Speaker 1: Bloomberg Audio Studios, podcasts, radio news. The perfect person say
Speaker 1: to talk to us about it choice on set this morning,
Speaker 1: Ken can Sell.
Speaker 2: Lovely to see you in London.
Speaker 1: By the way, welcome President's CEO of Churchill Asset Management. Look,
Speaker 1: we're obsessed in terms of trying to find a narrative
Speaker 1: here and there's a million things going on. So I'm
Speaker 1: going to go big picture with you first when we're
Speaker 1: talking about the volatility in this market and this consumer
Speaker 1: resilience that just doesn't quit coming out of the States.
Speaker 1: Is the Nvidia story, Is the FED story? Ultimately at
Speaker 1: its core just a question of liquidity and when does
Speaker 1: that snap?
Speaker 3: Well, look, you know, I think you know, as we
Speaker 3: look at the markets, we're seeing a long term trend
Speaker 3: of rates ultimately normalizing. It's taking longer, right, So we're
Speaker 3: definitely in a in a higher for longer environment. But
Speaker 3: as rates normalize, the opportunity for companies to go to
Speaker 3: the capital markets and raise financing is opening up. I mean,
Speaker 3: we had the broadly syndicated loan market that the liquid
Speaker 3: markets essentially closed for the last eighteen to twenty four months,
Speaker 3: so you know they've opened up. The Empire strikes back.
Speaker 3: You know, we're seeing the large liquid markets open for companies.
Speaker 3: So I think that all bodes well for liquidity, the
Speaker 3: ability of companies to raise capital, the ability to start
Speaker 3: investing in businesses, and frankly, the return of M and
Speaker 3: A activity.
Speaker 1: Is that just a function though, of money sitting on
Speaker 1: the sidelines that has been for years now, it's kind
Speaker 1: of dipping their toe back in the water, getting a
Speaker 1: little bit more comfortable here to actively participate in this
Speaker 1: market as opposed to sitting say on front and heelds
Speaker 1: or in private equity. And we'll circle back to the
Speaker 1: alternative story in a moment, But is that what this
Speaker 1: story is as opposed to real confidence in the fundamentals?
Speaker 3: Well, I think you are seeing some confidence returned. You know,
Speaker 3: we had a reasonably long period there of price discovery
Speaker 3: in the M and A markets. G Our company's really
Speaker 3: worth eighteen twenty times cash flow? You know, are we
Speaker 3: overpaying for businesses? And was the financing markets were they
Speaker 3: in aberration in terms of funding deals that were made
Speaker 3: be over levered or or or under capitalized. I think
Speaker 3: that things are moving in the right direction. You know,
Speaker 3: we saw a significant return to normalcy in the financing
Speaker 3: markets in the world that we live in, which is
Speaker 3: private credit and private equity. Deal activity was actually quite
Speaker 3: good in the core middal market, you know, which is
Speaker 3: the third largest global economy. If you kind of look
Speaker 3: at the overall US market, we saw a significant resurgence
Speaker 3: and am an activity, deal activity, private equity coming off
Speaker 3: the sideline. So you know, we are for example, our
Speaker 3: our m and A activity, our deal investing activity was
Speaker 3: up eighty percent core of a quarter from twenty three
Speaker 3: to twenty four, and was up sixty percent in the
Speaker 3: fourth quarter. So we're seeing a gradual return to normalcy
Speaker 3: against a backdrop obviously of political uncertainty. Well here and
Speaker 3: in the US.
Speaker 4: Yes, I want to come to that in just a moment.
Speaker 4: But you were just talking there about the deveolp of
Speaker 4: private equity, and I wonder what the move's like in
Speaker 4: that sector, because if you can't exit, you can't buy
Speaker 4: it seems and that we were there for We were
Speaker 4: there for quite a while, weren't we And now things
Speaker 4: are changing. I mean, is it just in time for
Speaker 4: the private equity space?
Speaker 2: What's the mood there?
