Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Mattis Potter, co
Speaker 1: Chief investment Officer at Artmont Asset Management. How are you,
Speaker 1: Mattis very good?
Speaker 2: Thanks James, thanks for having me on the show.
Speaker 1: Thank you so much for joining us today. We're very
Speaker 1: excited to dig into your credit market views. Also delighted
Speaker 1: to see Cat Hidalgo with Bloomberg News. Welcome Cat, Thanks
Speaker 1: so much for having me. James and Rob Schiffman with
Speaker 1: Bloomberg Intelligence. Great to see you again.
Speaker 3: Rob stoked to be here.
Speaker 1: So we're here to talk about private credit, the hottest
Speaker 1: trade on Wall Street. We've seen staggering growth over the
Speaker 1: last few years, and private credits now a one point
Speaker 1: seven trillion dollar market, biggest deal, biggest fundraising, titus pricing
Speaker 1: among some of the superlatives we racked up over the
Speaker 1: last few years, and every day we see more exciting headlines.
Speaker 1: At the same time, though, there's growing concern about private
Speaker 1: credit risk as interest rates stay high for longer and
Speaker 1: the economy slows, putting pressure on companies with a lot
Speaker 1: of debt. We're seeing more borrowers having to pay in kind,
Speaker 1: which means that they are using more debt instead of
Speaker 1: cash to cover interest payments. We're also seeing more amendments
Speaker 1: and extensions to existing deals. That's often a sign of stress. Meanwhile,
Speaker 1: tighter spreads imply lower returns. Fundraising is getting tougher. There's
Speaker 1: not enough deals for all the funds that have already
Speaker 1: been raised, and investors are having to reach for a
Speaker 1: bit of yield. Plus, there are signs of creditor on
Speaker 1: creditor violence and fears that new, less experienced money so
Speaker 1: called private debt tourists, could be running into trouble here.
Speaker 1: Red flags being raised by the likes of Jamie Diamond,
Speaker 1: the IMF, and PIMCO. Some say the Golden Ages over
Speaker 1: not very long after it started. What's your take, mattis
Speaker 1: is it the beginning, the end or people worrying too much?
Speaker 2: Yeah, Look, it's a very interesting topic. It's a very
Speaker 2: interesting debate. Looking at private credit and recent growth, I
Speaker 2: would say private credit in Europe has been growing consistently
Speaker 2: for a decade plus. We were fortunate to be one
Speaker 2: of the first ones to start the industry after the GFC.
Speaker 2: We started with a one billion fund more than twelve
Speaker 2: years ago and we are now ten times plus that size.
Speaker 2: I how I view the private credit growth as consistent
Speaker 2: growth over many many years. Fundraising. Industry growth was very
Speaker 2: very strong, I'd say more in terms of twenty twenty one,
Speaker 2: early twenty two and frankly over the last eighteen twenty
Speaker 2: four months it was very bifurcated. Were the likes of
Speaker 2: the largest asset managers in the space, with a special
Speaker 2: focus on what they do with a clear differentiation, had
Speaker 2: an easy time fundraising because we're generating very high yet
Speaker 2: for firstly in credit, but a lot of the rest
Speaker 2: of the market frankly did not, So I would actually
Speaker 2: not say that in the last twelve of eighteen twenty
Speaker 2: four months was the fastest growth for the industry in
Speaker 2: terms of fund raising, But the US picture may be
Speaker 2: slightly different. There's different sources that you can raise from
Speaker 2: in terms of wealth bdcsent the likes. Europe is an
Speaker 2: almost fully institutional backed market where investors allocate to private
Speaker 2: debt consistently and they increasing their allocations as right, and
Speaker 2: we're growing very well, but it is not that they're
Speaker 2: jumping into private debt and then straight back out. I wouldn't.
Speaker 2: I wouldn't call the last eighteen to twenty four months
Speaker 2: a huge growth in our European private credit space.
Speaker 3: Hey Madison, I've got some big picture macro questions for you,
Speaker 3: But just in terms of background, I'm Robie Schiffman. I'm
Speaker 3: a team leader and a technology credit analyst for Bloomberg Intelligence,
Speaker 3: which is Bloomberg's research department, and we've got a ton
Speaker 3: of analysts, five hundred analysts and strategists for covering all
Speaker 3: major markets, over two thousand equities and credits across ninety industry.
Speaker 3: So having a chance to talk to you about credit
Speaker 3: risks and rewards is really a true pleasure if we
Speaker 3: could just start off, maybe with your big picture and
Speaker 3: dig deeper into your bottoms before we dig deeper into
Speaker 3: the bottoms of value. View, this is a credit world
Speaker 3: that feels like a little bit of a Goldilocks story.
Speaker 3: So I'm wondering where you are in terms of the
Speaker 3: investment cycle, direction of rates and opportunities across geographic areas.
