WEBVTT - Churchill Asset Management CEO Ken Kencel

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. The perfect person say

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<v Speaker 1>to talk to us about it choice on set this morning,

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<v Speaker 1>Ken can Sell.

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<v Speaker 2>Lovely to see you in London.

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<v Speaker 1>By the way, welcome President's CEO of Churchill Asset Management. Look,

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<v Speaker 1>we're obsessed in terms of trying to find a narrative

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<v Speaker 1>here and there's a million things going on. So I'm

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<v Speaker 1>going to go big picture with you first when we're

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<v Speaker 1>talking about the volatility in this market and this consumer

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<v Speaker 1>resilience that just doesn't quit coming out of the States.

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<v Speaker 1>Is the Nvidia story, Is the FED story? Ultimately at

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<v Speaker 1>its core just a question of liquidity and when does

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<v Speaker 1>that snap?

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<v Speaker 3>Well, look, you know, I think you know, as we

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<v Speaker 3>look at the markets, we're seeing a long term trend

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<v Speaker 3>of rates ultimately normalizing. It's taking longer, right, So we're

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<v Speaker 3>definitely in a in a higher for longer environment. But

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<v Speaker 3>as rates normalize, the opportunity for companies to go to

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<v Speaker 3>the capital markets and raise financing is opening up. I mean,

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<v Speaker 3>we had the broadly syndicated loan market that the liquid

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<v Speaker 3>markets essentially closed for the last eighteen to twenty four months,

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<v Speaker 3>so you know they've opened up. The Empire strikes back.

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<v Speaker 3>You know, we're seeing the large liquid markets open for companies.

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<v Speaker 3>So I think that all bodes well for liquidity, the

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<v Speaker 3>ability of companies to raise capital, the ability to start

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<v Speaker 3>investing in businesses, and frankly, the return of M and

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<v Speaker 3>A activity.

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<v Speaker 1>Is that just a function though, of money sitting on

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<v Speaker 1>the sidelines that has been for years now, it's kind

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<v Speaker 1>of dipping their toe back in the water, getting a

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<v Speaker 1>little bit more comfortable here to actively participate in this

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<v Speaker 1>market as opposed to sitting say on front and heelds

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<v Speaker 1>or in private equity. And we'll circle back to the

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<v Speaker 1>alternative story in a moment, But is that what this

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<v Speaker 1>story is as opposed to real confidence in the fundamentals?

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<v Speaker 3>Well, I think you are seeing some confidence returned. You know,

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<v Speaker 3>we had a reasonably long period there of price discovery

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<v Speaker 3>in the M and A markets. G Our company's really

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<v Speaker 3>worth eighteen twenty times cash flow? You know, are we

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<v Speaker 3>overpaying for businesses? And was the financing markets were they

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<v Speaker 3>in aberration in terms of funding deals that were made

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<v Speaker 3>be over levered or or or under capitalized. I think

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<v Speaker 3>that things are moving in the right direction. You know,

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<v Speaker 3>we saw a significant return to normalcy in the financing

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<v Speaker 3>markets in the world that we live in, which is

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<v Speaker 3>private credit and private equity. Deal activity was actually quite

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<v Speaker 3>good in the core middal market, you know, which is

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<v Speaker 3>the third largest global economy. If you kind of look

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<v Speaker 3>at the overall US market, we saw a significant resurgence

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<v Speaker 3>and am an activity, deal activity, private equity coming off

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<v Speaker 3>the sideline. So you know, we are for example, our

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<v Speaker 3>our m and A activity, our deal investing activity was

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<v Speaker 3>up eighty percent core of a quarter from twenty three

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<v Speaker 3>to twenty four, and was up sixty percent in the

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<v Speaker 3>fourth quarter. So we're seeing a gradual return to normalcy

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<v Speaker 3>against a backdrop obviously of political uncertainty. Well here and

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<v Speaker 3>in the US.

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<v Speaker 4>Yes, I want to come to that in just a moment.

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<v Speaker 4>But you were just talking there about the deveolp of

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<v Speaker 4>private equity, and I wonder what the move's like in

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<v Speaker 4>that sector, because if you can't exit, you can't buy

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<v Speaker 4>it seems and that we were there for We were

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<v Speaker 4>there for quite a while, weren't we And now things

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<v Speaker 4>are changing. I mean, is it just in time for

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<v Speaker 4>the private equity space?

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<v Speaker 2>What's the mood there?

