Lessons learned from the corrosion of Exide Technologies with George Schultze

Everyone remembers their first car… lead-acid battery supplier bankruptcy.

For Max Frumes, 9fin’s global head of distressed debt and LevFin, that situation was Exide Technologies. It was the first full cycle of distress, bankruptcy and emergence that he covered in his storied career.

And George Schultze, founder and CEO of Schultze Asset Management and author of The Art of Vulture Investing, was an investor during that Exide bankruptcy — the second one, anyway — which taught him some valuable lessons about the importance of being nimble. And, of course, that regulatory factors are more likely to upend distressed investing strategies than support them.

In this latest episode of Cloud 9fin, Max and George compare notes, reminisce, and banter about a wide spectrum of distressed companies past and present.

Thanks for listening! Have any feedback for us? Send a note to [e-mail].

Creators and Guests

Producer

Chase Collum

Head of Podcasts for 9fin Limited

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Max Frumes:
Hello, and welcome to Cloud 9fin. My name is Max Frumes. I'm the global head of Distressed and Leveraged Finance (LevFin) here at 9fin. I'm joined today by George Schultze, who is a longtime distressed investor, the founder and CEO of Schultze Asset Management. And most importantly, an investor and a former shareholder of a company that restructured by the name of Exide Technologies. Hello, George.

George Schultze:
Hello, Max. Thanks for having me here.

Max Frumes:
Thanks so much for coming in. When we first got in touch, I knew that George is also the author of The Art of Vulture Investing, about distressed debt investing, and is one of the most knowledgeable people about the evolution of distressed debt investing over the years.

And when I first started to report on distressed debt investing for an audience of hedge funds, that was with Reorg Research when we launched Reorg Research in 2013. One of the earliest companies that we reported on, from the point where the debt started to go distressed through when it filed for bankruptcy and then there was this entire process where there was a free fall, there was debtor-in-possession (DIP) economics, and then ultimately an emergence with a capital structure that was put in place by the creditors, was Exide Technologies, a car battery maker that went bankrupt three times now.

And at the same time, unbeknownst to me, George was following it very closely. So, George, I'd like to ask you to give us a little bit of the history of Exide Technologies and how it came onto your radar.

George Schultze:
This company was one of the largest manufacturers and suppliers of lead-acid batteries used for automobiles. I think it was founded in the 1880s, 1888. I'm looking at my old notes here from it. You're right, it went through, I guess, three bankruptcies. The second one we called it Chapter 22. I got to admit, I didn't follow the third one that closely.

Max Frumes:
Some combination of a chapter 33 and a 29, because it ultimately liquidated.

George Schultze:
Exactly. But I do remember very well looking at it early on, probably around the time you were at Reorg Research, and thinking, well, this is an interesting company. It's a niche producer. It's important. I believe it had been owned previously by KKR, one of the private equity firms, I think.

Max Frumes:
Must have been.

George Schultze:
And like many things like this, it just seemed to have way too much debt. As things changed in the economy, it wasn't able to make it through the first cycle, the first round through bankruptcy anyway. So when it restructured, it did eliminate a lot of debt, but then, of course, had to go back into bankruptcy. Part of the problem, I think, with Exide, and this happens a lot, more these days, is that the creditors in charge just didn't really do enough of what had to be done, which is bite the bullet.

Bankruptcy is a very powerful tool. You're operating with the automatic stay in place, and you're given tools like the ability to cancel debt or restructure debt, but also cancel unprofitable business lines, get out of contracts that don't make sense, reject contracts. And it's one of those things, they call it a wonderful opportunity of crisis. So take advantage of it while you're there. And they just didn't do it enough. I think in the first or second round, the creditors wound up taking back a certain amount of debt. And the biggest thing is they didn't cancel, or they weren't successful at canceling, the environmental liabilities either, which really came back to bite them.

So an important company, just a commodity producer of these batteries, and an interesting business too, after you peeled back the onion and looked at it. An important recycler of existing lead-acid batteries, which I guess come with environmental risks. They had a plant out in California that simply couldn't get the approvals it needed to operate normally after that.

