November 26, 2025 • 48 mins
Global investors are looking more at European private credit as US returns get squeezed, according to London-based hedge fund Arini. “They want to focus on a place where they think there’s rule of law, where they think there’s opportunity set — and that’s really been Europe,” Mathew Cestar, the firm’s president, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Stephane Kovatchev in the latest Credit Edge podcast. Europe pays about 50 basis points more on private loans than the US to compensate for its relative complexity, says Cestar, who leads the Arini’s direct lending business. The firm generates additional spread by focusing on middle-market, non-sponsor deals across the continent. Cestar also discusses credit agreements, defaults, the potential for investment in defense and where by country and sector he sees the best opportunity.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to The Credit Edge, a weekly Markis podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Stefan Kovachev, a senior credit analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Matthew Sestar, president
of Arene, the London based hedge fund. How are you
doing today, Matthew.
Speaker 3 (00:37):
I'm doing super well. Great to be here. I'm a
huge fan of the podcast and so it's great to
play a rold today.
Speaker 2 (00:43):
Oh great, Thank you for joining us. Matthew oversees Arene's
private credits strategies and Lee's It's direct lending business, launched
earlier this year through a sourcing partnership with loz Art.
Before joining Arene, Matthew was global head of Credit at ICG,
and prior to that, held various leadership rules at Credit
(01:04):
SUITEE in London and New York. We're looking forward to
his insights on the private credit landscape and more broadly,
on where the most attractive credit opportunities may be in
twenty twenty six.
Speaker 1 (01:17):
Of course, we have loads of questions for you, Matthew,
but let's start with private credit. There is drama out
there at the moment. We're seeing more defaults, repayments in kind,
and debtholders becoming equity owners after borrowers failed to pay.
Blue Out scrapped, a private debt fund merger after investor's
bolt debt significant implied losses, and a black Rock YLO
failed over collateralization tests after it took one hundred percent
(01:38):
loss on a private loan. Big US private debt managers
meanwhile talking down previously lofty return expectations, just as the
fast growing asset class enters the mainstream, and the bond
king himself, Jeff Gundlack is calling private credit quote garbage lending.
There's a lot of doom mongering out there. The golden
age seems to be over. But what is your take, Matthew,
You're out there selling the product. That's the case for
(02:00):
going private at this point, particularly when you can get
pretty good yield right now on publicly traded debt.
Speaker 3 (02:04):
Yeah, so, I think I think the real thesis is
to focus on other geographies, other capital structures, different sized businesses.
As you know well, James, the lion's share of the
growth in private credit has been a US phenomenon. It's
really been around, you know, financing sponsors, and it's really
focused on the upper middle market in large cap sort
of arenas, and so that's been a theme really for
the last ten to fifteen years. We're doing something a
(02:26):
little bit different. We're focusing not on the US, not
on the large cap, not on the sponsor financings, but
we're really looking at Europe, and we're looking at the
middle market, and we're largely looking at these non sponsor areas.
And so as we were just chatting as we began,
you know, that's where we see value. We see it
less where there's been a lot of yield compression particuling
the US, where leverage levels have stepped up, and where
(02:48):
some of the you know, the traditional productions of the
credit lenders have really leaked out through some of that stuff.
And so I think some of those commons Youdis mentioned
are really kind of a US phenomenon. And that's why
our investors and our focus is really and largely in Europe.
Speaker 2 (03:03):
And what's the typical size or maybe structure or tenor
pricing of the deals you target.
Speaker 3 (03:11):
Yeah, so maybe i'll just do it just a mini
history lesson on what happened in Europe. I'm an American
by background, though I've been there for about twenty five years.
This market in private credit in public capital markets really
grew post the GFC. This is when these markets were
growing at a rate of you know, five to tenfold
in that period of time, and most of the activity,
again was focused on larger borrowers, bigger companies, sponsor backed
(03:34):
sort of arenas, and not dissimilar to your dialogue in
the US, that's where you've seen in Europe equally real
compression of yields and an uplift in MS in terms
of leverage. And so what we've been focused on and
where we think there is value is staying just below
the size of the public capital markets. And so that
means kind of facility sizes in the context of probably
(03:55):
one hundred to four hundred million, and that's very much
by design, because the public markets and the large cap
private credit markets are really focused on that four hundred
level and up. And so in those areas, you're getting
you know, spreads in the private markets as tight as
kind of the low four hundreds. You're seeing public market
activity at all time, sprite tight spreads in the kind
(04:17):
of the mid three hundreds. What we're finding if you
step down below those public capital markets and really focus
on the non sponsor component, you're picking up spreads kind
of north as six hundred basis points. And so that's
the dialogue that we've been having for you know, quite
a long time at ARENI, which is really to unpack
(04:38):
some of the complexity in Europe. So when you come
to Europe, given all the jurisdictional vagaries, given all the
national regimes, given all the languages and cultures, you get
paid additional spread to come there. And then what you
want to do is not just think about Europe as
a main but you want to think about how do
you penetrate some of those areas where banks are either
pulling back or the public capital markets aren't aren't focused.
(05:01):
And so if you're focused on the size, as I
just referenced a moment ago, that think we think that's
kind of the sweeter of the sweet spots where you
enjoying nice margin, you are having leverage levels that are
below the sponsor community. And then very importantly you're really
able to design your own credit agreements. And so James
to your point, which is a lot of the activity
(05:23):
and a lot of the noise, particularly the UAS is
because there's been a convergence and you're almost perfect convergence
between the public markets, particularly the large cap in the
private markets, and so in Europe it's a little bit
of a different story. So I'd welcome unpacking that as
we continue the discussion, and we.
Speaker 1 (05:39):
Have a fascinating perspective because you've been in Britain for
twenty five years, but you are originally American. I have
been in America for twenty five years and I am
originally British. So between us, we shall get to that.
Speaker 4 (05:49):
That's why the dialog is so good, which you.
Speaker 1 (05:51):
And I we've arranged as a swap by the King.
But the size of the deal is up to four
hundred million euros, right, and you can get six hundred
basis points over Sonya each.
Speaker 3 (06:06):
Yeah, in the main, that's what you're finding. So but
when you focus on this corporate world, you're picking up
between one hundred and fifty two hundred fifty bases points
of incremental spread, and so that gets you from kind
of that mid to four hundreds to something north of
the north of six hundred. So that's an important dynamic.
I think what you're finding, you know, in Europe is
leverage levels are just lower than the US, and so
if you look at the data very carefully, it tends
(06:27):
to be depending on the industry, of course, between one
and three turns less levered, particularly in the non sponsor space,
because these family companies in Europe, which are private companies
that dominate the economies, tend to be multigener generational, and
what they're looking to do is not maximize a return
in some finite period three to five years. What they
(06:47):
want to do is hold the asset really to the
next generation, and therefore they tend not to maximize leverage.
And so we very much like that dynamic. So less
leverage and you're enjoying these higher spreads in large art
because you're providing a solution to them. You're providing certainty.
And James, you'll know Europe quite well, which is generally
(07:10):
there was not a romance in the you know, the
private company space with the public appal markets. They never
really like the anonymity of large syndicates, large public you know,
groups of investors accessing their private data. And so what
I found in my career and having done that for
a long time in Europe. Is a solution works well
(07:31):
if it really solves an issue. And the issue that
we're really solving in Europe is a pullback of the banks,
a skipping over this market segment by the large you know,
asset managers that are deploying in scale, and you're finding
a community of borrowers, companies, families that need solutions and
they're relatively you know, not being serviced in a proper way.
(07:52):
And so we found that to be a really attractive segment,
and we think is a scale segment in large part
because when you look at Europe, Europe is a middle
market type continent. Companies are just smaller given the regional
footprint of these twenty six you know, separate countries. And
so we get a lot of dialogue from the US,
which is, if it's not scale, that must be a
(08:15):
problem with the underlying business, and we say, no, no, no, no,
that's not the case. What you find is we've been
financing what are kind of regional champions in each one
of the underlying countries and they haven't enjoyed scale, in
part because the cross border nature in Europe tends to
be more difficult cultural linguistic amongst other areas. And so
we found this middle market space in Europe broadly away
(08:36):
from some of the sponsors. Now though we clearly finance
sponsors when it's attractive lending opportunities, that tends to be
a very stable area to generate some attractive returns.
Speaker 1 (08:45):
But the banks, you know, they have stepped back a
little bit, but they're not absent, so you know, they
are active, they have local currency balance sheets, they probably
have very competitive terms. Why would a company in Italy,
say or Germany go to you instead of the you know,
the bank that they've been going to for years and
does the payroll and everything else.
Speaker 4 (09:01):
Yeah, it's a couple things.
Speaker 3 (09:02):
So one is that the big banks, the muscular big banks,
large like large deals, and they would rather lend on
a portfolio basis than do the underlying company by company
type lending activity. And so that's an easier underwrite for them.
It's one that's flattered from a regulatory and a capital perspective.
So unbalance, the banks are certainly resurgent in Europe, but
(09:23):
they're doing it really on a portfolio level, and so
they're looking to finance not only individuals like ourselves, but
other managers, and so you see that happening quite a bit.
What you also find is you segment the market. I
think I talked about, you know, kind of this kind
of two hundred and fifteen four hundred million facility size
or loan size. This is kind of the sweet spot
because you go below two fifty, there's a tremendous amount
(09:44):
of local bank demand and all the national champions a
country by country, UK, Germany, Italy, France, Benelux unusually strong
and very very inexpensive financing, and so you want to
step out of that. And then, as I said, when
you go north or four hundred, you run right into
the public capital markets, and particularly in the sponsor community
have converged those marketplaces, and so we're finding that kind
(10:06):
of middle space desirous of financial solutions. They want someone
who is who understands their businesses and someone who can
move in a reliable sort of way. So that's been
a kind of a steady stem of you know, opportunity
set for us.
Speaker 2 (10:23):
And what about private credit trading? How developed is the
secondary market for private credit and what's the outlook for
greater trading activity? Maybe?
