Our Chief Fixed Income Strategist Vishy Tirupattur is
joined by Dan Toscano, the
firm’s Chairman of Markets in Private
Equity, unpack how credit markets are changing—and what the
AI buildup means for the road ahead.
Read more insights from Morgan Stanley.
----- Transcript -----
Vishy Tirupattur: Welcome to Thoughts on the
Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed
Income Strategist.
Today is a special edition of our podcast. We are joined by Dan
Toscano, Chairman of Markets in Private Equity at Morgan Stanley,
and a seasoned practitioner of credit markets over many, many
credit cycles.
We will get his thoughts on the ongoing evolution and revolution
in credit markets
It's Wednesday, January 7th at 10am in New York.
Dan, welcome.
Dan Toscano: Glad to be here.
Vishy Tirupattur: So, to get our – the listeners
familiar with your journey, can you talk a little bit about your
experience in the credit markets, and how you got to where we are
today?
Dan Toscano: Yeah, sure. So, I've been doing
this a long time. You used the nice word seasoned. My kids would
refer to it as old. But I started in this journey in 1988. And to
make a long story short, my first job on Wall Street was buying
junk bonds in the infancy of the junk bond market, when most of
what we were financing were LBOs. So, if you're familiar with
Barbarians at the Gate, one of the first bonds we bought were RJR
Nabisco reset notes. And I've been doing this ever since, so over
almost four decades now.
Vishy Tirupattur: So, the junk bond market
evolved into high yield market, syndicated loan market, CLO
market, financial crisis. So, talk to us about your experiences
during this transition.
Dan Toscano: Yeah. I mean, one of the things
these markets do is they finance evolution in industries. So,
when I think back to the early days of financing leveraged
buyouts, they were called bootstrap deals. The first deal I did
as an intermediary on Wall Street as opposed to as an investor,
was a buyout with Bain Capital in 1993. At the time, Bain Capital
had a $600 million AUM private equity platform. Think about that
in the scale of what Bain Capital does in private equity today.
You know, back then it was corporate carve outs, and trying to
make the global economy more efficient. And you remember the rise
of the conglomerate. And so, one of the early things we financed
a lot of was the de-conglomeration of big corporates. So, they
would spin off assets that were not central to the business or
the strengths that they had as an organization.
So, that was the early days of private equity. There was
obviously the telecom build out in the late 90’s and the
resulting bust. And then into the GFC. And we sit here today with
the distinctions of private capital, private credit, public
credit, syndicated credit, and all the amazing things that are
being financed in, you know, what I think of as the next
industrial revolution.
Vishy Tirupattur: In terms of things that have
changed a lot – a lot also changed following the financial
crisis. So, if you dig deep into that one thing that happened was
the introduction of leveraged lending guidelines. Can you talk
about what leveraged lending guidelines did to the credit
markets?
Dan Toscano: Yeah, I mean, it was a big change
for underwriters because it dictated what you could and couldn't
participate in as an underwriter or a lender, and so it really
cut off one end of the market that was determined by – and I
think the thing most famously attributed to the leveraged lending
guidelines was this maximum leverage notion of six times leverage
is the cap. Nothing beyond that. And so that really limited the
ability for Wall Street firms to underwrite and distribute
capital to support those deals.
And inadvertently, or maybe by plan, really gave rise to the
growth in the private credit market. So, when you think about
everything that's going on in the world today, including, which
I'm sure we'll talk about, the relaxation of the leveraged
lending guidelines, it was really fuel for private credit.
Vishy Tirupattur: So private credit, this
relaxation that you mentioned, you know, a few weeks ago, the
FDIC and the OCC withdrew the leveraged lending guidelines in
total. What do you expect that will do to the private credit
markets? Will that make private credit market share decrease and
bank market share increase?
Dan Toscano: I think many people think of these
as being mutually exclusive. We've never thought of it that way.
It exists more on a continuum. And so, what I think the
relaxation of those guidelines or the elimination of those
guidelines really frees the banks to participate in the entire
continuum, either as lenders or as underwriters.
And so, in addition to the opportunity that gives the banks to
really find the best solutions for their clients, I think this
will also continue the blurring of distinctions between public
market credit and private market credit. Because now the banks
can participate in all of it. And when you think about what
defines in people's minds – public credit versus private credit,
in many cases it's driven by what terms look like. Customary
terms for a syndicated bond or loan versus a private credit loan.