Max Frumes:
We remember reporting on every back and forth with the California regulators of that California plant.

George Schultze:
Yeah.

Max Frumes:
And speaking with creditors at the time, distressed debt investors who had bought in, and I think they had some term loans, some second-lien notes, and bought in at deeply distressed prices, saying this company has to exist because no one else is going to do it. But they couldn't get that California plant back online.

George Schultze:
Yeah.

Max Frumes:
And there was delay after delay after delay.

George Schultze:
A classic not in my backyard situation.

Max Frumes:
Mm-hmm.

George Schultze:
It's great that you have the plant, but we don't want that in our town.

Max Frumes:
Pacific Gas and Electric will tell you, don't rely on California regulators for your distressed debt investment thesis.

George Schultze:
Exactly. That's actually one of the things we've learned over the years. Having done this for about 30 years, that's often one of the biggest risks of what happens politically. We got caught up with the Chrysler bankruptcy during the Great Financial Crisis. And that case, which was the first U.S. corporate bankruptcy where the acting president of the United States declared it and announced it and disclosed what the plan would be. In that case, the plan was the government would step in, provide debtor-in-possession financing, and then rejigger the waterfall of recoveries among different lenders.

In the Chrysler case, that meant that the retirees who are normally unsecured creditors would get paid ahead of the senior secured first-lien lenders. We brought that case all the way up to the Supreme Court to fight it, but ultimately it was already lost. The lesson I have from that, as well as from Exide, is really that if politics are involved, you got to be careful, because these things can go in any direction, depending on the political desires of the day.

Max Frumes:
It's the most interesting cases, I find. There's the necessity to understand so much for distressed debt investment. And that's why the teams that I've been involved with and helped build that cover distressed debt really require three skill sets. They require credit analysts to understand the financials, do the waterfall model. They require lawyers who are going to read the legal documents either in court or the credit documents for any sort of out-of-court restructuring that require a close read of the credit. And then it requires reporters who are kind of Hoovering up everything that is not disclosed, what's going on behind the scenes with the game theory of what's going on.

And I would say the most interesting situations have this fourth element to it of government involvement and the necessity to either follow, be part of, or participate in a government process, lobbying, lawmaking changes, and the like. And that has always been the biggest X factor.

George Schultze:
Yeah. More so lately too. I mean, I think that really took a big front seat in the Great Financial Crisis, because the government was effectively picking winners and losers. There was Troubled Asset Relief Program (TARP) financing. Certain companies and industries were deemed too big to fail. And even to this day, Freddie and Fannie, these giant quasi-governmental entities that finance most of the mortgages in the country, remain in conservatorship. And there's a continuing question with those.

Max Frumes:
How are they going to be fully independent?

George Schultze:
How are you going to get these out of governmental control? Will the preferred shareholders or maybe the stockholders get some recovery? For me, it's too early to say. It's kind of unclear which way that will go. Some people have made some big bets on that, though. But I think the theme is still there. And it's not just those two, which continue to be in conservatorship, but there are also other changes that are happening at the governmental level or political level. Things like the Department of Government Efficiency (DOGE), which came in with Elon Musk after Trump came into office for the second time. Big cutbacks. You know?

Max Frumes:
Yeah.

George Schultze:
Lots of people don't know that the government was one of the biggest tenants in the nation. And so when DOGE kicked in—

Max Frumes:
Distressed real estate investment trusts (REITs) out there that we cover.

George Schultze:
Yeah. Distressed REITs like Office Properties Income Trust, which is now in bankruptcy, about to come out of bankruptcy, with a very interesting fight over original issue discount (OID).

George Schultze:
Yes, which just got settled.

Max Frumes:
Are you in that?

George Schultze:
Yes, we are.

Max Frumes:
Oh, wow.

George Schultze:
Yeah, we had a short position in that stock.

Max Frumes:
Oh, that works.