Speaker 3 (10:33):
Yeah, So I think it's been a theme in the
US and the investment grade space. We haven't seen that
in Europe yet. So, you know, the lions share of
what's happening in Europe is been on the below investment
grade side. It's been largely sponsored backed, and just given
the illiquidity and the private nature of those assets, there
hasn't there hasn't been that level of focus. We'll have
to see you in the coming years if that's going
(10:56):
to be a topic that's relevant to Europe. But I
to be candid today, that's really not you know, not
a not a topic. The bigger topic in Europe is
this you know, multi decade retrenchment banks. So when you
think about when I came twenty twenty five years ago
to Europe, all the corporates in that space where one
hundred percent bank financed, and you look now you dial
(11:18):
forward in the date we are today about twenty percent
of corporate borrowers finance either in the public markets or
in the private markets, the institutional markets, but it's still
seventy five eighty percent through the banks. That's why there's
this big structural shift that will you know, it's been
throughout my career and will continue well beyond mind which
(11:40):
is this this de leveraging of the banks who really
don't like complexity, who don't like single name borrowers. And
what you find is in Europe, just again given the
size of the companies, they tend to be below investment grade.
Because they're smaller, they have less diversification by company, by
client base and the like. For it's below investment grade.
(12:01):
So this theme will continue on sort of unabated. James,
you know the US market incredibly Well, it's just the
inverse here. So traditionally this this segment of the marketplace
corporates in the US, twenty five percent of that is
really intermediated through the banks. Seventy five percent or so
it's through the public capital markets or securitization market. So
(12:21):
it's the inverse. But we're seeing you know, strong growth.
You know, in connection with that, do.
Speaker 1 (12:28):
You take the whole loan down yourself as it bi
lateral or you in a club with other lenders.
Speaker 3 (12:33):
Yeah, So that's the other distinction versus the US, And
thanks for asking that, which is US public capital markets
private markets now are broadly syndicated also, so you're looking
at syndicate private lenders are coming in in Europe that
happens certainly on the sponsor back financings, certainly on the
large cap deals. And that's one of the things where
less we find less attractive in the market, which is
(12:56):
it's not just leverage that's attractive in Europe, it's lower,
it's not just spread that's higher, it's around the document itself.
And we're you know, highly cognizant of the product, the
products that we're involved in, which are loan products which
we've got a cap on the return uh. And so
the most important thing for those type of funds and
for our investors is downside protection. And the best way
(13:19):
to ensure a down downside protection is having a very
tight credit agreement. In what we find in what we're
focused on, particularly in the middle market where we operate,
is we're able to write our own credit agreement, and
so that really protects the underlying collateral and it protects
against some of the some of the flexibility you find
in the public markets, which you're going to know very well,
(13:39):
whether it's distribution to the equity or it's allows you
prioritization of debt, you know ahead of yourselves. The leakage
of asset value or cloutter value outside the borrower group.
And so yeah, so we focus on being the sole
lender or being the co lender, and that's that's where
we've been deploying capital. I think it's it's critical from
(14:00):
a risk perspective, but what you also find from a
borrower and company perspective, particularly again in this non sponsor area,
these companies, these families, they want to know who they're
dealing with. Europe is still very relationship oriented. It is
less transactional, and it was a maybe it was an
(14:22):
unnatural period for a period of years where these companies
and families were borrowing from the public markets and so
as that shifted really after the rate change in twenty two,
public markets were less supportive of smaller companies in Europe,
and we can talk about why that was. This product
has stepped into that and it's a it's a better
product for the families and for the private companies in
(14:44):
the main.
Speaker 1 (14:45):
One thing that's giving people a bit of wherey here
is the amount of pick coming out in the US.
You know, so companies instead of paying the interests, they're
paying with new debt, some of them parently, you know
that they arrange that in advance. So it's a good pick,
but I honestly you can't see the difference how much
(15:05):
pick you sing in Europe and how much of it
you know, how much flexibility do you give your borrow
is in the case they do get into trouble.
Speaker 3 (15:11):
Yeah, so you're seeing that as as you say, James, rightly,
it's really been a US phenomenon. It's really been the
sponsor phenomenon, and it's really in the tech and software spaces,
and so some of those some of that under writing
underwriting activity was you know, predicated on growth, and when
growth has been stalled or disrupted, loans aren't able to
(15:32):
be cash paid, and hence they're moving to this this
this pic arena. And you can see that very readily
in some of the public data you're seeing around the
BBC's some.
Speaker 4 (15:39):
Of that's happened in Europe. Also.
Speaker 3 (15:41):
What I say, however, in Europe is the software and
tech areas are less represented versus the US. In the
main we for example, are really just financing real economies
in Europe, and the real economy is in Europe tend
to be industrial businesses, hard asset businesses, some consumer businesses,
some service businesses, and there's those are not predicated on
(16:06):
underlying growth of those companies, and so we're not offering
pick you know, into our portfolios.
Speaker 4 (16:13):
That presage is that you.
Speaker 3 (16:14):
Know, the capital structure somehow is not right sized for
the underlying cash flows. And so we see that quite
a bit in the US, and that's something that we're
trying to stay away from. You do see it, as
I said, on some of the larger cap you know,
sponsor oriented trades in Europe as you know us, James,
we have you know, a mixture of businesses at are
any liquid businesses, structure credit businesses, private market businesses. We
(16:37):
do take some real insights from our public market activities.
You know, so in public market activities, if you have
a non accrual or you have a pick, that generally
means there's a default or downgrade, and in private markets,
heretofore that hasn't been the case. And so we've taken
some of the lessons, some of the risk management techniques
(16:58):
we have in our public businesses and utilize those in
our private businesses, which I think is a little bit differentiated.
You know, we run scenario analyzes, downside scenario analyzes based
on different different you know, macro events, different rate events,
different drivers of underlying economies, and that that scenario and
(17:18):
risk analysis is bedrock in the public markets, and many
many folks don't don't think about that in you know,
in private markets, and so generally a non or cool
or a picking of your underlying instrument. In the public markets,
that's a default, and in the private markets has been
it's been a little bit it's a little bit different
from that. We find also that you know, what's one
(17:42):
thing that it's interesting about public markets is the feedback
loop is is very important and it's it's readily available.
So when you make a public markets investment, you get
feedback in three, six, nine, twelve months in terms of
what the market thinks about that underlying with the third
party recognized agencies think about that that investment. In private markets,
(18:05):
you really haven't you haven't had that right. And so
particularly in Europe, what you find in.
Speaker 4 (18:11):
Europe is.
Speaker 3 (18:14):
Maybe five percent or so of the public high heel
market has been restructuring pretty much every year. But we
haven't seen that that that parallel event in private markets.
So there's quite a bit of disparity between those two,
which is you know, quite concerning, and that's something we're
you know, we're watching, you know, relatively relatively carefully.
Speaker 2 (18:33):
And what kind of all in returns are you targeting
in your direct lending business? So, looking at European high
yield market for instance, as somewhat of a proxy, the
average yield to wurds here in Europe is about five percent,
roughly four percent for double B, six percent for single
B names, and twelve for three plus C rated credits.
But when we factor in the illiquidity premium typical for
(18:56):
private investments, what all in annual yields and returns are
you aiming for?
Speaker 3 (19:02):
Yeah, so we think about a little bit in spread terms.
So and maybe if you're a listener based because you
have a lot of listeners here in the US, we
do the build up really from the US to Europe,
particularly in private markets. And so you know, what you
find is when you move from the like private market
investment in the US to Europe, you earn about fifty
(19:22):
basis points in incremental spread. So you're getting paid for
that complexity. But I talked about it's not additional risk,
it's complexity. Twenty six separate countries, disparate solvency regimes, languages, cultures,
and the rest. And so you pick up about fifty
basis points. When you step into the middle market in Europe,
you enjoy another fifty basis points. So if you're doing
(19:45):
middle market direct lending, you know, in Europe versus some
of the larger cap stuff in the US, you're picking
up a spread of about one hundred basis points. And
so that's the bedrock of the business. What we find
interesting in this part of the cycle, and we're find value.
We're finding more value in the corporate non sponsor space.
And when you move from this middle market sponsor area
(20:07):
to non sponsor, you're able to enjoy you know, another
one hundred and fifty basiness points of spread. And so
that's that's something that I think we think is valuable,
our clients think are valuable. And so when you do
the math through that, that's how you get to these
kind of mid mid to six hundred type spread type
environments and you can see what the yield equivalent would
be on that.
Speaker 1 (20:26):
Interested and why you're staying away from the sponsor space.
You know, private acty firms they say have already raised
some of their last funds, maybe a big shakedown coming
in private actually is that the concern or are you
just finding that's to commoditize in terms of the actual
lending going on there.
Speaker 3 (20:42):
It's really a risk analysis where we're finding value in
the marketplace. And so, as I said, in the large
cap space, there's a lot of capital focusing on very
few few deals and therefore through that auction process in
private markets you're finding that spreads are being compressed, sponsors
are enjoying higher leverage, and then they've really converged the
credit agreements with the public market, and so that that's
(21:04):
been less less of an interest. We certainly do finance
and middle market sponsors, and we do the non sponsor base.
We do both of those, but I was just walking
through this sort of the relative value in this part
of the cycle is more compelling in a non sponsor space.
For in the main the challenge with Europe is getting
(21:25):
access to those and this is no I think if
you and I've heard a number of folks you've spoken with, James,
I think people on the main will say that the
sort of the corporate business is on balance less risky,
it's lower leverage, you enjoy more spread, and you're able
to really drive the document the challenge in Europe, however,
is how do you get access to that in a
scale way. So at our firm, we we have a
(21:49):
number of investors and originators in relationships with all the
corporates and we think that's highly highly differentiated. But we
did something a little bit different. We also up a
strategic partnership with Lizard and we did that very purposefully.
We did that and again your US folks will know, well,
they're eight or ten of these partnerships in the US,
(22:11):
many of which are very successful. We wanted to do
something a little bit different. We wanted access to a
firm that covered the middle market. They had pan European
coverage and that was a leader in each one of
the key markets UK, France, Germany, Italy, Bentelouques, amongst others,
but in a scale way. And so our firm is
approaching four four and a half years of age. Lizard
(22:33):
has been around for one hundred and seventy five years
and so they're they're really the corporate listener to private
families across Europe and that's given us lots of boots
on the ground to originate in a scale way, and
that just used that to complement our own origination techniques
and so we think it's a little bit different. Through
my background, I know, you had to have long standing
(22:56):
you know, advisors in market to be able to see
a big enough tam of opportunities that it's very hard
to do that from London. Many people try to do
the fly in, fly out type model, or they'll put
one originator in Spain and one in Italy and two
in Germany and think that's origination. So we've tried to
unpack this. We're thinking it a in a unique sort
(23:16):
of way. One that helps mitigate some of the conflicts
because they're not a balance sheet lender. So that's the
other way that we've kind of really complemented what we
do in the sponsor community. Plus this non sponsor sort
of sort of avenue.