Speaker 3: Well, you know, look, I think you've had private equity
Speaker 3: firms unable to deliver distributions for you know, a reasonable
Speaker 3: time here, distributions on our private equity fund commitments and
Speaker 3: our and our co investments. You know, we're down significantly
Speaker 3: last year, so I think private equity is beginning to
Speaker 3: come off the sidelines. I think we were coming through
Speaker 3: a period of price discovery and I think we're you know,
Speaker 3: we're certain to see buyers and sellers match up in
Speaker 3: a better way. So I'm pretty optimistic about the you know,
Speaker 3: the economic environment, deal environment and emine activity. And as
Speaker 3: we move through the course of twenty four I think
Speaker 3: rates you know, will come down obviously slower higher for longer,
Speaker 3: they will come down slowly, and I think that'll drive better,
Speaker 3: better investment activity.
Speaker 4: You mentioned the link with politics and political uncertainty, so
Speaker 4: you know, I don't need you to comment specifically on
Speaker 4: National Grid and its plans. But we've got this bit,
Speaker 4: this big UK business with a big each you today
Speaker 4: issuing shares who invest in the National Grid, all about
Speaker 4: the electroification story here in the UK, and this comes
Speaker 4: just a day after we had an election called does
Speaker 4: politics not get in the way of some of this
Speaker 4: capital markets activity? Is it much more about the rates story.
Speaker 3: Now, I think it's more about the rates story, although
Speaker 3: the backdrop of the political dynamics will increasingly come to bear.
Speaker 3: I think you'll see the FED back away a bit
Speaker 3: from interjecting themselves into the election. So at some point
Speaker 3: in July or August, you'll see the Fed, you know,
Speaker 3: try to stay out of it and allow hopefully the
Speaker 3: people to make that decision. But I do think that
Speaker 3: the underlying backdrop is a move toward normalcy and rates.
Speaker 3: I think the new normal will be higher the where
Speaker 3: it's been historically, but I think, you know, I think
Speaker 3: businesses and companies are getting used to that, and hopefully
Speaker 3: post election will start to see some certainty around of
Speaker 3: our own business conditions and improvement of continuing proven of activity.
Speaker 1: One A.
Speaker 2: Can you talk about the fact that companies are getting
Speaker 2: used to the high for longer environment. What's happening inside
Speaker 2: portfolio companies right now? Are they really getting used to
Speaker 2: higher for longer Private equity is very good at financial engineering,
Speaker 2: and it's figuring out various ways to make the debt
Speaker 2: loads that some of the companies it has within its
Speaker 2: portfolio can be managed, and the duration effectively being pushed
Speaker 2: out to allow these companies to continue to operate if
Speaker 2: rates stay higher for much longer, are we at some
Speaker 2: point going to see the end of the road in
Speaker 2: the ability of private equity to kind of push that
Speaker 2: process forward.
Speaker 3: So there's good and bad there. So I would say
Speaker 3: from a portfolio perspective, there are companies that were aggressively
Speaker 3: financed over the last several years that are going to
Speaker 3: continue to have issues, and you are starting to see
Speaker 3: cracks in portfolios of certain lenders and certain managers. I
Speaker 3: would say from our perspective, we have a portfolio of
Speaker 3: four hundred and fifty US mid size companies that we
Speaker 3: are watching very care We're not seeing it, but I
Speaker 3: can tell you that other lenders that it may have
Speaker 3: been a bit more aggressive than us, are starting to
Speaker 3: see it. So I think the longer the higher rate
Speaker 3: environment goes, the more you're going to see companies that
Speaker 3: simply can't sustain themselves at the higher leverage and at
Speaker 3: the higher price of financing. If your interest coverage rasos
Speaker 3: are less than one, you know you have an issue.
Speaker 3: So in that sense, I think you're starting to see it.
Speaker 3: On the other hand, I would say the opening of
Speaker 3: the large liquid loan markets has given them a bit
Speaker 3: of a reprieve in the sense that companies that couldn't
Speaker 3: finance themselves didn't have an alternative in the liquid markets
Speaker 3: are now coming to market, frankly at record numbers in
Speaker 3: the first quarter. So what you're seeing is refinancing activity,
Speaker 3: deals being done to kind of deal with maturity walls
Speaker 3: in companies that have to refinance or otherwise have issues.