George Schultze:
It's now trading under a cent. But the company's about to emerge, and then we'll have our realization on the short, which will be a 100% gain minus the cost of borrowing. But an interesting inter-creditor dispute there with some bondholders who did a liability management exercise (LME) with the company, refinanced their debt, thought that their OID was part of the new bond, and then were challenged in court as to the size of their claim. I think pretty successfully, but that brought them to the table to negotiate a settlement in the end. But at a higher level, the government there, reducing its office footprint and driving this company, which was otherwise pretty overlevered anyway, was the final catalyst forcing it into bankruptcy and restructuring. So, yeah, there's a whole list of industries right now where we're seeing things like that.

Max Frumes:
Absolutely.

George Schultze:
And I think it's likely to continue going forward.

Max Frumes:
Well, look, this was a good Petri dish, as well as anything post-Great Financial Crisis. But, yeah, in The Art of Vulture Investing, you wrote that it includes tutorials, anecdotes, and best practices. You emphasize distressed opportunities that arise from this complexity and mispricing. And you wrote in a 2016 Forbes editorial commenting on Exide, saying, well, its core problem really was the excessive debt. And eliminating the billion dollars of debt in the bankruptcy set it up for a turnaround. And so you say that in your fund you do long distressed bets, as well as shorting pre-bankruptcy equity. It winds up being very successful for bets on companies that go bankrupt, like OPI and Exide, right? So in Exide, what was your positioning going in? And then what remained your position throughout the restructuring?

George Schultze:
So it happened years ago. I believe we had a long position in the distressed debt at some point. And then I think what happened is that old distressed debt was swapped for new securities. I think some of it was new distressed debt or new post-reorg equity or debt plus equity.

Max Frumes:
Yes.

George Schultze:
My recollection is the equity was private. It was a long time ago, though, and we're long since out of it. Sometimes these things work out well, sometimes they don't work out so well. I think the key lesson from a company like Exide is it's probably better to be nimble. And if you can get securities that are publicly traded in a company that's as clean as possible after its restructuring, you just increase your odds of success in the future.

But here's a company, it's a big company, had high market share, and unquestionably people will need car batteries going forward, before and after the Exide bankruptcy and three times through bankruptcy. Back then, it looked like a great producer of this product that everybody needed. I think the environmental liability that continued through California, most investors didn't really anticipate how that could come back to bite it and put it back into bankruptcy. So I think it was generally a frustrating situation.

But in our portfolio, my recollection is that it was sized pretty small, like a pretty small percent of our portfolio. So when they fail, you better be able to either get out or have them positioned small enough that it doesn't make that much of a difference, because when they succeed, they can be absolute home runs. Looking back at the files for this one, I think what we expected is that this business effectively, you were creating it at one or two times earnings before interest, taxes, depreciation, and amortization (EBITDA).

Max Frumes:
Yeah.

George Schultze:
So if things did go according to plan, there's a lot of upside from there for any company trading at the top level.

Max Frumes:
And the comp was what, four to five times?

George Schultze:
Probably at least. Johnson Controls, I think, was the big gorilla in this industry with about $45 billion of revenues versus Exide had about three. But there were a couple of other ones. There was Enersys. There was GSU Asa. I don't know where they were based, probably in Asia somewhere. And there was also one which I think was in Brazil, Amara Raja Batteries. So it was one of several that provided the service, but I think Johnson Controls really dominated it, though it was a much more diversified business as well.

Max Frumes:
So, just assuming even a conservative estimate of four times EBITDA comps, this could have been an investment that returned multiples. And that's ultimately pricing in the compensation for the risk that one is taking.

George Schultze:
Yeah, you want to get involved with these things at a big discount to their fair value. For that one, and I'm just looking again at some old notes here, Lazard, who I believe was the debtor's financial advisor, for the purposes of the disclosure statement for this company after it restructured, used a valuation multiple of 5.5 to 6.6 times EBITDA. So to create it at under two times looked pretty interesting, if that's what you came up with as fair value. So, hopefully a multiple of that.

But as I said, things don't always work out that well. And in this case, when the company emerged, it was still pretty overlevered. And certainly, I think most people didn't anticipate that they would have big challenges keeping their main plants in operation.