Speaker 1 (23:29):
Not a bad place to fly around that wouldn't mind
you know, Madrid or Barcelona today. But this took back
up in zoom out a little bit, Matthew, the concept
of Europe for an American investor. You know, I'd say,
you know, six months ago when the tariffs hit was
very exciting for a lot of people. You know, let's
we suddenly realized that we need to be diversifying a
(23:50):
bit more geographically, and everyone was so long in the
US and there's trouble here, so let's look and what's
the nearest place Europe, So let's have a look at that.
But that all seems to have kind of gone away
very quickly, and I'm wondering, you know, when you're here
in the US and you're talking to potential investors, potential clients,
you know, what kind of questions are they asking you
about Europe? Beyond the complexity beyond you know, there's lots
(24:10):
of different countries and everyone speaks different languages, and it's
terribly confusing. What what are they asking you about Europe
that you know that you know expresses some interest and
real like sense that they will diversify their portfolios.
Speaker 3 (24:24):
Yeah, I think it's it's what you say, James, which
is the private markets in the US have had such
a lead lead versus Europe, whether it's in the equity
product or the credit product that many allocators globally have,
you know, a lot of exposure there and they're looking
for the next they're looking for from a diversification perspective,
where else can I allocate capital in size? Where there's
(24:46):
rule of law, there's a set of quality companies, uh,
there's transparency in the like. And what we found and
I found over my my career, is that from a
US perspective, Europe can be fetish. So a lot of
global investors come for a few years as they wax
and wane, and I've seen this over the last twenty
years or so, and so I think the point that
(25:06):
we emphasize is, you know, we're dedicated in Europe. We're
focused in Europe. We've got boots on the ground in Europe.
You know, our investment committee is our CIO, all of
which make decisions based in Europe. And so clients want
to make sure that you're there for a long time,
a long period of time. And then equally from the
borrowers side, borrowers in Europe, particularly on this non sponsor component,
(25:30):
are quite suspicious of you know, people are coming in
for fetish sort of sort of reasons. And so that's
a lot of the dialogue you know that we have,
you know, in that space, and so yes, some of
the some of those tailwinds have dissipated in terms of
this interest in Europe. But I have to say, once
you unpack it across the countries across the sectors. The
(25:52):
fact that there's not a reliance really on tech tech
and software and you're in a debt product. We're diversification
and downside risk is the most important thing. I think
it's made people interesting interested rather in the European credit experience.
There's a lot of question marks around the equity story
in Europe, and I'm not an expert in that, but
(26:13):
I see the equity value created in the US, particularly
in the tech in AI space.
Speaker 4 (26:17):
Europe really doesn't have that.
Speaker 3 (26:19):
And so our thesis is you don't need equity story
on a credit investment. You need to have credit credit metrics,
cash flow, downside protection in order to generate interesting returns.
So Europe in the main is on balance is probably
have better credit investment than an equity investment.
Speaker 1 (26:38):
Uh.
Speaker 4 (26:38):
And that plays to kind of where we have our expertise.
Speaker 2 (26:41):
I had a question about the sub sectors you're investing in.
In the industrial space I cover in Europe, I'm seeing
a bit of a K shaped recovery. So the clear
winners are aerospace, defense, maybe energy, great companies who have
big backlogs, while traditional heavy industries such as steel, chemicals
(27:03):
maybe autoparts still continue to struggle. So how does ARENI
allocate capital across different industrial segments in Europe?
Speaker 3 (27:12):
Yeah, I think that's I think we would probably agree
with some of those comments. So I think that's wisely put.
What we've done is really sectorized all our teams. And
so for your US audience, it sounds like an obvious thing.
Most of the big alternative asset managers have deep sector
expertise industrials, chemicals, consumer services, healthcare and the like. In
(27:35):
you in however, they run a business called Europe, which
just given the complexity of both borrower type, country type
and the like, stress as unusual.
Speaker 4 (27:45):
Uh.
Speaker 3 (27:45):
And so that's why we've generated I think some attractive
returns over time, is that we've been dedicated in each
of these key sectors. And that's how it really we're organized,
which is we use this reservoir sector expertise and to
express views across a variety of areas. And then what
we're talking about today in direct lending is we use
that expertise around that and we're just unusually focused on
(28:09):
cash flow generation, downside protection and the next lender analysis.
And so unlike some of the large cap deals which
are really predicated on an exit in the public markets
or an m and a transaction. That's not what we
focus on. And so you know, some of the sectors
you mentioned, some of these more cyclical sectors have definitely
been under pressure and clearly we've been underweight those opportunity sets.
(28:34):
What's interesting about Europe in this middle market set is
these tend to be national champions, so local, local clients,
local suppliers, local ecosystem and so they've been a little
bit more immune to some of the tariff winds, some
of the trade winds which you've seen express certainly the
large cap large cap European companies, particular the chemical space
(28:58):
for example. You've seen that really expressed in the equity uh,
the you know, the share price performance of those companies.
And so again when you focus on this middle market,
they tend to be not immune, but more insulated from
some of those those global trade winds, tariff wins and
the like. Uh and we're seeing that in the underlying
performance of our companies.
Speaker 1 (29:17):
Can you give us an example of, you know, a
deal that you've done that you're totally excited about. Just
to make it a bit more tangibly, you know that
we're talking middle market, we're talking about real essays, but
and local champions.
Speaker 3 (29:27):
What does that look like? Yeah, so I just give
you just in the main. So we've done some financings
in each one of the geographies, but we've done really
one recently in France. And this is very, very typical,
which is a multi generational family looking to move the
asset from the patriarch to the next generation. They need
financing and connection with that. Maybe there's a distribution of
capital that happens back to the patriarch. And what you
(29:50):
find is, you know, banks tend to be very cookie cutter,
and so you know, if you're delivering a little bit
of flexibility, providing a solution and in connection with a
generational change in ownership, that's very ripe for us. And
what you're finding in Europe, this is a theme. You're
finding in France, you're finding it in Germany, you're finding
(30:10):
it in northern Italy, which has a lot of similarities
to the doc region. So that's something that we would
we would do and have.
Speaker 4 (30:17):
Done on it.
Speaker 3 (30:19):
And you'll find that if it's a family and it's private,
what they don't want to do is have all their
confidential information put in some kind of offering documents syndicated
very very very broadly, and so they want the the
tailoring of a financing solution, They want it done in
really a confidential way, and they oftentimes want to work
with someone who actually understands their their their under underlying.
Speaker 4 (30:43):
Sector that they operate in.
Speaker 3 (30:44):
So what we do is we pull in our private
credit team, who are you know, structuring experts, diligent experts,
and then we marry them up with our sector team.
And so if you're dealing with something in whether whether
it's autos or industrials or consumer, it's that that sort
of interaction of industry knowledge plus the unwriting sort of
acumen which unlocks these deals. And so I think you'll
(31:04):
see a lot of that coming from us. On the
sponsor side, where we're finding is it's not the large
cap sponsors who have dedicated capital markets teams. It tends
to be much more industry driven sponsors. So these could
be a collection of former executives who have domain expertise,
who are partnering with families as they think about the
(31:26):
next steps with their platform. So whether it's growing across border,
making a disposal, doing a buyout, but those types of
private equity firms tend to be much more operationally focused,
country based, and then there's a sector in which they
are unusually strong, and that's what we're finding most of
the time.
Speaker 1 (31:44):
To be clear, these aren't stressed or distressed companies because
we do know ARENI because of the founder Hamza Lemsiga,
who made a lot of money doing great distressed trades.
And you do do some rescue financing some I'm interested
in sort of how you differentiate those two because you
are doing some private lends full you know, just press credit,
So what's the balance there.
Speaker 3 (32:02):
Yeah, So what I've been focused on is really performing
loans for mid sized companies, which is a very scalable
sort of opportunity set, and we're using that same bench
of sector analysts to give us a view to really
drive each one of our investment decisions around that. And
so we spent I don't know, eighteen twenty four months
really thinking about the best risk reward in private markets
(32:24):
in corporate in Europe. And as I said, we looked
at this small MidCap and small to competitive in the
marketplace with the commercial lenders where they're willing to do
lending activity on the large cap north of kind of
three hundred and four to four hundred million facility size,
huge capital markets sort of competition. And so it's in
(32:44):
this mid market area where we're finding if you can
underwrite performing credit profind a solution and be consistent with
the borrow, where it's quite a scalable market opportunity. And
that's where we've been doing the line share of our activity.
Speaker 2 (32:58):
And what's your review on credit d folds in Europe?
Do you expect defaults to rise potentially creating attractive opportunities
for you to deploy capital in the coming quarters.
Speaker 3 (33:09):
It's interesting. So again you've seen this expressed in the
public markets, where you know, numbers are different. Two to
five percent of the public markets have been restructured in
some sort of format in Europe, and you haven't seen that,
you know, at all in the private side of the marketplace.
And so I think, you know, again, you know, private
credit is really financing some of the similar type of companies,
(33:32):
and so I think what you're going to find is
you'll see an uplift not just in the public markets,
but you also see it, you know, in the in
the private markets. And so this is you know, some
of the reflection of this rapid and transformational growth both
in private markets and public markets in Europe, which as
I said in the beginning of our conversation, had grown,
(33:52):
you know, five or eightfold after that GFC period. And
so when high yield was trading at three percent, sovereigns
were negative, there was tremendous amount of credit creation. Some
of that activity, some of that restructuring, some of that
dispersion of outcomes is highly evident in the public markets.
So you know, eighty percent roughly of the highield market
is trading at the all time tis, and then there's
(34:14):
a portion of it that it's trading very poorly. So
a huge amount of credit dispersion that you've seen in
public markets, and the collari will have to be that
must be happening also in private markets. Is those fund
managers really grew those portfolios in the zero rate environment.
You think of it also, if sovereign rates were negative,
high yield was at three percent and some of the
(34:36):
private credit lenders were lending a ten percent, so it
tells you there's quite there could be quite a bit
of credit credit risk embedded in those portfolios. And so
we'll see how it unfolds in the coming years, but
something we watch out very carefully.
Speaker 1 (34:50):
You no doubt hearing all about the AI craze while
you're here. I'm wondering how it's affecting Europe and how
much private credit will be involved in how you might
be involved. But I'm also we hear a lot about
European defense spending, so that's potentially another big area of
investment and capsule raised. Are there either of those interesting
for ARENI?
Speaker 4 (35:11):
I think so.
Speaker 3 (35:11):
We spend a lot of time in Germany, and so
it's all the sort of the so called middle stock
companies is mid size family run companies that are really
providing the sort of the industrial backbone to the country.
