&P equal weight.

But asking investors to pay high fees for this portfolio can be a stretch. The fund charges a management fee of 1.5% and a performance fee of 16% with no hurdle rate of return. Last year, investors paid $700 million in total fees to the Pershing Square management company. That’s a lot to pay for buying the dip. In the eight years since the firm restructured around its listed entity, fees have consumed 4.8% of return per annum. Over the period, that’s the difference between a 7.2x gross return and a 5.3x return net of fees.

In the past, Ackman has argued that the fund wrapper offers sufficient advantages to justify the fees. One is that his positions often pop when disclosed, meaning shareholders capture gains that investors mimicking his portfolio would miss – though after revealing his Meta stake this week, the stock barely budged. Another is his “asymmetric hedging strategy” which paid out handsomely during Covid and when interest rates rose. Here, he concedes that no “black swans” appear imminent, and the market for cheap, asymmetric trades looks thin. Buying the fund does offer the advantage of a discount – it currently trades 22% below the value of its underlying holdings – but there is no guarantee it will narrow and any widening injects further risk.

Since last year, though, an alternative has emerged for those wanting to invest alongside Ackman without paying such high fees. In May, Pershing Square’s management company took a 15% stake in Howard Hughes Holdings, adding to the 32% already owned via Pershing Square Holdings. With effective control, Ackman set out to transform it into a vehicle to operate alongside his listed entity. While it would be subject to management fees, Howard Hughes is exempt from traditional performance fees. “We didn’t do it for free – we are in the investment management business – but we did so on, I would say, the best terms we’ve ever offered an independent pool of capital,” said Ackman.

Initially, Howard Hughes’ primary asset was a real estate business – quite different from the holdings inside Pershing Square Holdings. But, just before Christmas, the company announced the acquisition of an insurance company, Vantage, with some financing from Pershing Square Holdings. And, as students of Warren Buffett know, insurance companies come with capacity to invest in stocks. Ackman plans to grow this new pool of capital without charging additional fees – “the best deal ever in the insurance industry,” he says.

As Warren Buffett steps back from Berkshire Hathaway this year, Bill Ackman is building his own version. The admiration runs deep – Ackman has asked questions at Berkshire annual meetings on at least four occasions and held shares through Pershing Square. We’ve covered this Buffett obsession before, but now he’s put his money where his ambition is: an insurance company acquisition that mirrors Buffett’s 1967 playbook. The structure, though, reveals something more complex than simple imitation – and raises questions about what investors are really paying for. To understand the Vantage deal, the fee mathematics and why similar experiments have failed, read on.

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As an analyst, I was always good at spreadsheets. Not World Championship good, but I could knock up an earnings model fairly quickly. Before grasping that less can often be more, my spreadsheets could get quite unwieldy. The largest still sitting on my hard drive is a 10MB monster that spits out earnings estimates for Deutsche Bank while ingesting 25 years of history across five business segments.

As my friend Stephen Clapham points out, it can be oddly therapeutic bashing numbers into a spreadsheet. But it isn’t all fun, so when Anthropic released an add-in that integrates its AI assistant Claude into Excel, I thought I’d give it a spin. “Claude listens carefully, follows instructions precisely, and thinks through complex problems,” its marketing promises.

I chose Factset as the target of my analysis, an $8 billion company listed on the New York Stock Exchange whose stock is down 46% over the past six months because … well, we’ll get to that later. Opening a blank workbook, I told Claude to produce me an earnings model. I wanted ten years of history and three years of forecasts, and it goes without saying that it should look pretty.

What unrolled before me was magical – like when IT support takes control of your computer and your cursor flies across the screen, possessed of its own intelligence. Within five minutes, Claude had visited the Securities and Exchange Commission to fetch historical data and populated a very simple model forecasting revenue and operating income using company guidance that it directly sourced.