Speaker 3: So I think it's a mixed bag. But overall, the
Speaker 3: opening at the larger markets, you know, has been been
Speaker 3: a positive for availability of financing and company's ability to
Speaker 3: kind of re do their balance sheet or redo their
Speaker 3: capital structure.
Speaker 2: How much of a difference therefore, is there between the
Speaker 2: United States and what's happening in Europe. And we're still
Speaker 2: not giving about a capital markets union here in Europe.
Speaker 2: We still don't have the capacity to finance in the
Speaker 2: same way. We still don't have the number of options
Speaker 2: the US companies have in terms of their ability to
Speaker 2: seek financing. And I'm wondering, therefore, when you being here
Speaker 2: in London, how you see the different story in Europe
Speaker 2: versus the United States, and how companies are therefore going
Speaker 2: to navigate how portfolio companies are going to navigate this
Speaker 2: process given that difference in the financing options that they have.
Speaker 3: Sure, well, I think as a direct lender, as a
Speaker 3: private credit investor, I would say both markets are actually
Speaker 3: quite appealing, but for different reasons.
Speaker 1: Right.
Speaker 3: So, if you're a direct lender in Europe, for example,
Speaker 3: you have less large scale competitors, and you've got significant
Speaker 3: barriers to entry given all the local currencies and local laws. Right,
Speaker 3: so you've got different bankruptcy laws, You've got different dynamic.
Speaker 3: You really need to be local in Europe and that
Speaker 3: really creates barriers to entry. And so there are a
Speaker 3: limited number of larger players in the market. So as
Speaker 3: a lender, that's a good thing. I'd say As a borrower,
Speaker 3: it tends to raise costs, so you're generally paying more.
Speaker 3: The capital markets are less efficient, there's more, you know,
Speaker 3: the the liquid markets are smaller. Overall in the US
Speaker 3: market larger, more competition, uh, capital markets more efficient, and
Speaker 3: so I would say from an investment perspective, different dynamics.
Speaker 3: But but overall, the US I would say, is running
Speaker 3: ahead of Europe in terms of the economy and overall,
Speaker 3: you know, economic dynamics. I would say, if you look
Speaker 3: at the various industries. Software technology UH in the US
Speaker 3: doing extremely well. Pockets of challenges in healthcare, particularly dealing
Speaker 3: with reimbursement pressures. Certain healthcare businesses are having having a
Speaker 3: difficult time, but but overall, business services, you know, faring
Speaker 3: quite well through this.
Speaker 1: Ken, I'm going to put you on the spot here
Speaker 1: twenty thirty seconds if you can sure are the public
Speaker 1: market in the private market. Are the valuations you're seeing
Speaker 1: in both justified?
Speaker 3: I think that, you know, we deal mostly in the
Speaker 3: private markets, right, although obviously there's a knock on effect,
Speaker 3: you know, In terms of public valuations, I would say
Speaker 3: that they are increasingly finding their level. They're down roughly
Speaker 3: three to four turns from where they were eighteen to
Speaker 3: twenty four months ago. So at a very very high
Speaker 3: quality company, mid market private markets company could easily trade
Speaker 3: for fifteen, sixteen, seventeen times cash flow. In today's environment,
Speaker 3: that same company is probably trading at eleven to twelve
Speaker 3: times cash flow, so still good by historical standards, but
Speaker 3: the edge has been taken off a bit. So I
Speaker 3: think they are justified today. I think I think they
Speaker 3: found their level. Obviously, the financing markets have come in
Speaker 3: dramatically just with the cost of les average, you simply
Speaker 3: can't put six or seven times leverage on a business today.
Speaker 3: So as a result of that, leverage and pricing have
Speaker 3: come in. But I would say they are finding their
Speaker 3: levels and as they find their levels, deal activity has
Speaker 3: picked up a fair amount.
Speaker 2: Can go to see. It's interesting that the FED noticed
Speaker 2: noted yesterday in the minutes several members commented on the
Speaker 2: rapid growth of private credit market. So the Fed serney
Speaker 2: sitting up and paying attention to what you guys are up,
Speaker 2: so you can't can still nice to see you in London,
Speaker 2: thank you very much. They've still being by President CEO
Speaker 2: of Churchill Asset Management,