Also, who's participating in it. You know, these things have been
blurring, right? There's a cost differential or a perceived cost
differential that has been blurring for some time now. That will
continue to happen, in my opinion anyway.
Vishy Tirupattur: I totally agree with you, Dan,
on that. I think not only the distinction between public credit
and private credit, but also within the various credit channels –
secured, unsecured, securitized, structured – all these
distinctions are also blurring.
So, in that context, let's talk a little bit more about what
private credit's focus has been and where private credit focus
will be going forward. So, what we'll call private credit 1.0.
Focused predominantly on lending to small and medium-sized
enterprises. And we now see that potentially changing. What is
driving private credit 2.0 in your mind?
Dan Toscano: Well, the elephant in the room is
digital infrastructure. Absolutely. When you think about the
scale of what is happening, the type of capital that's required
for the build out, the structure you need around it, the ability
to use elements of structure. You mentioned several of them
earlier.
To come up with an appropriate risk structure for lending is
really where the market is heading. When you think about the
trillions of dollars that we anticipate is needed for the
technology industry to complete this transformation – not just
around digital infrastructure, but around everything associated
with it.
And the big one I think of most often is power, right? So, you
need capital to build out sources of power, and you need capital
to build out the data centers to be able to handle the compute
demand that is expected to be there. This is a scale unlike
anything we have ever seen. It is the backbone of what will be
the next industrial revolution.
We’ve never seen anything like this in terms of the scale of the
capital needed for the transformation that is already underway.
Vishy Tirupattur: We are very much on board with
this idea as well, Dan, in terms of the scale of the investment,
the capital investment that is needed. So, when you look ahead
for 2026, what worries you about the ind ustrial revolution
financing that is underway?
Dan Toscano: Given all that's going on in the
world, this massive capital investment that's going on globally
around digital infrastructure, we've never seen this before. And
so, when I look at the capital raising that has been done in 2025
versus what will be done in 2026, I think one of the differences
that we have to be mindful of is – nothing's gone wrong while we
were raising capital in 2025 because we were very much in the
infancy of these buildouts. Once you get further into these
buildouts and the capital raises in 2025 that are funding the
development of data centers start to season, problems will
emerge. The essence of credit risk is there will be problems and
it's really trying to predict and foresee where the problems will
be and make sure you can manage your way through them.
That is the essence of successful credit investing. And so there
will definitely be issues when you think about the scale of the
build out that is happening. Even if you look just in the U.S.,
where you need access to all sorts of commodities to build out.
And you know, people focus on chips, but you also need steel and
roofing, and importantly labor.
And as we talk to people about the build outs, one of the
concerns is supply of labor supply and cost of labor. So, when
you run into situations where maybe a project is delayed a bit,
or the costs are a bit more than what was expected, there will be
a reaction. And we haven't had that yet.
We will start to see that in 2026 and how investors and the
markets react to that, I think will be very important. And I'm a
little bit worried that there could be some overreaction because
people have trained themselves in 2025 to think of like, ‘I'm
operating in a perfect environment,’ because we haven't really
done anything yet. And now that we've done something, something
can and will go wrong. So, you know, we'll see how that plays
out.
I am very fixated in 2026 on the laws of supply and demand. When
I think about what's going on right now, we usually have
visibility on demand. And we usually have some level of
visibility on supply. Right now, we have neither – and I say that
in a positive way. We don't know how big the demand is in the
capital world to fund these projects. We don't know how big that
can be. And almost with every passing day, the supply – and what
we're hearing from our clients about what they need to execute
their plans – continues to grow in a way that we don't know where
it ends. And the scale, we're talking trillions of dollars,
right? Not billions, not millions, but trillions.
And so, I look at that – not so much as something I worry about,
but something I'm really curious about. Will we run out of money
to fund all of the ambitions of the Industrial Revolution? I
don't think so. I think money will find great projects, but when
you think about the scale of what we're looking at, we've never
seen anything like it before. And it will be fascinating to watch
as the year goes on.
Vishy Tirupattur: Thanks Dan. That's very
useful. And thanks for taking the time to speak to us and share
your wisdom and insights.
Dan Toscano: Well, it's great to be here.
Vishy Tirupattur: And to our audience, thanks
for listening. If you enjoyed the show, please leave us a review
wherever you listen and share thoughts on the market with a
friend or colleague today
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