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<v Speaker 3>Well, you know, look, I think you've had private equity

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<v Speaker 3>firms unable to deliver distributions for you know, a reasonable

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<v Speaker 3>time here, distributions on our private equity fund commitments and

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<v Speaker 3>our and our co investments. You know, we're down significantly

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<v Speaker 3>last year, so I think private equity is beginning to

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<v Speaker 3>come off the sidelines. I think we were coming through

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<v Speaker 3>a period of price discovery and I think we're you know,

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<v Speaker 3>we're certain to see buyers and sellers match up in

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<v Speaker 3>a better way. So I'm pretty optimistic about the you know,

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<v Speaker 3>the economic environment, deal environment and emine activity. And as

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<v Speaker 3>we move through the course of twenty four I think

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<v Speaker 3>rates you know, will come down obviously slower higher for longer,

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<v Speaker 3>they will come down slowly, and I think that'll drive better,

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<v Speaker 3>better investment activity.

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<v Speaker 4>You mentioned the link with politics and political uncertainty, so

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<v Speaker 4>you know, I don't need you to comment specifically on

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<v Speaker 4>National Grid and its plans. But we've got this bit,

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<v Speaker 4>this big UK business with a big each you today

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<v Speaker 4>issuing shares who invest in the National Grid, all about

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<v Speaker 4>the electroification story here in the UK, and this comes

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<v Speaker 4>just a day after we had an election called does

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<v Speaker 4>politics not get in the way of some of this

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<v Speaker 4>capital markets activity? Is it much more about the rates story.

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<v Speaker 3>Now, I think it's more about the rates story, although

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<v Speaker 3>the backdrop of the political dynamics will increasingly come to bear.

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<v Speaker 3>I think you'll see the FED back away a bit

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<v Speaker 3>from interjecting themselves into the election. So at some point

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<v Speaker 3>in July or August, you'll see the Fed, you know,

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<v Speaker 3>try to stay out of it and allow hopefully the

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<v Speaker 3>people to make that decision. But I do think that

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<v Speaker 3>the underlying backdrop is a move toward normalcy and rates.

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<v Speaker 3>I think the new normal will be higher the where

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<v Speaker 3>it's been historically, but I think, you know, I think

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<v Speaker 3>businesses and companies are getting used to that, and hopefully

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<v Speaker 3>post election will start to see some certainty around of

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<v Speaker 3>our own business conditions and improvement of continuing proven of activity.

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<v Speaker 1>One A.

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<v Speaker 2>Can you talk about the fact that companies are getting

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<v Speaker 2>used to the high for longer environment. What's happening inside

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<v Speaker 2>portfolio companies right now? Are they really getting used to

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<v Speaker 2>higher for longer Private equity is very good at financial engineering,

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<v Speaker 2>and it's figuring out various ways to make the debt

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<v Speaker 2>loads that some of the companies it has within its

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<v Speaker 2>portfolio can be managed, and the duration effectively being pushed

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<v Speaker 2>out to allow these companies to continue to operate if

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<v Speaker 2>rates stay higher for much longer, are we at some

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<v Speaker 2>point going to see the end of the road in

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<v Speaker 2>the ability of private equity to kind of push that

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<v Speaker 2>process forward.

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<v Speaker 3>So there's good and bad there. So I would say

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<v Speaker 3>from a portfolio perspective, there are companies that were aggressively

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<v Speaker 3>financed over the last several years that are going to

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<v Speaker 3>continue to have issues, and you are starting to see

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<v Speaker 3>cracks in portfolios of certain lenders and certain managers. I

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<v Speaker 3>would say from our perspective, we have a portfolio of

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<v Speaker 3>four hundred and fifty US mid size companies that we

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<v Speaker 3>are watching very care We're not seeing it, but I

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<v Speaker 3>can tell you that other lenders that it may have

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<v Speaker 3>been a bit more aggressive than us, are starting to

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<v Speaker 3>see it. So I think the longer the higher rate

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<v Speaker 3>environment goes, the more you're going to see companies that

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<v Speaker 3>simply can't sustain themselves at the higher leverage and at

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<v Speaker 3>the higher price of financing. If your interest coverage rasos

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<v Speaker 3>are less than one, you know you have an issue.

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<v Speaker 3>So in that sense, I think you're starting to see it.

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<v Speaker 3>On the other hand, I would say the opening of

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<v Speaker 3>the large liquid loan markets has given them a bit

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<v Speaker 3>of a reprieve in the sense that companies that couldn't

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<v Speaker 3>finance themselves didn't have an alternative in the liquid markets

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<v Speaker 3>are now coming to market, frankly at record numbers in

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<v Speaker 3>the first quarter. So what you're seeing is refinancing activity,

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<v Speaker 3>deals being done to kind of deal with maturity walls

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<v Speaker 3>in companies that have to refinance or otherwise have issues.