As a first draft, it was a bit lacking in granularity, so I asked it to analyse key earnings drivers and try again. After navigating usage limits (which I spent $65 to overcome) and context limits in the chat (frustrating, but since solved via the Claude Opus 4.6 update), Claude produced a serviceable model in the time it took me to finish a cup of coffee. Without knowing it, the model settled on earnings estimates that fell within 2% of consensus. That may tell you something about the way analysts generate earnings forecasts: extrapolating growth rates and margins is not a difficult algorithm to automate. Also, Factset is a relatively simple company to model – I have yet to set Claude loose on Deutsche Bank. But as a first attempt, it proved remarkably capable (see what you think below the paywall).

I’ve written about Excel here before. When I started out in equity research, it was ten years old and there was just one holdout in my department, a European autos analyst, who remained loyal to pencil and paper. Decades on, it is ubiquitous among financial analysts. Spreadsheets themselves have become commoditised along the way – firms make them readily accessible and few analysts derive competitive advantage from them – but they embed a common language for analyzing and thinking about company performance.

If there’s one drawback, it’s that while Excel makes its data visible, its formulas are hidden. That’s fine for visualizing how variables interact – like client numbers and annual subscription values in my Factset case. But when the data gets so big that you can’t look at it all, or when a spreadsheet becomes infested by circular references (we’ve all been there), it makes more sense to look at formulas. Trouble is, few financial analysts are comfortable venturing into an integrated development environment (IDE) where the formulas are exposed but the data hidden. And even if they are, that’s not the common language of financial analysts.

This is where Claude comes in. Nick Lin, head of product for Financial Services at Anthropic, has this to say: “Our file creation feature that was launched a few weeks ago [in October] that enables Claude to create Excel documents and PowerPoint is essentially Claude accessing a virtual machine within which it can run Python code at scale to edit, analyze, and create Excel documents and create these perfect DCF models.”

In particular, Lin recognises that Excel is where finance professionals live and so rather than disrupting it, he needs to accommodate it: “Financial models themselves, they’re not just these beautiful Excel sheets, right? They’re a way for finance analysts to inject their own judgment of what the future looks like and what the proper valuation looks like for that company, right? So, with that in mind, we want Claude to be really good at understanding these core finance concepts and manipulate systems like Excel and spreadsheets to be able to do that calculation.”

So could this be the killer app to inject AI into finance workflows? This week, software stocks – including market intelligence names like Factset – have cratered as investors question whether AI renders their business redundant. The launch of Claude Opus 4.6, with its expanded context window and improved reasoning capabilities, only sharpens the question. To explore what this all means for financial analysts, for Excel and for legacy tools like Factset, read on.

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My guest this week is . Ludo is a Professor of Financial Economics at the Saïd Business School at Oxford University, where he specialises in private equity and asset management. He’s the author of the book

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In a world that’s speeding up, private equity stands out as an anachronism. Over the past half-century, holding periods of stocks have collapsed from over five years to under one, CEO tenures have halved, the average lifespan of an S&P 500 company has fallen from six decades to under twenty years – yet private equity still asks investors to lock up capital for twelve.

Just take a look inside the Washington State Investment Board’s portfolio. The fund, which manages money for Washington’s public employees from its offices in Olympia, has been investing in private equity since the early 1980s. It now has over a quarter of its capital allocated to the asset class, double the national average for state pension funds. But while its early investments have fully paid out – it made 5.5 times its money on KKR’s 1986 fund – it still has exposure to investments that stretch back 20 years. Currently, around 14% of the value tied up in its mega buyout portfolio stems from commitments it made more than ten years ago. Although the outstanding commitment is small, KKR’s 2006 fund still sits on its balance sheet two decades after it seemed like a good idea.

Even within its more recent investments, it has become harder to get cash out. In a trend we’ve discussed here before, private equity funds are holding on to underlying positions for longer, delaying liquidity events for end investors. According to Bain & Company, the median holding period for a buyout-backed exit is currently over six years, versus historic lows of less than four. For allocators like Washington State Investment Board this means slower payouts. In the 12 months to June 2025, distributions declined to 12% of the market value of investments, down from 31% in 2021.