Speaker 2: Look, I think James and I talked about it last
Speaker 2: week in terms of how we're wired, what we do
Speaker 2: and how we invest. I must say we are very
Speaker 2: you want to call it boring or consistent shop that
Speaker 2: has been investing in private credit in Western Europe sponsor
Speaker 2: backed with a very similar strategy for far more than
Speaker 2: a decade. That has served us very well. I think
Speaker 2: it is very important in credit whether you talk about
Speaker 2: risk and reward. The reward is your contractual return. That's it, right,
Speaker 2: they have no upset. It's very important to be steady, consistent,
Speaker 2: have underwriting discipline over all the deals you do, all
Speaker 2: the years you invest in, and we shy away from
Speaker 2: binary risk, cyclic risks, regulatory risk, which is why, frankly,
Speaker 2: of course we debate a lot. The perfect micro picture
Speaker 2: is youre going to into recession, which country, which market,
Speaker 2: which industries We are set up, and we model for
Speaker 2: every deal we do that we're going into recession and
Speaker 2: that our companies can withstand that. I think that's how
Speaker 2: we are wired, that's how we invest, and frankly, that
Speaker 2: has changed very little over the last ten years.
Speaker 4: We jumped a little bit on fundraising in your previous
Speaker 4: answer there, and I think it's fairly well known that
Speaker 4: larger funds like yourself, who raise billions and billions in
Speaker 4: each fund definitely have an easier time of it than
Speaker 4: those smaller funds.
Speaker 5: But I think that it's fair to.
Speaker 4: Say that even you big guys have seen the fundraising
Speaker 4: environment change and become slightly more difficult. How do you
Speaker 4: deal with that? I'm sure there are loads of options
Speaker 4: on the table. What does Art want doing?
Speaker 2: Look, it helps when you have hundreds and hundreds of
Speaker 2: investors that have packed you in the previous fund and
Speaker 2: often the fund prior to that. They've senior returns. They
Speaker 2: see the cashier, they like the current increase year that
Speaker 2: we're generating, but they've also seen how you've behaved with
Speaker 2: troubate assets in the past, how you've restructured them, how
Speaker 2: you've gotten value back to them. It is much easier
Speaker 2: for them to undred us than a new credit manager
Speaker 2: or someone who's just started their business in twenty nineteen
Speaker 2: twenty twenty and ramped it in the probably most difficult
Speaker 2: period for new credit jops twenty one twenty two. It
Speaker 2: is much easier for an established manager to.
Speaker 4: Raise, undoubtedly, but have you found yourself needing to go
Speaker 4: after new investors as well? We've seen a lot of
Speaker 4: pushing into places like insurance companies or for example, in
Speaker 4: the Middle East. Are you kind of following any new lines.
Speaker 2: Look, we always we have a global investor base across Europe,
Speaker 2: Asia and the US, actually North America quite a lot
Speaker 2: as well. But that doesn't mean we're not like there
Speaker 2: are many investors that are not part of ours, and
Speaker 2: we will always go for new investors. We did eighteen
Speaker 2: months ago a partnership with TA and Novenda, obviously being
Speaker 2: one of the largest pension and insurance companies and one
Speaker 2: of the largest allocators to private that globally. That is
Speaker 2: a partnership that hasn't come from nowhere. That is very
Speaker 2: synergistic and that's probably the biggest step change in our
Speaker 2: fund or investor capital raising that we have had in
Speaker 2: quite some time.
Speaker 5: So that facilitates fundraising.
Speaker 4: You're able to kind of use the network that comes
Speaker 4: from your relationship with Uveen.
Speaker 2: Both internal from TA and Novene. Of course, they haven't
Speaker 2: bought us for a reason, they're partnering with us for
Speaker 2: a reason, and they're investing with us. And of course
Speaker 2: having a global platform together with Navegna and Churchill in
Speaker 2: the US provides completely different opportunities on the fund raising
Speaker 2: side than just being our ports stand alone.
Speaker 4: I don't know if you're happy to kind of go
Speaker 4: into this already, because you mentioned briefly there that you
Speaker 4: like that your investors like the way that you've been
Speaker 4: able to return money to them. Have you seen much
Speaker 4: distress in the portfolios so far? Have you had to
Speaker 4: take any kind of actions like workouts or do you
Speaker 4: have to do much restructuring so far?
Speaker 2: Look, we have I think by now twelve to thirteen
Speaker 2: years of investing, we've done more than four hundred years.
Speaker 2: Of course, we've had problems, we have restructured, restructured very successfully.
Speaker 2: If you're looking at the very recent period, and this
Speaker 2: is very very different two five, six years ago. We
Speaker 2: have a portfolio of very many companies and I think
Speaker 2: that if you look at the percentage of issues deforce problems,
Speaker 2: it is very very low. I think the good bit
Speaker 2: with private credit is that most of us larger, more
Speaker 2: established managers have focused on industries that are less reliant
Speaker 2: on the macro, and that often hundreds of customers were frankly, also, inflation,
Speaker 2: which we were very worried about two years ago or
Speaker 2: one year ago, can be passed through to customers and
Speaker 2: you keep your margin. So I think portfolio performance is
Speaker 2: probably the one piece that, having gone through the last
Speaker 2: two or three four years, has held up very well.
Speaker 3: So that is you know, I know mandate is somewhat critical.
Speaker 3: But in a changing rate environment, in which part of
Speaker 3: the capital structure are you finding most attractive these days?
Speaker 3: And it has that changed over the past two years.
Speaker 2: We have always been invested in firstly in credit the
Speaker 2: vast majority of what we do. In the last two years,
Speaker 2: I'd say we're staying even truer to that, simply because
Speaker 2: we think in the subordinated piece of the capital structure
Speaker 2: you're taking a lot more risk and especially the loss
Speaker 2: given before it is much higher than in the senior
Speaker 2: piece of it. We don't see we get very we
Speaker 2: get the double digit years these days and getting the
Speaker 2: extra one or two percent from being as Secondly in
Speaker 2: a pig or pref equity we don't see much value in.
