Milken on Financial Innovations (plus the booming BDC market lead by American Capital Strategies)

milken financial panel

Financial innovations: Creating Economic Opportunity.

Moderator: Glenn Yago, Director, Capital Studies, Milken Institute
Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions; co-Founder, Milken Family Foundation
Mark Opel, Principal, American Capital
Lewis Ranieri, Chairman, Hyperion Partners
Richard Sandor, Chairman and CEO, Chicago Climate Exchange, Inc.; Senior Fellow, Milken Institute
Glenn Stewart, Managing Director and Head of Loan Syndicate, Banc of America Securities LLC

Ranieri discussed housing subsidies, and how we were drilling down to the point at whichmilken and ceo of american capital strategies consumers with better credit got better deals. The people who need the subsidy the most get the worst deals. He pointed out how the people under 660 FICO scores were women from single households. He pointed out that the banking system is having a hard time working with the bottom 1/3rd of the market, and that that is the market that needs it the most. He said it is very troubling. He pointed out how the banking system took subsidies to get loans to the lower FICO score consumers and now they were not fulfilling that promise.

Richard Sandor, the CEO of Chicago Climate Exchange, Inc., talked about patents for financial innovations and how people like Milken never got to benefit from them. He talked about how he was able to raise more capital for his recent businesses because he was not patenting his work and is now licensing his processes for tracking environmental impact.

Milken talked about various financial technologies like securitized mortgages and credit cards, as well as derivatives. He discussed how hard it was to create things like collateralized loan obligations and collateralized bond obligations. He talked about how much legal work it took to do this, and how people took a lot of arrows to get them through (he joked about how he might have taken more arrows then others.) Milken talked about how it was not until 1987 that a women or an African American were able to run a large company as CEOnot counting people who had inherited businesses.

Milken discussed that traditional methods of credit are wrong and based on financing the past and not the future. He gave examples of Len Riggio of Barnes and Noble, Reg Lewis, Gedalio Grinberg and Kevork Hovananian. He mentioned how there was no way to look at their past to determine their credit worth.

He talked about understanding people’s talent and coupling that with capital. Milken said he was trying to figure out how do we define, find and finance human capital. He said we have no ways of judging that beyond giving college kids a credit card and tracking that (laugh from the audience.)

Mark Opel (far right with Milken) from American Capital Strategies (NASDAQ: ACAS) talked about their buyout and mezzanine fund. 20-500 million fund. He said there has been a bunch of BDC activity in the past month. He talked about private equity being the second oldest professional (big laugh.) He talked about how fragmented the industry is with 3,000 VC, buyout and mezzanine funds with 2,000 VCs alone. Opel discussed how a public company could open up to a larger capital pool: the investing public. He says they have a perpetual fund because they are public. He says they have high transparency and liquidity (which others like PE and VC firms don’t have.)

Opel explained how they are a lot like a REIT, and he explained what a Business Development Company is. A slide showed dozens of firms that were either filed to go public, or rumored to do so, in the BDC space. The belief is that there is a massive bubble building.

Milken and the panel discussed the 20-year lifespan on patents and how it might be better to have it be 75 years like copyrights. If this happened there would be more investment.

Here are some slides.

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