And so all those end markets aren't necessarily defense. They
can be broadly diversified. But that's a very interesting area
to spend time on. We have great expertise in some
(35:32):
of those those those areas from a sector perspective, and
then our origination partner at Loazard has a fantastic business
there also, So I think that's a very interesting, very
ripe area. As you know, they Germany becomes a bit
more muscular and fiscally sort of expands in that area.
On the AI topic that we haven't been involved in that.
You know, we're highly highly aware of our products, right,
(35:54):
so lending products are capped, you're trying to get back,
you're trying to get it, enjoy a coupon in your
money back, and so that whole dialogue between equity and
credit in connection with technology is a more challenging one.
Speaker 4 (36:05):
So we've been.
Speaker 3 (36:06):
Steering clear of that. And again that's not been the
opportunity set really really in Europe.
Speaker 1 (36:12):
And to kind of zooming on what's going on right
now based on a little this noise we're hearing from
the US. How is that affecting pricing in Europe? If
it's all right?
Speaker 3 (36:19):
Yeah, So so on the I think there's been sympathy
in the public markets between the public eh yield markets uh,
in both geographies, and so that's that's the media trans
transmission sort of mechanism. So you can you can see that.
You've also seen in the large cap direct lending, you've
seen some flow through of that because of the the
(36:41):
nature of those types of deals and oftentimes is the
same sponsored buyers in that and so there's been a
you know, a rethought process around those in the middle market.
You haven't seen that. So we haven't seen a real
change in the in the margins, the opportunity set and
the rest, and it seems to be a bit asynchronous
with the larger markets. And hence what we think that's
you know, probably a place to spend more of our
(37:02):
time and so that that'll be my commic jams.
Speaker 1 (37:04):
And the other thing people do worry about here is
the marks on the loans in the portfolios. I mean
we've seen wide divergence, you know, ten points in some cases,
you know, the mark the loan is marked at path
and then suddenly it drops to eighty and then everyone
freaks out, what what is your view of that?
Speaker 4 (37:20):
Now?
Speaker 1 (37:20):
Does that work in Europe?
Speaker 4 (37:22):
Yeah?
Speaker 3 (37:22):
So I think it's absolutely critical to have third party
organizations marking your books and so that that's been one
of the challenges where it's you know, if you're marking
your own homework so to speak, that is that's a
more challenging area. So what we do is we have
a third party mark and everything that that sort of
transparency is going to be required. I think for the
continued growth and scaling of the business. It's and you
(37:44):
see that again, you know again we have a number
of public businesses at the firm, and it's really that
that that belief that you know, marking happens on a
very frequent basis. It's not something that's stalled, uh And
that's ever flection of sort of the structures of some
of the funds. But it's also a demand by the
underlying investors for that transparency. So I think that's a
(38:06):
long term trend that will probably unfold in Europe, not
just similar to here, and I know there's a lot
more noise around it in the US at the moment,
but it's critical to have that third party validation outside
of the investment teams. And that's that's going to be
the health I think of a barometer of the health
of the growth of the marketplace.
Speaker 1 (38:25):
But the concerns about you know, valuation, about all the risk,
all of this concealed trouble that's brwing up, you know,
all the way to the IMF and the regulators. Do
you think it's overdone? Based on what you're saying, you're
much closer to the action than they are. You see
what's going on. You know, the quality of the firms
you're lending to and how they're paying you back. What
(38:45):
do you make of that compared to all of the noise.
Speaker 3 (38:47):
What I think is, I think the regulators and the
and the like are very concerned with the opacity and
so just giving the growth in size of these marketplaces.
You know, as I said, the public markets in Europe
are about a trillion dollars. There's some numbers in the
corporate private corporate private corporate area could be also another
trillion dollars of private credit, and so those are just
(39:08):
you know, it's a very big marketplace that's broadly outside there,
you know, sometimes outside of their net. And you can
see why there's quite a bit of focus on that.
And again it tends to be larger companies, tends to
be larger corporate companies. But you've got to be very
cognizant of that. And I can see why there's been, rightfully,
you know, a lot of focus on that. They see
(39:28):
the rapid ballooning of these markets and and it it
only makes good sense for them to, you know, spend
more time.
Speaker 1 (39:36):
The counter argument for private credit is really that you
get to see everything. You have so much more transparency
because you are doing everything. You know, they use the
farm to table analogy. But is that do you think
that's fair? I mean for private credit that you really
are so much more hands on that you are way
more protected as a lender.
Speaker 3 (39:57):
Yeah, so the merits are we talked about a little bit.
You have a little bit like less leverage in the
public markets, you get you enjoy a higher spread, and
then you have downside protection around you know, the the
credit agreement, but you you hit around a grade point.
Which is the other huge benefit is you're doing primary diligence,
so you're meeting companies, meeting management teams, understanding their operating models,
(40:18):
and having time to understand the underlying investment. That's one
of the challenges is you know, given the public you
know public markets or the syndication of private credit, is
it becomes one or two steps removed from doing primary diligence.
And so we pride ourselves on our sector expertise, in
our underwriting acumen, and by getting direct access to companies,
(40:41):
not in an accelerated way, because what you find is
in public markets or in the syndicated private markets, it's
always a timetable. You've got to come back in three days,
are you inigure out? And there's all this pressure and
then it, you know, adds an unusual dynamic on your
underwriting process. And so I think this fourth area where
the real value in private credit is just that which
(41:02):
is doing primary diligence largely on site, meeting management teams,
operating teams, and then making an underwriting decision. It's kind
of old school, old school lending, I believe it or not.
Speaker 1 (41:15):
It's almost like leverage loans used to be twenty five
years ago. But it's in terms of a renie you
know when we talk to I mean, this is maybe
more of a US perspective, but there is a sense
that and I think Golden stat Season said it a
year and a half ago that there'll only be eight
potentially players left after a huge amount of consolidation that
(41:35):
needs to be done in private credit because you have
to be big to do this kind of business. How
do you scale up? Do you need to scale up,
do you need to hire people, do you need to acquire?
What's the long term strategy?
Speaker 3 (41:46):
Our strong belief is that public markets in private markets
in Europe are converging, and so we need to express
views around those, and so we have certain products that
are all public only. We have products that are convergence
of public and private and then we have private and
so I think to be relevant in Europe, to be
relevant to our clients and be relevant to borrowers, you
need to provide all of those solutions. And so what
(42:08):
you find in the main in Europe is that there
tends to be a lot of specialized managers. Some just
do structure credit, some just do public liquid credit, some
just do private credit. That that's a much more narrow
way to do the business, and it's one of that
doesn't leverage the connectivity between those marketplaces. And so I
think we've had relevance and we've enjoyed some good growth
in large part because we're a European focused credit manager
(42:31):
and we can express our views in just different risk
profile depending on the underlying liquidity of that risk. And
so that's how we differentiate ourselves. That's how I think
we'll continue to be relevant in Europe. And that's you know,
that's really been the game plan and we're just you know,
kind of day to day executing on that and we'll
see that where that takes us in the coming coming period.
Speaker 2 (42:53):
And what keeps you up at night, Matthew, is it
the risk of an a AI bubble, maybe political risks
in Europe, more coproaches emerging from cracks in the walls,
or something else.
Speaker 3 (43:06):
Entirely, I think it's I think it's just risk risk.
You risk transparency. So you know a lot of that
risk transparency has been you know, clouded in private markets,
and you know, as that unfolds in the coming period,
it's you know, we're not expecting any kind of cataclysmic issue,
but you know, when there's been less, less transparency, less
(43:29):
third party marking, you know, that's an area that we're
that we're keeping a very very close eye on. It's
again in Europe, you've seen this sort of the very
wide dispersion of credit performance in public markets, but heretofore
you haven't seen it in the private markets, and it's
probably the same are similar underliars, uh And therefore that's
that's something that we keep an eye out for, and
(43:51):
that's you know, in the coming period, that's an area
of focus for certain.
Speaker 1 (43:55):
So you've spotted this opportunity in European middle market private credit.
Once show goes out, everyone else will be piling in.
How do you stay ahead of that competition? How do
you differentiate what's your edge.
Speaker 3 (44:07):
I think it's I think it's relatively hard to do
for a couple of different reasons. One is you need
to have deep research teams that are sectorized and deeply
relevant to each one of the underlying borrowers. That's a
big teams. It's got a lot of expertise from a
company by company perspective. Two is Europe is not just
looking at underlying cash flows, it's also understanding structure. And
(44:31):
so having had teams that have worked a long time
in Europe, some of them have great restructuring capabilities, allows
us to bring forward that sort of legal analysis, that
legal underwriting analysis upfront. And so I think that combination
of sector focus, a very strong legal analysis, and being
acutely focused just on Europe is really differentiating ourselves. And
(44:53):
I think what you as I said before, what you
find is Europe for a lot of the non European
managers tends to be something that is in vogue. Sometimes
they wax and weigh down Europe. And I've seen this
five or six times in the last twenty years, and
I think, are you know, our longevity is really focused
on the fact that we're European specialist. We have this
(45:14):
sector expertise, We understand the the insolvency regimes, uh, and
we're looking very holistically, holistically across as public and private
sort of convergence theme. And I think that's that's enough
for us to focus on for some period of time.
Speaker 1 (45:26):
And if you have to pick one product, one sector,
one country, is our best relative value idea, You've got
tons of.
Speaker 4 (45:31):
Yeah, I really like this.
Speaker 3 (45:33):
We like this senior middle market direct lending activity from
a risk adjusted perspective. We don't like it in just
one country with like on a pan European basis, and
we're generating really attractive, you know, risk adjusted returns for that.
And so that's that's what we've been focused on in
this partnership and part with Lizard and using our own
investment teams, and so I think that's something we'll come
back hopefully, James, and I'll give you an update in
(45:55):
the coming years.
Speaker 1 (45:55):
No particular industry that you really love for city in
Europe that you love to visit to do this sort
of business.
Speaker 4 (46:02):
We like northern Europe quite a bit.
Speaker 3 (46:04):
We spend a lot of time in Germany, a lot
of time in the Nordics, a lot of time in UK,
and those are pretty rich environments for US.
Speaker 1 (46:12):
And in terms of fundraising, how's that going generally? I mean,
I don't need to getting specifics, but do you find
that there is appetite for what you're describing in terms
of when you go out and see big pension funds,
big institution investors in the US.
Speaker 4 (46:26):
I think there are two themes.