Speaker 2: So we have focused much more on just being firstly
Speaker 2: in senior in the current environment.
Speaker 3: And what about in terms of sectors. I know you've
Speaker 3: been recently positive in the tech space, from software to
Speaker 3: it to business services. You can give some of the
Speaker 3: characteristics of these sub sectors that make them more attractive
Speaker 3: than others. And then if you could potentially just highlight
Speaker 3: the next and video for all of us, we'd appreciate it.
Speaker 2: The next time video sure, unfortunately not in the game.
Speaker 2: But the companies we like is five ten, fifteen percent
Speaker 2: like forlycorganic growth goods, healthy margins, twenty five thirty percent,
Speaker 2: high cashlow generation eighty nine percent from ebadats to cash
Speaker 2: flows ideally one of the market leaders in the industries.
Speaker 2: Because then what happens when you get a wage inflation
Speaker 2: shocked like in the last two years, you have many customers,
Speaker 2: you're not reliant on any you can pass it through
Speaker 2: and people actually won't churn. That is the type of
Speaker 2: company we like. That can be business services, that can
Speaker 2: be insurance broking, that can be software. All these these
Speaker 2: these sectors have those characteristics, but characteristics very often it
Speaker 2: does companies that are very tough to break. If grows
Speaker 2: cycles slow, and they certainly have slowed a bit in
Speaker 2: the last one two years and you're not growing sort
Speaker 2: of low double digit but mid single digits not a
Speaker 2: problem for us. It is important for us that give
Speaker 2: you keep a stable and growing top and bottom line
Speaker 2: to pay our interest and keep the CASHWS were running.
Speaker 2: That's the most important. We shy away from anything that
Speaker 2: looks anywhere near nvideo. When something grows fifty percent plus,
Speaker 2: we probably scared and run away because we have a
Speaker 2: fear that the same happen on the downside. So we
Speaker 2: are very focused on stable, consistent, growing companies.
Speaker 3: Do you have the ability to talk about any specific
Speaker 3: investments that have worked out?
Speaker 2: Well, I'm not sure we should talk about specific years.
Speaker 2: If you put you into context what we do day
Speaker 2: to day and year after year, we do forty to
Speaker 2: fifty years a year, and that twenty of those new
Speaker 2: logos new companies we invest in the rest is portfolio.
Speaker 2: So very often we just minor portfolio and reinvest add
Speaker 2: on investing in portfolio companies that we affect for years
Speaker 2: and years, and frankly, almost all of them work out
Speaker 2: and we get our contractual year back. Very little of
Speaker 2: them we get outsized returns, and very little of them
Speaker 2: we get hit with issues and problems. And that is
Speaker 2: what we like. And we see more than a thousand
Speaker 2: deals a year and we pick, and that's important to understand,
Speaker 2: we pick twenty twenty five new companies every year out
Speaker 2: of a huge pool of companies that come to us
Speaker 2: to refinance for a new LB or whatever it is.
Speaker 2: Origination deployment is very very easy if you have been
Speaker 2: doing the same thing for a decade plus, because people
Speaker 2: know exactly what you're doing, they trust you, they've seen
Speaker 2: you how you behave on a good day and frankly
Speaker 2: on a bad day. It is a very very good
Speaker 2: place to be. And then it is all about credits,
Speaker 2: election and underwriting standards, and originating is, frankly at the
Speaker 2: today where we set the easiest bit of our business.
Speaker 3: You know, it's interesting. I think you sort of answered
Speaker 3: what I was going to try to focus on next.
Speaker 3: It seems like there's so much private capital chasing after
Speaker 3: the same companies, but you're saying there's not a lack
Speaker 3: of investment opportunity. Now, why do you think that is?
Speaker 3: Is there a lack of public capital?
Speaker 5: Now?
Speaker 3: Are you? Are you guys offering money that's just simply
Speaker 3: more attractive because you're not charging what you used to
Speaker 3: have to? Like? Why is why are there so many
Speaker 3: more opportunities today than there ever were?
Speaker 2: Look, I think it is also I think a big
Speaker 2: difference between the US and Europe to be honest, it
Speaker 2: is if you're European scaled private debt manager that has
Speaker 2: been dealing with many many private equity funds, management teams
Speaker 2: and borrow us over many many years, they have a
Speaker 2: strong preference to keep partnering bit with you because these
Speaker 2: private equity firms, of course they're interested in economic terms
Speaker 2: as you say, but in reality, how they make their
Speaker 2: money and how they drive their equity stories very often
Speaker 2: is buy and build with a trusted partner then can
Speaker 2: give you the debt capital to do so, and that
Speaker 2: oftentimes they get two hundred million from us they won
Speaker 2: in the first LBO, and they get another two hundred
Speaker 2: million over the next five years of US doing this
Speaker 2: doing add on deals to form those companies together. And
Speaker 2: if they take the money from someone who's just raised
Speaker 2: a huge amount, maybe from Wales or from other source
Speaker 2: of capital in the US and place Europe in twenty
Speaker 2: twenty one, it is gone for twenty two and twenty
Speaker 2: three is back in twenty twenty four. They will think
Speaker 2: twice and oftentimes they give us a last look on
Speaker 2: financings and say, look, you want to do this deal
Speaker 2: because frankly I know the same people, the same funds.