At a time when everything else is getting faster, the duration embedded in private equity looks increasingly out of step. So it’s no surprise that Wall Street has been engineering a solution. A secondary market for private equity holdings has been around for a while but last year its growth really took off. In total, a record $240 billion of volume changed hands in 2025, up nearly 50% on the prior year.

Supply came from a range of sources but to meet it, demand had to be created. The largest private equity close of the year was a fund dedicated to secondaries which raised $30 billion of capital. It’s an area established firms are targeting. On his October earnings call, Blackstone founder Steve Schwarzman listed the secondaries market among his top priorities for capital deployment – alongside digital and energy infrastructure, private credit and Asia. And last week, Stockholm-based EQT acquired specialist firm Coller Capital with $50 billion of assets under management. Coller reckons that transaction volume will grow to $500 billion across the market by 2030.

“We cannot just dispose of some of these assets overnight,” the chair of the Washington State Investment Board told the Seattle Times this week. Well now she can.

For the full story of how a single transaction sparked today’s $240 billion market – and where it goes next, read on.

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No hedge fund manager in history has made more money in a year than Sir Chris Hohn. Last year, his fund, TCI, generated profits of $18.9 billion for investors, exceeding even what John Paulson achieved in “The Greatest Trade Ever”. Its record performance takes TCI’s lifetime gains to $68.4 billion, catapulting it into the top five hedge funds of all-time – up there with Citadel and Millennium, firms we have spotlighted here before.

Except TCI doesn’t really look like a hedge fund. Hohn manages a concentrated portfolio of stocks. He hasn’t put a short on for three years and holds positions for an average of eight years, with some having been on his books for 13. He runs an investment team of seven or eight people and although his back office inflates the numbers, his headcount is much smaller than the 6,500 Millennium, say, employs across 330 teams.

Hohn espouses a simple philosophy. He looks to buy companies that are immune from competition and disruption. He likes growth, but thinks it’s over-rated. “I think this is something a lot of people get wrong,” he says. “They think it’s about growth, often. Or something new. Neither of them, those things in themselves, to us, matter by themselves. The most important thing for the types of investing that we do, is high barriers to entry.”

Hohn lists the kinds of barriers he looks for: irreplaceable physical assets, intellectual property, an installed base, scale, network effects, brands, customer switching costs. His holdings often encompass a number of them. GE Aerospace and Safran sit on intellectual property and an installed base of long-term contracts; Visa enjoys scale and network effects. Perhaps because it’s his favorite, the one he checks off first is usually irreplaceable physical assets, where he has exposure through Aena (airports), Ferrovial (toll roads and airports), Canadian Pacific Kansas City (railroads), Canadian National Railway (railroads) and Cellnex (telecom infrastructure). All-in, Hohn reckons there are only 200 companies worldwide investible under his framework.

Once he’s found one of these companies, he holds on, often working with management to realize value. At his latest investor event, CEOs from GE Aerospace, Airbus, Moody’s, Vinci and a top executive from Visa all showed up to present to clients. “I value predictability,” he says. “Most investors are looking for the next hot thing… Investors say, what’s new? I say, do you need to change your wife every year?”

Hohn’s edge is his long-term focus and his willingness to act as an owner in the businesses he invests in. He also has a lot of skin in the game. Of the $77 billion of assets the firm currently manages, $14 billion is internal capital. Like all the best investors, his strategy has evolved as assets have grown and the environment has changed. Known for his aggressive shareholder activism when he launched the fund in 2003, he now uses activism as a tool rather than a strategy.

“I owned bad businesses long ago, like ABN AMRO,” he says. “They didn’t know what they were doing. We didn’t know what we were doing. And it was all, you know, a madness… a lot of activists end up being activists in bad businesses.”

These days he steers clear of banks (low quality of earnings, leveraged, opaque).1 There are a number of other industries he steers clear of, too – including one he knows well. Despite running a highly profitable business – TCI Fund Management Ltd earned revenue of $1 billion in the year to March 2025 – Hohn avoids asset managers. “Traditional asset managers – bad businesses,” he says. “Yeah, speaking as one.”