Speaker 3 (46:26):
One is, I think a number of the communities continue
to be investment communities are underweight credit, and with rates
staying at the level they are and so higher for
longer they're in the main, there's interest in credit product,
particularly alternative credit product we can enjoy an uplift and
spread and so we're finding that to be a theme
in many of the geographies the US, the Middle East, Asia,
(46:47):
amongst others. So this movement towards credit. And two is
the geographical which is they've been many investors have enjoyed
the US private markets equity and credit. Now theen a
real compression of returns and therefore they want to focus
on a place where they think there's rule of law,
where they think there's opportunity set and that's really been Europe.
(47:08):
And so that's a theme that it's not going to
be fatish. I think it's one that has, you know,
medium term growth in it, and that's when we've been
enjoying quite a.
Speaker 1 (47:16):
Bit great stuff. Matthew Sestar, President of IRENI, It's been
a real pleasure having you on the Credit Edge money.
Speaker 4 (47:21):
Thanks James, a treat to be here and we'll see
you very soon.
Speaker 1 (47:23):
And of course very grateful to Stephan Kovichef from Bloomberg Intelligence.
Thank you for joining us today. Thank you, and for
more credit market analysis and insight, read all of Stefankovicheff's
great work on the Bloomberg Terminal. Bloomberg Intelligence is part
of our research department, with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
and credits and outlooks on more than ninety industries and
(47:44):
one hundred market industries, currencies and commodities. Please do subscribe
to the Credit Edge wherever you get your podcasts. We're
on Apple, Spotify and all other good podcast providers, including
the Bloomberg Terminal at b pod Go. Give us a review,
tell your friends, or email me directly at Jcrombie eight
at Bloomberg dot net. I'm James Crombie, it's been a
(48:04):
real pleasure having you join us again next week on
the Credit Edge.
Hello, and welcome to The Credit Edge, a weekly Markis podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Stefan Kovachev, a senior credit analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Matthew Sestar, president
of Arene, the London based hedge fund. How are you
doing today, Matthew.
Speaker 3 (00:37):
I'm doing super well. Great to be here. I'm a
huge fan of the podcast and so it's great to
play a rold today.
Speaker 2 (00:43):
Oh great, Thank you for joining us. Matthew oversees Arene's
private credits strategies and Lee's It's direct lending business, launched
earlier this year through a sourcing partnership with loz Art.
Before joining Arene, Matthew was global head of Credit at ICG,
and prior to that, held various leadership rules at Credit
(01:04):
SUITEE in London and New York. We're looking forward to
his insights on the private credit landscape and more broadly,
on where the most attractive credit opportunities may be in
twenty twenty six.
Speaker 1 (01:17):
Of course, we have loads of questions for you, Matthew,
but let's start with private credit. There is drama out
there at the moment. We're seeing more defaults, repayments in kind,
and debtholders becoming equity owners after borrowers failed to pay.
Blue Out scrapped, a private debt fund merger after investor's
bolt debt significant implied losses, and a black Rock YLO
failed over collateralization tests after it took one hundred percent
(01:38):
loss on a private loan. Big US private debt managers
meanwhile talking down previously lofty return expectations, just as the
fast growing asset class enters the mainstream, and the bond
king himself, Jeff Gundlack is calling private credit quote garbage lending.
There's a lot of doom mongering out there. The golden
age seems to be over. But what is your take, Matthew,
You're out there selling the product. That's the case for
(02:00):
going private at this point, particularly when you can get
pretty good yield right now on publicly traded debt.
Speaker 3 (02:04):
Yeah, so, I think I think the real thesis is
to focus on other geographies, other capital structures, different sized businesses.
As you know well, James, the lion's share of the
growth in private credit has been a US phenomenon. It's
really been around, you know, financing sponsors, and it's really
focused on the upper middle market in large cap sort
of arenas, and so that's been a theme really for
the last ten to fifteen years. We're doing something a
(02:26):
little bit different. We're focusing not on the US, not
on the large cap, not on the sponsor financings, but
we're really looking at Europe, and we're looking at the
middle market, and we're largely looking at these non sponsor areas.
And so as we were just chatting as we began,
you know, that's where we see value. We see it
less where there's been a lot of yield compression particuling
the US, where leverage levels have stepped up, and where
(02:48):
some of the you know, the traditional productions of the
credit lenders have really leaked out through some of that stuff.
And so I think some of those commons Youdis mentioned
are really kind of a US phenomenon. And that's why
our investors and our focus is really and largely in Europe.
Speaker 2 (03:03):
And what's the typical size or maybe structure or tenor
pricing of the deals you target.
Speaker 3 (03:11):
Yeah, so maybe i'll just do it just a mini
history lesson on what happened in Europe. I'm an American
by background, though I've been there for about twenty five years.
This market in private credit in public capital markets really
grew post the GFC. This is when these markets were
growing at a rate of you know, five to tenfold
in that period of time, and most of the activity,
again was focused on larger borrowers, bigger companies, sponsor backed
(03:34):
sort of arenas, and not dissimilar to your dialogue in
the US, that's where you've seen in Europe equally real
compression of yields and an uplift in MS in terms
of leverage. And so what we've been focused on and
where we think there is value is staying just below
the size of the public capital markets. And so that
means kind of facility sizes in the context of probably
(03:55):
one hundred to four hundred million, and that's very much
by design, because the public markets and the large cap
private credit markets are really focused on that four hundred
level and up. And so in those areas, you're getting
you know, spreads in the private markets as tight as
kind of the low four hundreds. You're seeing public market
activity at all time, sprite tight spreads in the kind
(04:17):
of the mid three hundreds. What we're finding if you
step down below those public capital markets and really focus
on the non sponsor component, you're picking up spreads kind
of north as six hundred basis points. And so that's
the dialogue that we've been having for you know, quite
a long time at ARENI, which is really to unpack
(04:38):
some of the complexity in Europe. So when you come
to Europe, given all the jurisdictional vagaries, given all the
national regimes, given all the languages and cultures, you get
paid additional spread to come there. And then what you
want to do is not just think about Europe as
a main but you want to think about how do
you penetrate some of those areas where banks are either
pulling back or the public capital markets aren't aren't focused.
(05:01):
And so if you're focused on the size, as I
just referenced a moment ago, that think we think that's
kind of the sweeter of the sweet spots where you
enjoying nice margin, you are having leverage levels that are
below the sponsor community. And then very importantly you're really
able to design your own credit agreements. And so James
to your point, which is a lot of the activity
(05:23):
and a lot of the noise, particularly the UAS is
because there's been a convergence and you're almost perfect convergence
between the public markets, particularly the large cap in the
private markets, and so in Europe it's a little bit
of a different story. So I'd welcome unpacking that as
we continue the discussion, and we.
Speaker 1 (05:39):
Have a fascinating perspective because you've been in Britain for
twenty five years, but you are originally American. I have
been in America for twenty five years and I am
originally British. So between us, we shall get to that.
Speaker 4 (05:49):
That's why the dialog is so good, which you.
Speaker 1 (05:51):
And I we've arranged as a swap by the King.
But the size of the deal is up to four
hundred million euros, right, and you can get six hundred
basis points over Sonya each.
Speaker 3 (06:06):
Yeah, in the main, that's what you're finding. So but
when you focus on this corporate world, you're picking up
between one hundred and fifty two hundred fifty bases points
of incremental spread, and so that gets you from kind
of that mid to four hundreds to something north of
the north of six hundred. So that's an important dynamic.
I think what you're finding, you know, in Europe is
leverage levels are just lower than the US, and so
if you look at the data very carefully, it tends
(06:27):
to be depending on the industry, of course, between one
and three turns less levered, particularly in the non sponsor space,
because these family companies in Europe, which are private companies
that dominate the economies, tend to be multigener generational, and
what they're looking to do is not maximize a return
in some finite period three to five years. What they
(06:47):
want to do is hold the asset really to the
next generation, and therefore they tend not to maximize leverage.
And so we very much like that dynamic. So less
leverage and you're enjoying these higher spreads in large art
because you're providing a solution to them. You're providing certainty.
And James, you'll know Europe quite well, which is generally
(07:10):
there was not a romance in the you know, the
private company space with the public appal markets. They never
really like the anonymity of large syndicates, large public you know,
groups of investors accessing their private data. And so what
I found in my career and having done that for
a long time in Europe. Is a solution works well
(07:31):
if it really solves an issue. And the issue that
we're really solving in Europe is a pullback of the banks,
a skipping over this market segment by the large you know,
asset managers that are deploying in scale, and you're finding
a community of borrowers, companies, families that need solutions and
they're relatively you know, not being serviced in a proper way.
(07:52):
And so we found that to be a really attractive segment,
and we think is a scale segment in large part
because when you look at Europe, Europe is a middle
market type continent. Companies are just smaller given the regional
footprint of these twenty six you know, separate countries. And
so we get a lot of dialogue from the US,
which is, if it's not scale, that must be a
(08:15):
problem with the underlying business, and we say, no, no, no, no,
that's not the case. What you find is we've been
financing what are kind of regional champions in each one
of the underlying countries and they haven't enjoyed scale, in
part because the cross border nature in Europe tends to
be more difficult cultural linguistic amongst other areas. And so
we found this middle market space in Europe broadly away
(08:36):
from some of the sponsors. Now though we clearly finance
sponsors when it's attractive lending opportunities, that tends to be
a very stable area to generate some attractive returns.
Speaker 1 (08:45):
But the banks, you know, they have stepped back a
little bit, but they're not absent, so you know, they
are active, they have local currency balance sheets, they probably
have very competitive terms. Why would a company in Italy,
say or Germany go to you instead of the you know,
the bank that they've been going to for years and
does the payroll and everything else.
Speaker 4 (09:01):
Yeah, it's a couple things.
Speaker 3 (09:02):
So one is that the big banks, the muscular big banks,
large like large deals, and they would rather lend on
a portfolio basis than do the underlying company by company
type lending activity. And so that's an easier underwrite for them.
It's one that's flattered from a regulatory and a capital perspective.
So unbalance, the banks are certainly resurgent in Europe, but
(09:23):
they're doing it really on a portfolio level, and so
they're looking to finance not only individuals like ourselves, but
other managers, and so you see that happening quite a bit.