Speaker 2: The same strategy you've done for the last ten years,
Speaker 2: you will be there for the next ten years. It
Speaker 2: is a very differentiated proposition simply because you've built a
Speaker 2: network and you've built a business over a long period
Speaker 2: of time that has done similar things in France, in Italy,
Speaker 2: in Germany, in Sweden. It is very different, I think
Speaker 2: from what people often think that you can just drop
Speaker 2: in and do a deal that is at market terms
Speaker 2: and then drop out of the market again. It just
Speaker 2: doesn't work that way. It is. It is very important
Speaker 2: for our partners. Our prioritically firms that we are in
Speaker 2: the market, we're a scale player, and we will back
Speaker 2: them in the future. That's why origination is easy. If
Speaker 2: if you are in a business that tries to play
Speaker 2: the market opportunistically in a specific year, I think origination
Speaker 2: is very hard and you will need to be very
Speaker 2: very competitive and usually probably you will lose the years
Speaker 2: because you're just not a trustworthy partner for future.
Speaker 4: You have seen margin compression in the market though, that's correct, right, Yeah,
Speaker 4: we've been kind of tracking about one hundred bits over
Speaker 4: the last year. I know it's very difficult to say overall.
Speaker 5: But do you think that's how much things have come
Speaker 5: in roughly, I.
Speaker 2: Think it's less than that. I think you have to
Speaker 2: look if you look at margins over time, I think
Speaker 2: you have to look at not just twenty two and
Speaker 2: twenty three. Those were Look, I'm not gonna I'm not
Speaker 2: going to sity and say second half twenty two and
Speaker 2: all of twenty three were great years for us. The
Speaker 2: liquid markets were shot. A lot of the players that
Speaker 2: usually do Europe sometimes they were out of the market
Speaker 2: because they had problems with the macro maybe fund raised,
Speaker 2: and the smaller players in Europe didn't didn't have the
Speaker 2: money to invest as much. So in reality, the last
Speaker 2: eighteen twenty four months were exceptionally good. I think that's right,
Speaker 2: And margins were high. Terms were very good, and that
Speaker 2: is true, and we're off that I would say, probably
Speaker 2: anywhere twenty five to seventy five BIPs ish. But if
Speaker 2: you look a bit further back, I think margins and
Speaker 2: spreads are very much similar to where we did. DearS
Speaker 2: and tranjected in the time prior to sort of exceptionally
Speaker 2: strong spreads and yeah, in terms time.
Speaker 5: Right of course, so we're kind of back to normal,
Speaker 5: is what I think.
Speaker 2: That's right. I think it is. I think if everyone
Speaker 2: says sort of we were in a golden age and
Speaker 2: now it's all over and it's all terrible and extra competitive,
Speaker 2: we add a couple of very good years where we
Speaker 2: could play up and back much larger business than we
Speaker 2: usually do. But the bread and butter of what we
Speaker 2: do fifty two hundred million with our businesses, they're too
Speaker 2: small for the liquor markets, and they're much too large
Speaker 2: for the smaller direct lenders, for the commercial banks, et cetera.
Speaker 2: It's a good space to be in. That's what we're
Speaker 2: currently doing. We're not competing with a BSM market.
Speaker 4: So you mentioned earlier that you're not a big fan
Speaker 4: of pick. What do you do when a company comes
Speaker 4: to you and says that we're having trouble with our
Speaker 4: cash burden? Can we can we turn this into pick?
Speaker 4: How do you typically deal with that?
Speaker 2: I think so those there's two things that pick or
Speaker 2: subordinated capital. I think it's different if if you're first
Speaker 2: lea in cash BA loan with a small element of
Speaker 2: PICK to it, because you control your destiny, your firstly lender.
Speaker 2: If they are trouble, you are the dominant piece in
Speaker 2: the capital structure, and you will force the outcome which
Speaker 2: direction it goes into. If you're a junior pick lender
Speaker 2: and the cup company comes into trouble and the value
Speaker 2: breaks in this you face the risk of losing hunder
Speaker 2: percent of your capital. That has never happened to us,
Speaker 2: and we must avoid it all. Of course, that's why
Speaker 2: we don't like junior picks.
Speaker 4: Right, okay, But you never come into a situation, you
Speaker 4: know where that's looking to kind of it's coming to
Speaker 4: maturity and it's looking to refinance, and they say to you,
Speaker 4: you know, are you capable of giving pick?
Speaker 5: Would you like to give pick?
Speaker 4: I mean, I guess my question is would you be
Speaker 4: happy to lose that deal instead of offering a pick?
Speaker 2: We are okay to give a pick or component to
Speaker 2: borrow us private equity firms when they say, look we
Speaker 2: want to level this company six times, Really the lever
Speaker 2: should have been five and a half times. On a
Speaker 2: cash pay basis, can we structure alone that you have
Speaker 2: a component of the margin to be picked, and we're
Speaker 2: open to that. There's obviously a different risk profile for
Speaker 2: the pick versus cash pay because it's not quarterly accruing
Speaker 2: cash yield, so that is also priced a littleit of
Speaker 2: a premium, but we will offer a l of pick indias.