Through his lens of competition and disruption, the industry certainly looks challenged. Hohn has compounded his fund at two times the market rate of return over two decades, but few others get anywhere close. According to S&P Global, 88% of large-cap US funds have underperformed the S&P 500 index over 15 years. Passive products provide a cheaper alternative and, as pointed out on my Net Interest Extra podcast this week, the prevalence of passive flows is changing the structure of the market in ways that stack the deck against the active managers that remain.

“Active management as an industry has been a failure and is dying,” Hohn said at an event I attended this week.

To explore why Hohn’s model works while the rest of active management bleeds, read on.

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This week, I’m talking to . If you’re not already following Mike on X or Substack I recommend you do. For many years Mike has been warning about fundamental changes in equity market structure linked to the…

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Even as he hounds the highest-ranking officials at the Federal Reserve, Trump appears to have absorbed the work of their staff. Last week, the president announced a proposal to cap credit card interest rates at 10%, attacking the 20% to 30% rates that he says “festered unimpeded” under his predecessor. It comes three months after Fed researchers published a paper that asks: Why are these rates so high? Its authors point out that while spreads over the Fed Funds benchmark rate cluster in the low single digits across most kinds of loans, on credit card loans they stretch as high as 18%.

Such high rates make credit cards a profitable business. There are around 580 million cards in circulation in the US, with three-quarters of American adults holding at least one. In 2023, they accounted for $6 trillion of purchase volume, equivalent to 70% of retail spending. Not all of that accrues interest – around 40% of account holders pay off their balance in full each month – but the balances that revolve generate substantial earnings for lenders. At the end of November, outstanding credit card debt stood at $1.3 trillion. According to the Fed, interest on that debt makes up around a sixth of banks’ total interest income, despite comprising less than 5% of assets. Even after accounting for defaults, rewards programs and operating costs, credit card lending earns more than four times the banking sector’s overall return on assets.1

No wonder bank executives are pushing back on a price cap:

“People will lose access to credit… that’s a pretty severely negative consequence for consumers and frankly, probably also a negative consequence for the economy as a whole,” said JPMorgan’s CFO Jeremy Barnum.

“If you make these products unprofitable, that [$6 trillion] spending will be drastically reduced – and that’s British understatement,” said Citigroup’s UK-born CEO, Jane Fraser.

“You will see unintended consequences,” said Bank of America CEO Brian Moynihan.

It’s a position they’ve been in before. In 2009, the Credit Card Accountability Responsibility and Disclosure (CARD) Act restricted card companies’ flexibility to change rates on existing borrowing and extended the time consumers had to pay. It’s one of the reasons credit card rates are as high as they are today. “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger,” Jamie Dimon said at the time. “And my guess is, over time, it will all be repriced into the business.”

It was. The spread between upfront card rates and the Fed Funds rate rose from around 10% prior to the Act to 14% afterwards. More recently, a now abandoned regulatory proposal to cap late payment fees led to another run-up in credit card spreads to their current level of around 18%.2

Even before the current crop of bank executives took on their jobs, the industry has faced pressure to cap rates. Interest rates were initially fixed at 18% at the birth of the market in 1958. “There was no black magic involved,” writes Joe Nocera in his book, A Piece of the Action, “The bank just assumed that if a one-month grace period and a monthly interest charge of 1.5% (which amounts to 18% a year) was good enough for Sears, with its fifty years of credit experience, then it was good enough for Bank of America.”

But some in authority were not happy. At a hearing on unsolicited bank credit cards in 1967, the chairman of the House of Representatives Banking Committee, Wright Patman, railed that “what with skimming off up to 7% of each sale from the merchants, plus up to 18% interest from the card user, it’s like taking candy from a baby for these big bankers.” Patman would be pleased to see that the 7% discount rate has come down; the 18% interest charge, not so much.