What you also find is you segment the market. I
think I talked about, you know, kind of this kind
of two hundred and fifteen four hundred million facility size
or loan size. This is kind of the sweet spot
because you go below two fifty, there's a tremendous amount
(09:44):
of local bank demand and all the national champions a
country by country, UK, Germany, Italy, France, Benelux unusually strong
and very very inexpensive financing, and so you want to
step out of that. And then, as I said, when
you go north or four hundred, you run right into
the public capital markets, and particularly in the sponsor community
have converged those marketplaces, and so we're finding that kind
(10:06):
of middle space desirous of financial solutions. They want someone
who is who understands their businesses and someone who can
move in a reliable sort of way. So that's been
a kind of a steady stem of you know, opportunity
set for us.
Speaker 2 (10:23):
And what about private credit trading? How developed is the
secondary market for private credit and what's the outlook for
greater trading activity? Maybe?
Speaker 3 (10:33):
Yeah, So I think it's been a theme in the
US and the investment grade space. We haven't seen that
in Europe yet. So, you know, the lions share of
what's happening in Europe is been on the below investment
grade side. It's been largely sponsored backed, and just given
the illiquidity and the private nature of those assets, there
hasn't there hasn't been that level of focus. We'll have
to see you in the coming years if that's going
(10:56):
to be a topic that's relevant to Europe. But I
to be candid today, that's really not you know, not
a not a topic. The bigger topic in Europe is
this you know, multi decade retrenchment banks. So when you
think about when I came twenty twenty five years ago
to Europe, all the corporates in that space where one
hundred percent bank financed, and you look now you dial
(11:18):
forward in the date we are today about twenty percent
of corporate borrowers finance either in the public markets or
in the private markets, the institutional markets, but it's still
seventy five eighty percent through the banks. That's why there's
this big structural shift that will you know, it's been
throughout my career and will continue well beyond mind which
(11:40):
is this this de leveraging of the banks who really
don't like complexity, who don't like single name borrowers. And
what you find is in Europe, just again given the
size of the companies, they tend to be below investment grade.
Because they're smaller, they have less diversification by company, by
client base and the like. For it's below investment grade.
(12:01):
So this theme will continue on sort of unabated. James,
you know the US market incredibly Well, it's just the
inverse here. So traditionally this this segment of the marketplace
corporates in the US, twenty five percent of that is
really intermediated through the banks. Seventy five percent or so
it's through the public capital markets or securitization market. So
(12:21):
it's the inverse. But we're seeing you know, strong growth.
You know, in connection with that, do.
Speaker 1 (12:28):
You take the whole loan down yourself as it bi
lateral or you in a club with other lenders.
Speaker 3 (12:33):
Yeah, So that's the other distinction versus the US, And
thanks for asking that, which is US public capital markets
private markets now are broadly syndicated also, so you're looking
at syndicate private lenders are coming in in Europe that
happens certainly on the sponsor back financings, certainly on the
large cap deals. And that's one of the things where
less we find less attractive in the market, which is
(12:56):
it's not just leverage that's attractive in Europe, it's lower,
it's not just spread that's higher, it's around the document itself.
And we're you know, highly cognizant of the product, the
products that we're involved in, which are loan products which
we've got a cap on the return uh. And so
the most important thing for those type of funds and
for our investors is downside protection. And the best way
(13:19):
to ensure a down downside protection is having a very
tight credit agreement. In what we find in what we're
focused on, particularly in the middle market where we operate,
is we're able to write our own credit agreement, and
so that really protects the underlying collateral and it protects
against some of the some of the flexibility you find
in the public markets, which you're going to know very well,
(13:39):
whether it's distribution to the equity or it's allows you
prioritization of debt, you know ahead of yourselves. The leakage
of asset value or cloutter value outside the borrower group.
And so yeah, so we focus on being the sole
lender or being the co lender, and that's that's where
we've been deploying capital. I think it's it's critical from
(14:00):
a risk perspective, but what you also find from a
borrower and company perspective, particularly again in this non sponsor area,
these companies, these families, they want to know who they're
dealing with. Europe is still very relationship oriented. It is
less transactional, and it was a maybe it was an
(14:22):
unnatural period for a period of years where these companies
and families were borrowing from the public markets and so
as that shifted really after the rate change in twenty two,
public markets were less supportive of smaller companies in Europe,
and we can talk about why that was. This product
has stepped into that and it's a it's a better
product for the families and for the private companies in
(14:44):
the main.
Speaker 1 (14:45):
One thing that's giving people a bit of wherey here
is the amount of pick coming out in the US.
You know, so companies instead of paying the interests, they're
paying with new debt, some of them parently, you know
that they arrange that in advance. So it's a good pick,
but I honestly you can't see the difference how much
(15:05):
pick you sing in Europe and how much of it
you know, how much flexibility do you give your borrow
is in the case they do get into trouble.
Speaker 3 (15:11):
Yeah, so you're seeing that as as you say, James, rightly,
it's really been a US phenomenon. It's really been the
sponsor phenomenon, and it's really in the tech and software spaces,
and so some of those some of that under writing
underwriting activity was you know, predicated on growth, and when
growth has been stalled or disrupted, loans aren't able to
(15:32):
be cash paid, and hence they're moving to this this
this pic arena. And you can see that very readily
in some of the public data you're seeing around the
BBC's some.
Speaker 4 (15:39):
Of that's happened in Europe. Also.
Speaker 3 (15:41):
What I say, however, in Europe is the software and
tech areas are less represented versus the US. In the
main we for example, are really just financing real economies
in Europe, and the real economy is in Europe tend
to be industrial businesses, hard asset businesses, some consumer businesses,
some service businesses, and there's those are not predicated on
(16:06):
underlying growth of those companies, and so we're not offering
pick you know, into our portfolios.
Speaker 4 (16:13):
That presage is that you.
Speaker 3 (16:14):
Know, the capital structure somehow is not right sized for
the underlying cash flows. And so we see that quite
a bit in the US, and that's something that we're
trying to stay away from. You do see it, as
I said, on some of the larger cap you know,
sponsor oriented trades in Europe as you know us, James,
we have you know, a mixture of businesses at are
any liquid businesses, structure credit businesses, private market businesses. We
(16:37):
do take some real insights from our public market activities.
You know, so in public market activities, if you have
a non accrual or you have a pick, that generally
means there's a default or downgrade, and in private markets,
heretofore that hasn't been the case. And so we've taken
some of the lessons, some of the risk management techniques
(16:58):
we have in our public businesses and utilize those in
our private businesses, which I think is a little bit differentiated.
You know, we run scenario analyzes, downside scenario analyzes based
on different different you know, macro events, different rate events,
different drivers of underlying economies, and that that scenario and
(17:18):
risk analysis is bedrock in the public markets, and many
many folks don't don't think about that in you know,
in private markets, and so generally a non or cool
or a picking of your underlying instrument. In the public markets,
that's a default, and in the private markets has been
it's been a little bit it's a little bit different
from that. We find also that you know, what's one
(17:42):
thing that it's interesting about public markets is the feedback
loop is is very important and it's it's readily available.
So when you make a public markets investment, you get
feedback in three, six, nine, twelve months in terms of
what the market thinks about that underlying with the third
party recognized agencies think about that that investment. In private markets,
(18:05):
you really haven't you haven't had that right. And so
particularly in Europe, what you find in.
Speaker 4 (18:11):
Europe is.
Speaker 3 (18:14):
Maybe five percent or so of the public high heel
market has been restructuring pretty much every year. But we
haven't seen that that that parallel event in private markets.
So there's quite a bit of disparity between those two,
which is you know, quite concerning, and that's something we're
you know, we're watching, you know, relatively relatively carefully.
Speaker 2 (18:33):
And what kind of all in returns are you targeting
in your direct lending business? So, looking at European high
yield market for instance, as somewhat of a proxy, the
average yield to wurds here in Europe is about five percent,
roughly four percent for double B, six percent for single
B names, and twelve for three plus C rated credits.
But when we factor in the illiquidity premium typical for
(18:56):
private investments, what all in annual yields and returns are
you aiming for?
Speaker 3 (19:02):
Yeah, so we think about a little bit in spread terms.
So and maybe if you're a listener based because you
have a lot of listeners here in the US, we
do the build up really from the US to Europe,
particularly in private markets. And so you know, what you
find is when you move from the like private market
investment in the US to Europe, you earn about fifty
(19:22):
basis points in incremental spread. So you're getting paid for
that complexity. But I talked about it's not additional risk,
it's complexity. Twenty six separate countries, disparate solvency regimes, languages, cultures,
and the rest. And so you pick up about fifty
basis points. When you step into the middle market in Europe,
you enjoy another fifty basis points. So if you're doing
(19:45):
middle market direct lending, you know, in Europe versus some
of the larger cap stuff in the US, you're picking
up a spread of about one hundred basis points. And
so that's the bedrock of the business. What we find
interesting in this part of the cycle, and we're find value.
We're finding more value in the corporate non sponsor space.
And when you move from this middle market sponsor area
(20:07):
to non sponsor, you're able to enjoy you know, another
one hundred and fifty basiness points of spread. And so
that's that's something that I think we think is valuable,
our clients think are valuable. And so when you do
the math through that, that's how you get to these
kind of mid mid to six hundred type spread type
environments and you can see what the yield equivalent would
be on that.
Speaker 1 (20:26):
Interested and why you're staying away from the sponsor space.
You know, private acty firms they say have already raised
some of their last funds, maybe a big shakedown coming
in private actually is that the concern or are you
just finding that's to commoditize in terms of the actual
lending going on there.
Speaker 3 (20:42):
It's really a risk analysis where we're finding value in
the marketplace. And so, as I said, in the large
cap space, there's a lot of capital focusing on very
few few deals and therefore through that auction process in
private markets you're finding that spreads are being compressed, sponsors
are enjoying higher leverage, and then they've really converged the
credit agreements with the public market, and so that that's
(21:04):
been less less of an interest. We certainly do finance
and middle market sponsors, and we do the non sponsor base.
We do both of those, but I was just walking
through this sort of the relative value in this part
of the cycle is more compelling in a non sponsor space.
For in the main the challenge with Europe is getting
(21:25):
access to those and this is no I think if
you and I've heard a number of folks you've spoken with, James,
I think people on the main will say that the
sort of the corporate business is on balance less risky,
it's lower leverage, you enjoy more spread, and you're able
to really drive the document the challenge in Europe, however,
is how do you get access to that in a
scale way. So at our firm, we we have a
(21:49):
number of investors and originators in relationships with all the
corporates and we think that's highly highly differentiated. But we
did something a little bit different. We also up a
strategic partnership with Lizard and we did that very purposefully.