Speaker 5: Okay, cool, that's that's helpful tonight. Thank you.
Speaker 4: I know I'm not as nice as Roberts, so I'm
Speaker 4: going to keep pushing on you. Are you seeing more
Speaker 4: requests for this type of pick, because we certainly are.
Speaker 4: Is that something that you're seeing across the market or
Speaker 4: in your portfolio?
Speaker 2: So I think I think it is correct that private
Speaker 2: credit and our funds it is much easier to allow
Speaker 2: for an element of pick than the liquid loan markets.
Speaker 2: There are ten times leveled clos that need cash pay
Speaker 2: and they must get the cash pay in full in
Speaker 2: order to pay the liability sec Most of our money
Speaker 2: is unlevered, some is one to one leveled at the
Speaker 2: peak that it is very different So we can be
Speaker 2: a bit more flexible and we do that, and and
Speaker 2: then we offer an element of pick. I think that
Speaker 2: is a differentiator. And then the buy and build I
Speaker 2: talked about earlier, where you have committed and uncommitted lines
Speaker 2: that people can tap. Those are the two differentiators we
Speaker 2: have versus these very level structures that are very boxed
Speaker 2: in a certain way that they need to behave all
Speaker 2: funds that very flexible.
Speaker 3: I'd love to go a little deeper into this because
Speaker 3: you know, it seems like so many pieces of the
Speaker 3: market are priced to perfection right now. And I know
Speaker 3: that capital solutions is a key strategy of your firms.
Speaker 3: Know what sort of dislocation are you seeing today in
Speaker 3: terms of size and sectors that are in most need
Speaker 3: for liquidity or rescue financing, and how do you best
Speaker 3: take advantage of that?
Speaker 2: Yeah, that's a good question. So our business, we have
Speaker 2: a capital solutions business as part of our private credit offering,
Speaker 2: and that sort of joined the private credit offering I
Speaker 2: want to say five years ago roughly, and it's had
Speaker 2: a very good time. And the reason is that I
Speaker 2: talked about earlier what we focus on direct lending or
Speaker 2: direct lending funds, and it's quite narrow. If I talked
Speaker 2: about the industries the type of businesses we like, we
Speaker 2: are quite narrow. We are selecting very carefully and frankly,
Speaker 2: they are very strong businesses in slightly more cyclical sectors
Speaker 2: in what our capal solutions business we call unloved sectors.
Speaker 2: From credit or other investors, you can invest in market
Speaker 2: leading good businesses and unloved sectors and often get e
Speaker 2: plus ten percent and more for it, and they can
Speaker 2: generate mid teens returns that way. I think that is
Speaker 2: given our standing in the with also the private equity
Speaker 2: community in Europe where we've done this more with more
Speaker 2: than one hundred funds, they will, for more challenging sectors,
Speaker 2: et cetera, try to come to a trusted source where
Speaker 2: they get the financing not from our direct learning proposition,
Speaker 2: but from the couple solutions business. That is the biggest
Speaker 2: difference that we have in capital solutions that the origination
Speaker 2: platform is so strong that from a dirog lending business
Speaker 2: we reject some of those slightly high risk credits that
Speaker 2: then they will transact on. That has always been the
Speaker 2: biggest differentiator they have done. They're also very flexible funds,
Speaker 2: even more flexible diag lending funds, and they can of
Speaker 2: course also take advantage of seasonal cyclical differences that you
Speaker 2: may have when the liquid markets are completely dissilocated, are
Speaker 2: trading at the discount currently they're working well, so then
Speaker 2: they focus on private opportunities that come through the private
Speaker 2: equity franchise that we have.
Speaker 4: It.
Speaker 2: It is different in different years, but this year, of course,
Speaker 2: liquid et cetera. For capital solutions are not relevant.
Speaker 3: So your track record enables you to be highly selective.
Speaker 3: That's pretty clear, and that reduces significant amounts of risk,
Speaker 3: particularly as you're moving up in the capital structure. But
Speaker 3: if you had to define, you know, the one or
Speaker 3: two things that that keep you up at night that
Speaker 3: you're really worried about, what are they?
Speaker 2: It is interesting. I mean, I think actually, if you
Speaker 2: look at our funds today compared to our fund one
Speaker 2: that we first raised, what are we trying to do.
Speaker 2: We're trying to be first lean, we are trying to
Speaker 2: diversify the funds. We want to control our destinies, so
Speaker 2: we usually lead our deals and all of that together,
Speaker 2: and we want to back larger businesses because they are safer,
Speaker 2: and all of that together. Frankly, in Front one we
Speaker 2: had to make a lot of compromises because it was
Speaker 2: much smaller, with much less track recorded, with much less relationships.
Speaker 2: It is a lot easier, and I think the risk
Speaker 2: that is currently in our funds is a lot less
Speaker 2: for that reason. What keeps me up. Let's be honest.
Speaker 2: We are credit people and we are constantly worried. I
Speaker 2: share the IC at least twice a week. We see
Speaker 2: ten plus memos and transactions every single week. Underwriting standards,
Speaker 2: consistency in backing the right credits, and making sure to
Speaker 2: make no mistakes on upfront when we go into a
Speaker 2: credit into a company. I think that's the thing that
Speaker 2: always worries me most, and that is debt together with people,
Speaker 2: because people consistency and people will drive those decisions I
Speaker 2: think are most important for our firm. And people have
Speaker 2: been very consistent rising too. But when you do forty
Speaker 2: to fifty loans a year, you've got to be on
Speaker 2: your tours all the time.