Max Frumes:
Yeah, I guess you comment in your book also about pricing in the long-tail liabilities like legal or tort exposure. And I feel like that is especially important right now. But I got to bring it to today. How does one price in these long-tail risks when things feel so uncertain? Things can't get refinanced because of the war right now, all going on, the conflict in Iran driving up the price of oil. There's artificial intelligence (AI) risk to software companies.

So there's a lot of long-tail risks that feel very unpredictable. How are you able to price those in, or how do you think about those?

George Schultze:
I think it helps to be a lawyer when you think about these situations, and each one can be different. A couple of years ago, we saw a bunch of companies that had opioid exposure. There were opioid manufacturers. Purdue Pharma was the largest, but there were other smaller companies that had more securities available to trade, like Mallinckrodt.

Max Frumes:
Endo.

George Schultze:
Endo Pharmaceuticals. And then also Johnson & Johnson had exposure to it as well, and so did a couple of other pharma companies that were larger, a little bit more diversified. But in that case, you're talking about exposure that maybe isn't that long-tailed, but it does have a big uncertain nature.

I think probably the asbestos companies have the most long-tailed exposure, but we've also seen it with glyphosate, otherwise known as Roundup, with a company like Bayer, and then also with wildfire and other tort-type liabilities. So that, too, can act like debt. Litigation-related liabilities can act like commercial debt and put a company into bankruptcy.

And so if it's long-tailed, the best you can do, I think, is come up with a range of what it might be. We typically start with what the company is showing on their balance sheet and their cash flow statement, and it sometimes doesn't match. They might say, oh, there's nothing here, or they might have some sort of contingent disclosure in one of their footnotes that describe it. But then every year, if they're paying settlement charges, then you know that it's probably more than they're estimating for financial statement purposes. So usually where there's smoke, there's fire.

For asbestos, in the past, I've always thought if you use three times the stated liability, that's a good starting point, but it could be worse. But every situation is different, and it's very fact-intensive as you look at these companies with long-term liabilities or long-dated liabilities. For some of them, there's something called the futures plaintiffs, the ones that don't necessarily have a seat at the table because they don't know that they're going to get cancer from buying the product that you sold. Maybe it's talcum powder that you bought from Johnson & Johnson that one day might cause you cancer.

Max Frumes:
A continuously disputed source of litigation.

George Schultze:
Exactly. So it's interesting when the companies try to propose plans to resolve this liability with the plaintiffs who aren't really represented there, the futures plaintiffs, and how the judges struggle with trying to bring them on board is kind of a due process, constitutional question. How do you settle with plaintiffs like that, even if the lawyers want to settle, but you don't know if the people have received notice about their potential claim against the company? So I think that's something that Bayer is dealing with a little bit with glyphosate right now. The Supreme Court recently agreed to take that case under a different theory, really federal preemption. But long-dated liabilities are always an issue. I think as our economy and the global economy have become more complex, they'll continue to be an issue.

Fortunately for our society, opioid bankruptcies seem to be on the downswing now. Most of those have gone through bankruptcy. Many of them have set up settlement pools. And I think importantly, opioid production is down. There's been a big microscope looking at that industry. So hopefully the number of people who became addicted to it is going to be in the downswing.

Max Frumes:
Yeah, I mean, you bring up the really profoundly impactful factors from the businesses themselves, right? I kind of keep in mind always the triple bottom line. What is, first of all, the hit to the business itself? But then there's the environmental impact and then the social cost-benefit. The social cost of some of these things, like the opioid epidemic, is huge.

George Schultze:
Yeah. That's what makes our industry interesting.

Max Frumes:
In restructuring and bankruptcy and transformation, a number is put on these things because it keeps on. It's very upsetting. And so people keep on coming. And that's where you kind of want to avoid that.

George Schultze:
Yeah, and it's one of the few areas, I think, in investing where there's an overlap between doing this research and then thinking about public policy goals and what's the right thing to do. And I think you see politicians struggling with these questions over the years. I'm sure you remember just back a few years ago when all the coal companies went through bankruptcy.

Max Frumes:
Yeah. Oh, yeah.