We did that and again your US folks will know, well,
they're eight or ten of these partnerships in the US,
(22:11):
many of which are very successful. We wanted to do
something a little bit different. We wanted access to a
firm that covered the middle market. They had pan European
coverage and that was a leader in each one of
the key markets UK, France, Germany, Italy, Bentelouques, amongst others,
but in a scale way. And so our firm is
approaching four four and a half years of age. Lizard
(22:33):
has been around for one hundred and seventy five years
and so they're they're really the corporate listener to private
families across Europe and that's given us lots of boots
on the ground to originate in a scale way, and
that just used that to complement our own origination techniques
and so we think it's a little bit different. Through
my background, I know, you had to have long standing
(22:56):
you know, advisors in market to be able to see
a big enough tam of opportunities that it's very hard
to do that from London. Many people try to do
the fly in, fly out type model, or they'll put
one originator in Spain and one in Italy and two
in Germany and think that's origination. So we've tried to
unpack this. We're thinking it a in a unique sort
(23:16):
of way. One that helps mitigate some of the conflicts
because they're not a balance sheet lender. So that's the
other way that we've kind of really complemented what we
do in the sponsor community. Plus this non sponsor sort
of sort of avenue.
Speaker 1 (23:29):
Not a bad place to fly around that wouldn't mind
you know, Madrid or Barcelona today. But this took back
up in zoom out a little bit, Matthew, the concept
of Europe for an American investor. You know, I'd say,
you know, six months ago when the tariffs hit was
very exciting for a lot of people. You know, let's
we suddenly realized that we need to be diversifying a
(23:50):
bit more geographically, and everyone was so long in the
US and there's trouble here, so let's look and what's
the nearest place Europe, So let's have a look at that.
But that all seems to have kind of gone away
very quickly, and I'm wondering, you know, when you're here
in the US and you're talking to potential investors, potential clients,
you know, what kind of questions are they asking you
about Europe? Beyond the complexity beyond you know, there's lots
(24:10):
of different countries and everyone speaks different languages, and it's
terribly confusing. What what are they asking you about Europe
that you know that you know expresses some interest and
real like sense that they will diversify their portfolios.
Speaker 3 (24:24):
Yeah, I think it's it's what you say, James, which
is the private markets in the US have had such
a lead lead versus Europe, whether it's in the equity
product or the credit product that many allocators globally have,
you know, a lot of exposure there and they're looking
for the next they're looking for from a diversification perspective,
where else can I allocate capital in size? Where there's
(24:46):
rule of law, there's a set of quality companies, uh,
there's transparency in the like. And what we found and
I found over my my career, is that from a
US perspective, Europe can be fetish. So a lot of
global investors come for a few years as they wax
and wane, and I've seen this over the last twenty
years or so, and so I think the point that
(25:06):
we emphasize is, you know, we're dedicated in Europe. We're
focused in Europe. We've got boots on the ground in Europe.
You know, our investment committee is our CIO, all of
which make decisions based in Europe. And so clients want
to make sure that you're there for a long time,
a long period of time. And then equally from the
borrowers side, borrowers in Europe, particularly on this non sponsor component,
(25:30):
are quite suspicious of you know, people are coming in
for fetish sort of sort of reasons. And so that's
a lot of the dialogue you know that we have,
you know, in that space, and so yes, some of
the some of those tailwinds have dissipated in terms of
this interest in Europe. But I have to say, once
you unpack it across the countries across the sectors. The
(25:52):
fact that there's not a reliance really on tech tech
and software and you're in a debt product. We're diversification
and downside risk is the most important thing. I think
it's made people interesting interested rather in the European credit experience.
There's a lot of question marks around the equity story
in Europe, and I'm not an expert in that, but
(26:13):
I see the equity value created in the US, particularly
in the tech in AI space.
Speaker 4 (26:17):
Europe really doesn't have that.
Speaker 3 (26:19):
And so our thesis is you don't need equity story
on a credit investment. You need to have credit credit metrics,
cash flow, downside protection in order to generate interesting returns.
So Europe in the main is on balance is probably
have better credit investment than an equity investment.
Speaker 1 (26:38):
Uh.
Speaker 4 (26:38):
And that plays to kind of where we have our expertise.
Speaker 2 (26:41):
I had a question about the sub sectors you're investing in.
In the industrial space I cover in Europe, I'm seeing
a bit of a K shaped recovery. So the clear
winners are aerospace, defense, maybe energy, great companies who have
big backlogs, while traditional heavy industries such as steel, chemicals
(27:03):
maybe autoparts still continue to struggle. So how does ARENI
allocate capital across different industrial segments in Europe?
Speaker 3 (27:12):
Yeah, I think that's I think we would probably agree
with some of those comments. So I think that's wisely put.
What we've done is really sectorized all our teams. And
so for your US audience, it sounds like an obvious thing.
Most of the big alternative asset managers have deep sector
expertise industrials, chemicals, consumer services, healthcare and the like. In
(27:35):
you in however, they run a business called Europe, which
just given the complexity of both borrower type, country type
and the like, stress as unusual.
Speaker 4 (27:45):
Uh.
Speaker 3 (27:45):
And so that's why we've generated I think some attractive
returns over time, is that we've been dedicated in each
of these key sectors. And that's how it really we're organized,
which is we use this reservoir sector expertise and to
express views across a variety of areas. And then what
we're talking about today in direct lending is we use
that expertise around that and we're just unusually focused on
(28:09):
cash flow generation, downside protection and the next lender analysis.
And so unlike some of the large cap deals which
are really predicated on an exit in the public markets
or an m and a transaction. That's not what we
focus on. And so you know, some of the sectors
you mentioned, some of these more cyclical sectors have definitely
been under pressure and clearly we've been underweight those opportunity sets.
(28:34):
What's interesting about Europe in this middle market set is
these tend to be national champions, so local, local clients,
local suppliers, local ecosystem and so they've been a little
bit more immune to some of the tariff winds, some
of the trade winds which you've seen express certainly the
large cap large cap European companies, particular the chemical space
(28:58):
for example. You've seen that really expressed in the equity uh,
the you know, the share price performance of those companies.
And so again when you focus on this middle market,
they tend to be not immune, but more insulated from
some of those those global trade winds, tariff wins and
the like. Uh and we're seeing that in the underlying
performance of our companies.
Speaker 1 (29:17):
Can you give us an example of, you know, a
deal that you've done that you're totally excited about. Just
to make it a bit more tangibly, you know that
we're talking middle market, we're talking about real essays, but
and local champions.
Speaker 3 (29:27):
What does that look like? Yeah, so I just give
you just in the main. So we've done some financings
in each one of the geographies, but we've done really
one recently in France. And this is very, very typical,
which is a multi generational family looking to move the
asset from the patriarch to the next generation. They need
financing and connection with that. Maybe there's a distribution of
capital that happens back to the patriarch. And what you
(29:50):
find is, you know, banks tend to be very cookie cutter,
and so you know, if you're delivering a little bit
of flexibility, providing a solution and in connection with a
generational change in ownership, that's very ripe for us. And
what you're finding in Europe, this is a theme. You're
finding in France, you're finding it in Germany, you're finding
(30:10):
it in northern Italy, which has a lot of similarities
to the doc region. So that's something that we would
we would do and have.
Speaker 4 (30:17):
Done on it.
Speaker 3 (30:19):
And you'll find that if it's a family and it's private,
what they don't want to do is have all their
confidential information put in some kind of offering documents syndicated
very very very broadly, and so they want the the
tailoring of a financing solution, They want it done in
really a confidential way, and they oftentimes want to work
with someone who actually understands their their their under underlying.
Speaker 4 (30:43):
Sector that they operate in.
Speaker 3 (30:44):
So what we do is we pull in our private
credit team, who are you know, structuring experts, diligent experts,
and then we marry them up with our sector team.
And so if you're dealing with something in whether whether
it's autos or industrials or consumer, it's that that sort
of interaction of industry knowledge plus the unwriting sort of
acumen which unlocks these deals. And so I think you'll
(31:04):
see a lot of that coming from us. On the
sponsor side, where we're finding is it's not the large
cap sponsors who have dedicated capital markets teams. It tends
to be much more industry driven sponsors. So these could
be a collection of former executives who have domain expertise,
who are partnering with families as they think about the
(31:26):
next steps with their platform. So whether it's growing across border,
making a disposal, doing a buyout, but those types of
private equity firms tend to be much more operationally focused,
country based, and then there's a sector in which they
are unusually strong, and that's what we're finding most of
the time.
Speaker 1 (31:44):
To be clear, these aren't stressed or distressed companies because
we do know ARENI because of the founder Hamza Lemsiga,
who made a lot of money doing great distressed trades.
And you do do some rescue financing some I'm interested
in sort of how you differentiate those two because you
are doing some private lends full you know, just press credit,
So what's the balance there.
Speaker 3 (32:02):
Yeah, So what I've been focused on is really performing
loans for mid sized companies, which is a very scalable
sort of opportunity set, and we're using that same bench
of sector analysts to give us a view to really
drive each one of our investment decisions around that. And
so we spent I don't know, eighteen twenty four months
really thinking about the best risk reward in private markets
(32:24):
in corporate in Europe. And as I said, we looked
at this small MidCap and small to competitive in the
marketplace with the commercial lenders where they're willing to do
lending activity on the large cap north of kind of
three hundred and four to four hundred million facility size,
huge capital markets sort of competition. And so it's in
(32:44):
this mid market area where we're finding if you can
underwrite performing credit profind a solution and be consistent with
the borrow, where it's quite a scalable market opportunity. And
that's where we've been doing the line share of our activity.
Speaker 2 (32:58):
And what's your review on credit d folds in Europe?
Do you expect defaults to rise potentially creating attractive opportunities
for you to deploy capital in the coming quarters.
Speaker 3 (33:09):
It's interesting. So again you've seen this expressed in the
public markets, where you know, numbers are different. Two to
five percent of the public markets have been restructured in
some sort of format in Europe, and you haven't seen that,
you know, at all in the private side of the marketplace.
And so I think, you know, again, you know, private
credit is really financing some of the similar type of companies,
(33:32):
and so I think what you're going to find is
you'll see an uplift not just in the public markets,
but you also see it, you know, in the in
the private markets. And so this is you know, some
of the reflection of this rapid and transformational growth both
in private markets and public markets in Europe, which as
I said in the beginning of our conversation, had grown,
(33:52):
you know, five or eightfold after that GFC period. And
so when high yield was trading at three percent, sovereigns
were negative, there was tremendous amount of credit creation. Some
of that activity, some of that restructuring, some of that
dispersion of outcomes is highly evident in the public markets.