Speaker 4: You spoke a bit about controlling your destiny, and when
Speaker 4: you say that, I think of depth for equity swaps,
Speaker 4: I understand that you Aren'tmont took over a business called
Speaker 4: Sosalitos in.
Speaker 5: Germany last year.
Speaker 4: We hear a lot about dept frequity swaps and we
Speaker 4: get a lot of kind of speak from from direct
Speaker 4: lenders telling us, you know, well, we can actually get
Speaker 4: away higher return when we get a debt f equity swap,
Speaker 4: and some people kind of frame it like it's actually
Speaker 4: a really good thing. I'd love to hear where you
Speaker 4: stand on that pendulum, and again sorry for being so mean.
Speaker 2: Look, we don't want to take over businesses. I think
Speaker 2: we are wired that we are running highly that first
Speaker 2: firstly funds that frankly we just want to get our
Speaker 2: cash return and be repaid after three to four years.
Speaker 2: Normally we don't want to take over. I think we
Speaker 2: don't opportunistically take over, but sometimes we have to. We've
Speaker 2: done hundreds of hundreds of years and there's a number
Speaker 2: which is much less than ten over the last thirteen
Speaker 2: fourteen years that we had to take over. And then
Speaker 2: we do that, we take action. The important bit is
Speaker 2: when do you take over. We have covenance almost all
Speaker 2: our the years. When they breach and there's an issue
Speaker 2: and the private equity is not willing to sort of
Speaker 2: put new money and back their back their investment, we
Speaker 2: will have to do that and then we have to
Speaker 2: come in oftentimes change management team, correct stabilize the company
Speaker 2: and growth again. And I don't think that's an excellent opportunity,
Speaker 2: but you need to be able to do it. Of course,
Speaker 2: wetructuring teams, you need to have partners in the business
Speaker 2: that all we have restructure before and it is for
Speaker 2: a private credit fund, it's incredibly important to be well
Speaker 2: set up to do it, do it successfully return the
Speaker 2: money to investors. Yeah, that's how we think about it.
Speaker 4: Fair enough, sponsor relationships, as you've spoken a key how
Speaker 4: how do how does that kind of work when you
Speaker 4: do a debt for actor swat are you able to
Speaker 4: kind of keep the relationship up with the sponsor if
Speaker 4: you were to take a company. And I'm happy to
Speaker 4: hear about this kind of in theory because yeah, I've
Speaker 4: never personally worked on a debt.
Speaker 2: Franquity thought, Look, it's very rare. We do it, and
Speaker 2: it is. It is very We've done more the Hunt,
Speaker 2: We've worked with more. We are working with more than
Speaker 2: one hundred sponsors. We've taken over businesses with very, very
Speaker 2: very few, and it is a unique experience every single time.
Speaker 2: And sometimes, frankly, when we take over what we see
Speaker 2: what the private aguiti film has done and how they'vet
Speaker 2: oft at the business, and we're not very enthused with
Speaker 2: what we see, and maybe we don't want to transact
Speaker 2: with them in the future. But sometimes frankly, there were
Speaker 2: external issues, other issues. You work with them together and
Speaker 2: maybe you jointly help the company, you jointly run it,
Speaker 2: and you're very much respect for the private equity firm,
Speaker 2: and you do transact in the future. It completely depends
Speaker 2: on how these situations are being dealt with each time.
Speaker 5: That makes sense.
Speaker 4: I wonder if I could get your opinion on the
Speaker 4: private equity industry as a whole. Obviously you speak to
Speaker 4: loads of sponsors very closely connected with the industry. I
Speaker 4: was at Super Return last week and Scott Kleinman was
Speaker 4: on a panel, you know, saying I'm here to tell
Speaker 4: you everything's not going to be okay. Things when we
Speaker 4: look at kind of pick going up, leverage going higher,
Speaker 4: things like no fun financing getting secured against secuity positions.
Speaker 4: All of this to me looks like private equity is
Speaker 4: in a very difficult position and that things could get
Speaker 4: a lot harder in the future. I'd be interested to
Speaker 4: know where you stand on private equity returns.
Speaker 2: Look, I think if you are general as private aguity
Speaker 2: fund at the moment that is doesn't have the decades
Speaker 2: of track record of the larger ones, it is much
Speaker 2: harder to raise and get your new fund together then
Speaker 2: it was three years ago. I think that's clear and
Speaker 2: we see that with private equity firms it is it
Speaker 2: is much tougher, and it is, but let's be clear.
Speaker 2: I think private firms have gone through very tough environments
Speaker 2: in the GFC and after and they are quite good
Speaker 2: at managing difficult periods and managing the assets through those
Speaker 2: and then also coming out at the other end. That
Speaker 2: will probably they will not all go through this well
Speaker 2: and easily. If you have a specialized fund, if you
Speaker 2: have long track record, it's all about returns. If you
Speaker 2: have good returns and also cash returns to your investors
Speaker 2: in the last years, you will raise money. It is
Speaker 2: very important to show these cash leads that a piece
Speaker 2: want so much these days.