George Schultze:
There was a big environmental, social, and governance (ESG) push, and coal was a dirty word. Nobody wanted to get rid of coal producers altogether. Banks were encouraged to stop lending to coal companies. And so the proverbial baby got thrown out with the bathwater. Because there were coal producers that produced steam coal, which is burned to make electricity. But there were also met coal producers. And met coal is used for making steel, which is important for the economy, even for the new economy. You can't make an electric vehicle without steel or a windmill or a building or a bridge or whatever. So met coal companies went bankrupt at the same time. And some of these were incredible values at the time.

I'm thinking about, and maybe, I don't know if you followed this one, but Alpha Metallurgical Coal. It restructured, went through bankruptcy. It had a different name before that. And then it merged with its prior sister company. In effect, it was able to eliminate over $7 billion in debt and then come out on the other side with a squeaky-clean balance sheet and a stock price that was trading under $4 a share before people figured it out. By the time they figured it out, the stock had appreciated from under $4 to over $400 a share. That's the kind of leverage you can get post-reorg or post-bankruptcy if some of these things are really misunderstood.

Max Frumes:
It's not Patriot Coal?

George Schultze:
No, that was a different company.

Max Frumes:
I know. Okay, so I have a shout-out to my friend and former colleague, Zach Bader, who covered the coal industry and pointed out to me the shocking amount of power that was still provided by the coal industry and always had the correct thesis that a lot of these things were undervalued. Peabody wound up being a great investment for Elliott.

George Schultze:
But then it had another bout with distress.

Max Frumes:
Yeah.

George Schultze:
Because they had a big fire in a mine down in Australia.

Max Frumes:
They did. They did not go bankrupt there because of that and ultimately bounced back. But yeah, that's exactly a perfect example of one of those that went through the ups and downs. And right now, those types of ESG concerns have, I guess, become less taboo or top of mind for the regulators.

George Schultze:
Yeah. With a change in the administration, it's a completely different view on coal producers.

Max Frumes:
Yeah. And so this brings us to the concept of complexity as opportunity, right, versus a trap. And you've talked about a number of these things where the complexity of these situations misprices the securities and then provides an opportunity for investors such as yourself. Nowadays there are situations like First Brands, Tricolor, where there's alleged fraud, or even a case like Neiman Marcus Saks Global that was purchased by Saks Global and then combined with a thesis that vastly projected what the combined company would be worth or would be able to do in this economy.

Not to mention all the tariffs and the import costs. The underlying thesis of combining luxury retailers was just off. And investors that provided new capital at the end of 2024 saw that go deeply distressed, more than a 50% discount, before they had to provide rescue financing.

George Schultze:
Right in the furnace.

Max Frumes:
Shortly before the company files for bankruptcy, like before there was even one interest payment. So how do you distinguish between complexity as an opportunity and complexity that becomes a trap in this day and age?

George Schultze:
Yeah. It's tough to do. I think in retail, though, there's been a pretty long-standing trend where legacy retailers, the business has just been disrupted again and again and again by Amazon and other giant retailers. The ones that own the physical locations have been at a huge disadvantage. It's been going on for 30 years. Wall Street is littered with bankruptcies for retailers.

Max Frumes:
Oh, yeah. The quasi-death of the mall, but it's all turned into experiential. American Dream Mall, awesome.

George Schultze:
Yep. But it's happening in other industries too. I mean, the cable TV industry is getting disrupted with streaming, with sports entertainment, same thing. Streaming over the top. Cord cutting.

Max Frumes:
Diamond Sports, right? Yeah. Big disaster. Tough.

George Schultze:
Right? And we'll see how that works.

Max Frumes:
RSNs are not the way of the future. Yeah. So it's continuing.

And that goes to one of the big themes, I think, for distressed investing, which is secular change. The other two major themes, I think, are just higher interest rates versus when they were zero a couple of years ago. And another one is just inflation. Inflation has affected just about every industry. But secular change has impacted retailers forever.

So I think if you keep some of these broad, high-level themes in mind when you think about industries, perhaps that will save you from risk. So complexity isn't good just for complexity's sake. You can find good opportunities in complex situations with regulated industries or companies that have litigation, all other things equal, assuming the industry is fine and the company is fine. But if there are additional problems because of secular change, or you're having trouble keeping customers because the industry is getting harder and harder to compete in with the new ways of competing in that same industry, it's a different story.