Patman’s mantle has been taken up many times since. Last year, senators Bernie Sanders and Josh Hawley introduced a bipartisan bill to cap credit rates, echoing much of the language Patman used 60 years earlier. Now Trump is weighing in, reprising a pledge he made on the campaign trail.

To see how the industry got here and why a cap would break the model, read on.

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Vegas is as good a location for a data center as you could find. Low year-round humidity reduces corrosion risks for sensitive IT equipment and low night-time temperatures help with the cooling process. It’s a short hop to California and Silicon Valley – latency is just five milliseconds. And energy is cheaper than in other parts of America, no small consideration given Switch is already NV Energy’s largest customer and on track to consume a third of the state’s energy supply.

Rob Roy has been building data centers for 25 years. He developed a modular system for their construction and has more than 700 patents to his name. His latest project is a site, in Las Vegas, purpose-built to support the extreme density demands of next-generation AI workloads. Roy’s design features hybrid air and liquid cooling systems engineered to power and cool more than two megawatts (MW) per server rack. Roy reckons that although current generation chips consume only around 150 kW per rack, consumption rates are only going up and data centers need to be ready. “These aren’t just cryptosheds,” he says of his data centers.

Roy’s data centers are in demand. The top ten sites, covering 2 million square feet, offer capacity of around 130 MW but the company has leased approximately 160 MW. Average customer tenure is five years, with churn running at less than 2.5% a year, confirming that tenants stick around. The ten largest account for 52% of revenue, so even if one does leave, it doesn’t impact the company too much. Overall, the portfolio brings in over $400 million a year of leasing revenue and costs $125 million to manage – power being the biggest expense.

The problem is that it is a capital-intensive business to run and there is no more earthly constraint than financing. Switch addresses this by issuing bonds secured on its data center operations. In October, it raised $660 million in the asset-backed securities market, its fourth such foray into the market, to bring its total issuance to $3.5 billion. You can buy Switch series 2025-2, class A-2.1 bonds at a yield of around 5%. Data centers backing the bonds have an appraisal value of around $4.7 billion, leaving investors with a wide valuation buffer to give them comfort.1

The company has also tapped other financing markets and has $10 billion of loan facilities arranged by JPMorgan and TD Bank. It also relies on equity financing. Switch listed on the New York Stock Exchange in 2017 but was taken private five years later by a consortium led by private equity firm DigitalBridge at an equity value of $11 billion. DigitalBridge currently owns 56% of the company, with Switch management holding 7% and Australian asset management firm IFM holding the remainder.

There is no doubt that data centers are a hot property right now. We discussed the asset class last year in Financing the AI Boom. Since its acquisition, new financing sources – such as asset-backed bonds – have opened up for Switch, and its equity value has appreciated. A story last year suggested that Switch may now be worth $50 billion including debt.

One potential buyer is SoftBank, whose founder Masayoshi Son (subject of another of last year’s Net Interest issues, The Bank Inside SoftBank) has ambitions to ride the AI-fueled boom in digital infrastructure. Son knows Switch well. He already owns chip design company Arm, which works with Switch. As a Las Vegas Raiders fan, Arm CEO Rene Haas often passes through town to visit.

But $50 billion is a lot of money. An acquisition would ratchet SoftBank’s self-defined leverage ratio up from 16.7% (including the stake in OpenAI it just bought) to over 35% – above the 25% limit it sets “under normal market conditions” and the 35% threshold it allows for “exigent circumstances”. SoftBank may yet find a way round this but perhaps the cleverest of all is just to buy DigitalBridge. On December 29, SoftBank announced a full acquisition of DigitalBridge for an enterprise value of $4 billion. Why spend $50 billion on a single data center operator when you can spend $4 billion for a stake in the economics of a whole portfolio of them?2

As we discussed in The Bank Inside SoftBank, Masayoshi Son is a master at deploying leverage to achieve his ambitions. Buying a private equity firm that uses other people’s money to dominate an industry is the latest iteration of that. To uncover what he sees in DigitalBridge and what the acquisition says about the state of private equity, read on.

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