Speaker 4: Yeah, definitely, and that's actually what I mentioned. Have fund
Speaker 4: financing already. Is this a potential strategy for you guys
Speaker 4: in the future. Do you think could you look into
Speaker 4: doing that fund financing?
Speaker 2: It's definitely a possibility. Look, we are we are first
Speaker 2: with our direct lending business. Then we capital solutions. We
Speaker 2: are very good in providing solutions for the private ecor
Speaker 2: community and get the best returns out of that for
Speaker 2: our ALPS and ENAW would be a logical extension where
Speaker 2: your private decor relationships in a different product could frankly
Speaker 2: give us a very good deal flow in a different
Speaker 2: set of opportunity that we haven't tapped into at all.
Speaker 4: So, I mean, it's my job to be nervous about
Speaker 4: the industry. We're talking a lot about leverage and leverage
Speaker 4: on leverage and kind of we're seeing leverage packages on
Speaker 4: certain deals not really getting.
Speaker 5: That much smaller in general.
Speaker 4: I'd love to hear you passif could you pacify me,
Speaker 4: say that everything's fine, or do you have a doomsday answer?
Speaker 4: Is this really kind of a dangerous moment that we're
Speaker 4: in in terms of just how much leverage is in
Speaker 4: the industry.
Speaker 2: Look, the typical deals that we do are single bee credits, right,
Speaker 2: they are levered. They're private equity owned. Call it five
Speaker 2: five and a half times leverage. That's a typical deal.
Speaker 2: These companies do transact. We typically do deers at thirty
Speaker 2: thirty five percent loan to value. So if you have
Speaker 2: five times loan, it's a fifteen times company most of
Speaker 2: the time, or on average leverage on leverage and there's leverage, right,
Speaker 2: A five or five and a half times business is
Speaker 2: a levered business. That's why we need to be very
Speaker 2: picky on industries, industry leader, can they sustain difficult periods,
Speaker 2: et cetera, et cetera. But leverage on leverage and is
Speaker 2: the system levered and is there a lot of problem
Speaker 2: in our fund structure? All of that, I think it is. Frankly,
Speaker 2: it's very different to when you're at hedge funds, credit
Speaker 2: hedge funds and clos, which are all sometimes five times
Speaker 2: plus and colos ten times levered. We are often unlevered,
Speaker 2: sometimes up to one to one. That's it. I think, Yes,
Speaker 2: we lever companies highly. I don't. I'm not going to
Speaker 2: dispute that. But in the background, I think there's very
Speaker 2: little leverage in the system.
Speaker 4: Definitely, is this matter Spotter telling us that he's worried
Speaker 4: about CLO leverage and hedge fund leverage.
Speaker 2: Look, I know, I think. Look, I mean the in
Speaker 2: the liquid credit market, clos have played a very important
Speaker 2: function for decades. They've actually, if you look at CLO
Speaker 2: returns through the GFC, they've played up quite nicely if
Speaker 2: you hadn't sold at the worst possible time, which I
Speaker 2: unfortunately some people did. I think they're very relevant for
Speaker 2: the structure. They have a good business model networks, I'm
Speaker 2: not worried about.
Speaker 3: That, and made one more for me, like, how worry
Speaker 3: are you about the private credit in general? In terms
Speaker 3: of deal flow? You mentioned like you have to turn
Speaker 3: down looks like ninety five percent of the deals that
Speaker 3: you're being shown. But what happens in a few years
Speaker 3: if we're in an immaningly lower rate environment is does
Speaker 3: the need for private credit drop dramatically and do we
Speaker 3: go back to where we were five years ago? And
Speaker 3: what does that generally mean for your business profile?
Speaker 2: Yeah, I mean we lived in zero rate environment for
Speaker 2: most of our existence. Frankly, the last two years were different.
Speaker 2: I think what has the last two or three years
Speaker 2: have shown to borrow us issues private equity firms That
Speaker 2: a private equity structure, private debt structure with committed capital
Speaker 2: is a huge differentiator to a liquid structure or a
Speaker 2: structure where you backed by a source of finance which
Speaker 2: can't give you stable, consistent and debt finans for future growth.
Speaker 2: And I think that is the step change we've been
Speaker 2: through and that was so great for the last two
Speaker 2: or three years for private credit because even the larger
Speaker 2: private aquity firms that frankly often operated on the assumption
Speaker 2: that I'm going to get the loosest stock, the tightest
Speaker 2: price from the liquid markets. I have a revolver, I
Speaker 2: do a bit of M and A, and I tap
Speaker 2: the market and I get that revolver refinites in two
Speaker 2: days and it's perfectly efficient. It is great and it works.
Speaker 2: COVID Ukraine conflict the markets being shot for some time
Speaker 2: showed the Pe community that that is not the case,
Speaker 2: and a lot of companies we looked at had finance
Speaker 2: from larger, less scaled players, liquid markets, people that don't
Speaker 2: focus on Europe all the time, that were gone in
Speaker 2: twenty twenty three, and that is there's always been. Our
Speaker 2: pitch is that you rely on the prior credit players.
Speaker 2: We've done the same for you for years and years.
Speaker 2: We will be there. And also that give you committed
Speaker 2: line that you can tap for ad ons, because otherwise
Speaker 2: you have to do with the equity. And even though
Speaker 2: we're expensive these days, we're much cheaper than the equity capital.