There are a lot of minefields out there. There's a lot of traps, a lot of value traps. I guess we're lucky that we missed some of the retailer ones. With First Brands, and you call it Tricolor, I thought it was Tricolor.

Max Frumes:
I always said Tricolor. Everyone's like, no, man, it's a weird pronunciation there. French pronunciation or something. Tricolor. But those situations feel to me more like fraud and bad underwriting. Investors and lenders just looking to put money to work and willing to cut corners to get there because they have too much capital. Because lenders were seeking returns, and they were just so inundated with cash during the credit bubble, when interest rates were so low that they did dumb things. It started with covenant-light structures, but this latest situation, where you have really bad underwriting like that, I don't know if it's systemic yet. Maybe it is. It's happened before.

George Schultze:
I remember one company, maybe you know this one, Le-Nature's. Do you remember that one?

Max Frumes:
Sounds familiar.

George Schultze:
It was, I think, a juice and water company, and it was a fraud maybe 15 years ago or longer, 20 years ago, where they raised a lot of money. Wells Fargo did their financing, and then there was nothing there. There was no revenue. The founders had basically just committed fraud, and they used the money to go buy things, including the weirdest things like train sets and other things. So the founders there, there was jail time.

Max Frumes:
There was a bunch of reverse merger, like Chinese reverse mergers, where half of them didn't exist, and that's where Muddy Waters made a lot of their money by shorting.

George Schultze:
These things are a sign of the times. When there's a bubble atmosphere, I'm sure you remember well, just a couple of years ago, interest rates were so low that there was negative-yielding debt, to the tune of hundreds of billions of dollars of negative-yielding debt. People that bought those loans, those government bonds on the open market, were guaranteed to lose money, but they would rather be there than risk anything else. They're in the game of trying to just get their money back, and if they lost some of it, that was better than the equity market risk.

I think sometimes you get these weird situations where, if you think about it and you look back, it may never happen again in our lifetimes. Zero percent interest rates, negative-yielding debt. Wasn't oil negative? I was like, how do I go store a bunch of barrels of oil? That was an interesting time too, because that created a lot of bankruptcies in the oil and gas space. And now some of those companies have had a huge revival since then. Well, man, yeah. You know? But it's during times like that, when there's a big crisis, I think, that you get the best balance sheets that come out of it.

Max Frumes:
Yeah.

George Schultze:
Because in those days, the people running the companies, the directors or creditor committees or whoever it is, the advisors, whoever's in charge, I think, really bite the bullet then. It happened with the coal companies when nobody wants to lend coal. Yeah. Everyone thought the sector was dead, so the balance sheets came out of those restructurings with zero debt. It was the same thing with oil and gas. Post-COVID, oh, it's negative? This will never emerge with debt.

Max Frumes:
Nary see exploration and development and oil and gas companies filing for bankruptcy right now. It was also ESG. The Hooky Duke went belly up. Yeah, it was also ESG. People said, oh, we'll never need oil again. Electric vehicles are going to take over. Yeah. And that's still a thief. I mean, it's happening, but it's just not wiping out the industry overnight like people thought might happen back then. It is taking its time.

And which brings me to what we were talking about before we started recording, which is the really opaque world of private credit. All right. So you get this quasi-bubble environment in private credit. There are multiple macro issues that are going on that really augur the secular change that you're talking about, including, in addition to the inevitable rise of interest rates and inflation, this multi-trillion-dollar private credit world. All right. And then we cover it very closely here at 9fin.

There's always these examples of, okay, is it time where there's going to be liability management exercises that take place in these private credits? Is there going to be this wave after First Brands and Fat Brands and some of these other private credit blowups and restructurings? Where are you seeing opportunities there? And then what are some of your concerns?