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<v Speaker 3>So I think it's a mixed bag. But overall, the

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<v Speaker 3>opening at the larger markets, you know, has been been

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<v Speaker 3>a positive for availability of financing and company's ability to

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<v Speaker 3>kind of re do their balance sheet or redo their

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<v Speaker 3>capital structure.

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<v Speaker 2>How much of a difference therefore, is there between the

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<v Speaker 2>United States and what's happening in Europe. And we're still

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<v Speaker 2>not giving about a capital markets union here in Europe.

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<v Speaker 2>We still don't have the capacity to finance in the

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<v Speaker 2>same way. We still don't have the number of options

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<v Speaker 2>the US companies have in terms of their ability to

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<v Speaker 2>seek financing. And I'm wondering, therefore, when you being here

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<v Speaker 2>in London, how you see the different story in Europe

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<v Speaker 2>versus the United States, and how companies are therefore going

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<v Speaker 2>to navigate how portfolio companies are going to navigate this

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<v Speaker 2>process given that difference in the financing options that they have.

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<v Speaker 3>Sure, well, I think as a direct lender, as a

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<v Speaker 3>private credit investor, I would say both markets are actually

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<v Speaker 3>quite appealing, but for different reasons.

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<v Speaker 1>Right.

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<v Speaker 3>So, if you're a direct lender in Europe, for example,

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<v Speaker 3>you have less large scale competitors, and you've got significant

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<v Speaker 3>barriers to entry given all the local currencies and local laws. Right,

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<v Speaker 3>so you've got different bankruptcy laws, You've got different dynamic.

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<v Speaker 3>You really need to be local in Europe and that

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<v Speaker 3>really creates barriers to entry. And so there are a

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<v Speaker 3>limited number of larger players in the market. So as

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<v Speaker 3>a lender, that's a good thing. I'd say As a borrower,

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<v Speaker 3>it tends to raise costs, so you're generally paying more.

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<v Speaker 3>The capital markets are less efficient, there's more, you know,

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<v Speaker 3>the the liquid markets are smaller. Overall in the US

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<v Speaker 3>market larger, more competition, uh, capital markets more efficient, and

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<v Speaker 3>so I would say from an investment perspective, different dynamics.

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<v Speaker 3>But but overall, the US I would say, is running

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<v Speaker 3>ahead of Europe in terms of the economy and overall,

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<v Speaker 3>you know, economic dynamics. I would say, if you look

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<v Speaker 3>at the various industries. Software technology UH in the US

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<v Speaker 3>doing extremely well. Pockets of challenges in healthcare, particularly dealing

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<v Speaker 3>with reimbursement pressures. Certain healthcare businesses are having having a

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<v Speaker 3>difficult time, but but overall, business services, you know, faring

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<v Speaker 3>quite well through this.

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<v Speaker 1>Ken, I'm going to put you on the spot here

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<v Speaker 1>twenty thirty seconds if you can sure are the public

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<v Speaker 1>market in the private market. Are the valuations you're seeing

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<v Speaker 1>in both justified?

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<v Speaker 3>I think that, you know, we deal mostly in the

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<v Speaker 3>private markets, right, although obviously there's a knock on effect,

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<v Speaker 3>you know, In terms of public valuations, I would say

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<v Speaker 3>that they are increasingly finding their level. They're down roughly

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<v Speaker 3>three to four turns from where they were eighteen to

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<v Speaker 3>twenty four months ago. So at a very very high

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<v Speaker 3>quality company, mid market private markets company could easily trade

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<v Speaker 3>for fifteen, sixteen, seventeen times cash flow. In today's environment,

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<v Speaker 3>that same company is probably trading at eleven to twelve

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<v Speaker 3>times cash flow, so still good by historical standards, but

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<v Speaker 3>the edge has been taken off a bit. So I

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<v Speaker 3>think they are justified today. I think I think they

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<v Speaker 3>found their level. Obviously, the financing markets have come in

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<v Speaker 3>dramatically just with the cost of les average, you simply

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<v Speaker 3>can't put six or seven times leverage on a business today.

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<v Speaker 3>So as a result of that, leverage and pricing have

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<v Speaker 3>come in. But I would say they are finding their

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<v Speaker 3>levels and as they find their levels, deal activity has

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<v Speaker 3>picked up a fair amount.

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<v Speaker 2>Can go to see. It's interesting that the FED noticed

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<v Speaker 2>noted yesterday in the minutes several members commented on the

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<v Speaker 2>rapid growth of private credit market. So the Fed serney

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<v Speaker 2>sitting up and paying attention to what you guys are up,

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<v Speaker 2>so you can't can still nice to see you in London,

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<v Speaker 2>thank you very much. They've still being by President CEO

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<v Speaker 2>of Churchill Asset Management,