Speaker 2: So this last two or three years I think has
Speaker 2: given a structural boost to the private credit industry in
Speaker 2: terms of demand because a lot of boris and fe
Speaker 2: films have realized there is much added value to private
Speaker 2: credit then they had frankly appreciated before. So I do think.
Speaker 2: I think, I think look summer cyclical, the liquor markets
Speaker 2: are back, the mega deals we will do, but a
Speaker 2: lot of its structural growth that is the demand for
Speaker 2: our loans.
Speaker 1: And when we look at the US against Europe, matter
Speaker 1: is I know you have that perspective. What we what
Speaker 1: we generally hear over here is there's a lot of
Speaker 1: money chasing too few deals, and there's a lot of
Speaker 1: frost and there's a lot of risk going on. But
Speaker 1: it sounds like what you're saying is in Europe it's
Speaker 1: quite different that there's a different sort of opportunity. Are
Speaker 1: you seeing money flow from the US to Europe for
Speaker 1: that opportunity?
Speaker 2: Definitely? Look it is. I think it's very different markets,
Speaker 2: and the US is much easier to penetrate. But also
Speaker 2: the US is much more mature. The markets started ten
Speaker 2: to fifteen years before we started, and you can see it.
Speaker 2: They're much much larger players, many many more of them,
Speaker 2: and that makes it more competitive, more mature, and you
Speaker 2: can much easier transact in all corners of the US
Speaker 2: rather than between France and Stockholm and Austria or whatever.
Speaker 2: You are investing, the different legal regimes, different structures, very
Speaker 2: different actors that you need to be very familiar with,
Speaker 2: it is harder to penetrate. But of course the successful
Speaker 2: US firms that have raised a lot of money and
Speaker 2: diversify into Europe, they are in Europe and they're investing,
Speaker 2: and in twenty twenty four they're very much putting capital
Speaker 2: to work in Europe. However, it is easiest with the
Speaker 2: large cap sponsors with large capital markets seen as London,
Speaker 2: that are very much more transactional. It is harder when
Speaker 2: you go a level deeper where or the next work
Speaker 2: and the origination capability and the track record metters so
Speaker 2: much more.
Speaker 1: And you're talking about double digit yields on first lean
Speaker 1: debt in Europe, what does that mean? Is that at
Speaker 1: ten or is it fifteen or is it twenty? And
Speaker 1: how sustainable are those returns?
Speaker 2: I'd say ten to twelve and I in terms of spreads,
Speaker 2: our spreads have been very consistent for a decade. Yes,
Speaker 2: we're less than the last two years, but that was exceptional.
Speaker 2: And if you look at spreads and fees, frankly, you
Speaker 2: need you will get to high single digits returns and
Speaker 2: you add the base rates to it, and you add
Speaker 2: ten to twelve percent. I think that's what we're currently seeing,
Speaker 2: and I think that's sustainable. Whether rates will go we
Speaker 2: will see that. Obviously everything's floating rate that will impact
Speaker 2: overall absolute returns. But important to us is always to
Speaker 2: keep a healthy spread risk premium differential to the liquid
Speaker 2: markets who invest in similar single bee type credits as
Speaker 2: we do.
Speaker 1: The worry over here still seems to be that there
Speaker 1: are too many participants. Do you expect more consolidation?
Speaker 2: Look, we partner with MARIENA. Churchill and it's been very
Speaker 2: good for US. It's a natural combination where global US
Speaker 2: focused manager insurance companies is partnering with US in Europe,
Speaker 2: you can see other managers that are having similar discussions
Speaker 2: and transactions being done. I think as the right approach.
Speaker 2: If you are a US firm and you want to
Speaker 2: penetrate Europe in earnest, not just as a diversifier, then
Speaker 2: those partnerships and consolidation makes a lot of sense.
Speaker 1: And one last thing that sort of springs to mind
Speaker 1: in the context of private credit, to me always is
Speaker 1: when do you expect it to start trading will will
Speaker 1: there ever be a secondary market for this stuff?
Speaker 2: That will be Look, I mean private equity has had
Speaker 2: a secondary market for a long long time. Private credit
Speaker 2: is much younger in Europe. It is obviously still quite young.
Speaker 2: And when most of the private gps and by now
Speaker 2: that's the case, have hundreds of investors, you're very different
Speaker 2: type of investors with very different needs. And it doesn't
Speaker 2: even matter exactly oftentimes the perfect performance, but an investor
Speaker 2: may have a liberidity need and they need to create
Speaker 2: and they need to exit and unfortunately the long term
Speaker 2: lockdown structure, it's not possible. And that means they will
Speaker 2: have to find a secondary buyer and that is happening sporadically,
Speaker 2: and that's not a big market yet. I will evolve.
Speaker 2: I think that market will certainly. Yeah, that would certainly
Speaker 2: be a larger market for it in a few years.
Speaker 1: The great stuff matters pot a, co chief investment officer
Speaker 1: at Artmond Asset Management. It's been pleasure having you on
Speaker 1: the credit Edge. Many thanks, thank you, James, and of
Speaker 1: course Rob Schiffing with Bloomberg Intelligence, thank you very much
Speaker 1: for being on the show.
Speaker 3: Thanks so much.
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