George Schultze:
I'm going to answer that backward. I'll start with the concerns. I think there might be systemic risk. I mean, it's so prevalent if you talk about it or look at the space. You and Jamie Dimon. Yeah, some people thought it was maybe $800 billion to $1.2 or $1.3 trillion. I read something the other day from Goldman Sachs that the private credit market is a $3.5 trillion market. That's a big number. And 50% of all flows that came into alternative investments over the last several years went to private credit. There was a shortcut. People wanted to be in alternatives, and it was easy to say, okay, let's do private credit. It was sold to them. It looked good looking backwards because these funds had a high Sharpe ratio. And what's not to like? It never goes down. Great dividends. Nice yield.

So here we are. Now you have all these private credit vehicles. Some of them are public. Some of them aren't. This looks to be a mismatch between the assets and the liabilities for a number of the structures. And my concern is that it's more pervasive and more interconnected than many of us realized up until recently.

You have the Cliffwater Fund, which is a fund of private credit funds, and it also owns collateralized loan obligation (CLO) debt. And it's getting redemptions, and it's capped its redemptions at 5% of capital, like a number of the other ones have. So I don't think that stops. I think if 40% of the investors come to the door and they're only given 5% of their capital back, that's not it. They'll be back the next time the window opens. They're not going to keep investing.

Max Frumes:
Assuming the value of their principal keeps going down, and they have some margin calls themselves, they're going to want their capital back.

George Schultze:
Eventually, you're going to get a clearing price for some of this debt, and it's not going to be pretty. For those that are overlevered, that own it, that have to create a liquid exit, it's going to be tough. There's also some exchange-traded funds (ETFs) that own it. My bigger concern is there are some insurance companies that are chock-full of this stuff too. And if there's some sort of crisis of confidence among policyholders, maybe retirees, about what private credit investments their insurance company holds, then it could be a real systemic meltdown from there.

So our approach to it right now is tread carefully, stay liquid, look for good shorts. There are a number of private credit funds that I think are interesting short ideas. Some of them have sold off a fair amount already, but some of them are not very diversified. A lot of them hold too much software exposure. And that industry, I think, is likely to go through a big secular demand cycle, with AI replacing the need for a lot of it.

Max Frumes:
I feel like 9fin is on the winning side of that secular trend.

George Schultze:
Absolutely. That's great. You guys are nimble and smart. But it turns out that a lot of the private credit out there can't be nimble and smart because you're starting with the thesis that these are overlevered companies. They were leveraged buyout deals where a lot of debt was put on them and then maybe cash was paid out as a sponsor dividend. So they don't have the financial wherewithal to manage through secular change. It requires investment.

Max Frumes:
No research and development (R&D) or new developments going on.

George Schultze:
No investment in AI training and everything else. Tech stack, yeah.

Max Frumes:
Let's face it, times are getting more challenging with inflation, higher interest rates, et cetera, all this disruption from the Middle Eastern conflict.

So most companies are going to try to figure out how to save money. If you can do with AI what you did with expensive software a couple of quarters ago, I'm sure most companies are at least considering it. So those companies that sell the software-as-a-service model, their whole existence is in question if they're also levered.

So I think that's the way to play it. We haven't seen the end of it yet. It's not just buy these things blindly because they trade at a discount. There are cheaper ways to do it. The debt is generally not audited by bank regulators, which it should be. These are non-bank banks. They don't have all the protections that you get from a bank that takes in deposits.

You don't have the comptroller of the currency coming in. There aren't regular audits by the Fed, et cetera. It's a real question on how it'll play out. And over the course of your Schultze Asset Management life, you've deployed seven and a half billion dollars of capital, right? And what's the structure of that fund in terms of the length of the capital, and how does that give you the opportunity to take advantage of this environment?

George Schultze:
Ours is a hybrid fund, so it's an evergreen structure. We do take in new capital regularly. Investors can opt for a more liquid share class, where they can get quarterly liquidity, or they can opt for the longer-dated share class, which can do more private equity-type investments as well. We also have managed accounts.

Max Frumes:
So you will be nimble and able to take advantage of opportunities as they come while avoiding the pitfalls. George, thank you so much for coming on the pod. It's been wonderful to have you.

George Schultze:
My pleasure. We'll continue to look for the remnants of Exide Technologies in its successors out there, which still exist.

Max Frumes:
Thank you very much.

George Schultze:
Thank you.