So you know, eighty percent roughly of the highield market
is trading at the all time tis, and then there's
(34:14):
a portion of it that it's trading very poorly. So
a huge amount of credit dispersion that you've seen in
public markets, and the collari will have to be that
must be happening also in private markets. Is those fund
managers really grew those portfolios in the zero rate environment.
You think of it also, if sovereign rates were negative,
high yield was at three percent and some of the
(34:36):
private credit lenders were lending a ten percent, so it
tells you there's quite there could be quite a bit
of credit credit risk embedded in those portfolios. And so
we'll see how it unfolds in the coming years, but
something we watch out very carefully.
Speaker 1 (34:50):
You no doubt hearing all about the AI craze while
you're here. I'm wondering how it's affecting Europe and how
much private credit will be involved in how you might
be involved. But I'm also we hear a lot about
European defense spending, so that's potentially another big area of
investment and capsule raised. Are there either of those interesting
for ARENI?
Speaker 4 (35:11):
I think so.
Speaker 3 (35:11):
We spend a lot of time in Germany, and so
it's all the sort of the so called middle stock
companies is mid size family run companies that are really
providing the sort of the industrial backbone to the country.
And so all those end markets aren't necessarily defense. They
can be broadly diversified. But that's a very interesting area
to spend time on. We have great expertise in some
(35:32):
of those those those areas from a sector perspective, and
then our origination partner at Loazard has a fantastic business
there also, So I think that's a very interesting, very
ripe area. As you know, they Germany becomes a bit
more muscular and fiscally sort of expands in that area.
On the AI topic that we haven't been involved in that.
You know, we're highly highly aware of our products, right,
(35:54):
so lending products are capped, you're trying to get back,
you're trying to get it, enjoy a coupon in your
money back, and so that whole dialogue between equity and
credit in connection with technology is a more challenging one.
Speaker 4 (36:05):
So we've been.
Speaker 3 (36:06):
Steering clear of that. And again that's not been the
opportunity set really really in Europe.
Speaker 1 (36:12):
And to kind of zooming on what's going on right
now based on a little this noise we're hearing from
the US. How is that affecting pricing in Europe? If
it's all right?
Speaker 3 (36:19):
Yeah, So so on the I think there's been sympathy
in the public markets between the public eh yield markets uh,
in both geographies, and so that's that's the media trans
transmission sort of mechanism. So you can you can see that.
You've also seen in the large cap direct lending, you've
seen some flow through of that because of the the
(36:41):
nature of those types of deals and oftentimes is the
same sponsored buyers in that and so there's been a
you know, a rethought process around those in the middle market.
You haven't seen that. So we haven't seen a real
change in the in the margins, the opportunity set and
the rest, and it seems to be a bit asynchronous
with the larger markets. And hence what we think that's
you know, probably a place to spend more of our
(37:02):
time and so that that'll be my commic jams.
Speaker 1 (37:04):
And the other thing people do worry about here is
the marks on the loans in the portfolios. I mean
we've seen wide divergence, you know, ten points in some cases,
you know, the mark the loan is marked at path
and then suddenly it drops to eighty and then everyone
freaks out, what what is your view of that?
Speaker 4 (37:20):
Now?
Speaker 1 (37:20):
Does that work in Europe?
Speaker 4 (37:22):
Yeah?
Speaker 3 (37:22):
So I think it's absolutely critical to have third party
organizations marking your books and so that that's been one
of the challenges where it's you know, if you're marking
your own homework so to speak, that is that's a
more challenging area. So what we do is we have
a third party mark and everything that that sort of
transparency is going to be required. I think for the
continued growth and scaling of the business. It's and you
(37:44):
see that again, you know again we have a number
of public businesses at the firm, and it's really that
that that belief that you know, marking happens on a
very frequent basis. It's not something that's stalled, uh And
that's ever flection of sort of the structures of some
of the funds. But it's also a demand by the
underlying investors for that transparency. So I think that's a
(38:06):
long term trend that will probably unfold in Europe, not
just similar to here, and I know there's a lot
more noise around it in the US at the moment,
but it's critical to have that third party validation outside
of the investment teams. And that's that's going to be
the health I think of a barometer of the health
of the growth of the marketplace.
Speaker 1 (38:25):
But the concerns about you know, valuation, about all the risk,
all of this concealed trouble that's brwing up, you know,
all the way to the IMF and the regulators. Do
you think it's overdone? Based on what you're saying, you're
much closer to the action than they are. You see
what's going on. You know, the quality of the firms
you're lending to and how they're paying you back. What
(38:45):
do you make of that compared to all of the noise.
Speaker 3 (38:47):
What I think is, I think the regulators and the
and the like are very concerned with the opacity and
so just giving the growth in size of these marketplaces.
You know, as I said, the public markets in Europe
are about a trillion dollars. There's some numbers in the
corporate private corporate private corporate area could be also another
trillion dollars of private credit, and so those are just
(39:08):
you know, it's a very big marketplace that's broadly outside there,
you know, sometimes outside of their net. And you can
see why there's quite a bit of focus on that.
And again it tends to be larger companies, tends to
be larger corporate companies. But you've got to be very
cognizant of that. And I can see why there's been, rightfully,
you know, a lot of focus on that. They see
(39:28):
the rapid ballooning of these markets and and it it
only makes good sense for them to, you know, spend
more time.
Speaker 1 (39:36):
The counter argument for private credit is really that you
get to see everything. You have so much more transparency
because you are doing everything. You know, they use the
farm to table analogy. But is that do you think
that's fair? I mean for private credit that you really
are so much more hands on that you are way
more protected as a lender.
Speaker 3 (39:57):
Yeah, so the merits are we talked about a little bit.
You have a little bit like less leverage in the
public markets, you get you enjoy a higher spread, and
then you have downside protection around you know, the the
credit agreement, but you you hit around a grade point.
Which is the other huge benefit is you're doing primary diligence,
so you're meeting companies, meeting management teams, understanding their operating models,
(40:18):
and having time to understand the underlying investment. That's one
of the challenges is you know, given the public you
know public markets or the syndication of private credit, is
it becomes one or two steps removed from doing primary diligence.
And so we pride ourselves on our sector expertise, in
our underwriting acumen, and by getting direct access to companies,
(40:41):
not in an accelerated way, because what you find is
in public markets or in the syndicated private markets, it's
always a timetable. You've got to come back in three days,
are you inigure out? And there's all this pressure and
then it, you know, adds an unusual dynamic on your
underwriting process. And so I think this fourth area where
the real value in private credit is just that which
(41:02):
is doing primary diligence largely on site, meeting management teams,
operating teams, and then making an underwriting decision. It's kind
of old school, old school lending, I believe it or not.
Speaker 1 (41:15):
It's almost like leverage loans used to be twenty five
years ago. But it's in terms of a renie you
know when we talk to I mean, this is maybe
more of a US perspective, but there is a sense
that and I think Golden stat Season said it a
year and a half ago that there'll only be eight
potentially players left after a huge amount of consolidation that
(41:35):
needs to be done in private credit because you have
to be big to do this kind of business. How
do you scale up? Do you need to scale up,
do you need to hire people, do you need to acquire?
What's the long term strategy?
Speaker 3 (41:46):
Our strong belief is that public markets in private markets
in Europe are converging, and so we need to express
views around those, and so we have certain products that
are all public only. We have products that are convergence
of public and private and then we have private and
so I think to be relevant in Europe, to be
relevant to our clients and be relevant to borrowers, you
need to provide all of those solutions. And so what
(42:08):
you find in the main in Europe is that there
tends to be a lot of specialized managers. Some just
do structure credit, some just do public liquid credit, some
just do private credit. That that's a much more narrow
way to do the business, and it's one of that
doesn't leverage the connectivity between those marketplaces. And so I
think we've had relevance and we've enjoyed some good growth
in large part because we're a European focused credit manager
(42:31):
and we can express our views in just different risk
profile depending on the underlying liquidity of that risk. And
so that's how we differentiate ourselves. That's how I think
we'll continue to be relevant in Europe. And that's you know,
that's really been the game plan and we're just you know,
kind of day to day executing on that and we'll
see that where that takes us in the coming coming period.
Speaker 2 (42:53):
And what keeps you up at night, Matthew, is it
the risk of an a AI bubble, maybe political risks
in Europe, more coproaches emerging from cracks in the walls,
or something else.
Speaker 3 (43:06):
Entirely, I think it's I think it's just risk risk.
You risk transparency. So you know a lot of that
risk transparency has been you know, clouded in private markets,
and you know, as that unfolds in the coming period,
it's you know, we're not expecting any kind of cataclysmic issue,
but you know, when there's been less, less transparency, less
(43:29):
third party marking, you know, that's an area that we're
that we're keeping a very very close eye on. It's
again in Europe, you've seen this sort of the very
wide dispersion of credit performance in public markets, but heretofore
you haven't seen it in the private markets, and it's
probably the same are similar underliars, uh And therefore that's
that's something that we keep an eye out for, and
(43:51):
that's you know, in the coming period, that's an area
of focus for certain.
Speaker 1 (43:55):
So you've spotted this opportunity in European middle market private credit.
Once show goes out, everyone else will be piling in.
How do you stay ahead of that competition? How do
you differentiate what's your edge.
Speaker 3 (44:07):
I think it's I think it's relatively hard to do
for a couple of different reasons. One is you need
to have deep research teams that are sectorized and deeply
relevant to each one of the underlying borrowers. That's a
big teams. It's got a lot of expertise from a
company by company perspective. Two is Europe is not just
looking at underlying cash flows, it's also understanding structure. And
(44:31):
so having had teams that have worked a long time
in Europe, some of them have great restructuring capabilities, allows
us to bring forward that sort of legal analysis, that
legal underwriting analysis upfront. And so I think that combination
of sector focus, a very strong legal analysis, and being
acutely focused just on Europe is really differentiating ourselves. And
(44:53):
I think what you as I said before, what you
find is Europe for a lot of the non European
managers tends to be something that is in vogue. Sometimes
they wax and weigh down Europe. And I've seen this
five or six times in the last twenty years, and
I think, are you know, our longevity is really focused
on the fact that we're European specialist. We have this
(45:14):
sector expertise, We understand the the insolvency regimes, uh, and
we're looking very holistically, holistically across as public and private
sort of convergence theme. And I think that's that's enough
for us to focus on for some period of time.
Speaker 1 (45:26):
And if you have to pick one product, one sector,
one country, is our best relative value idea, You've got
tons of.
Speaker 4 (45:31):
Yeah, I really like this.
Speaker 3 (45:33):
We like this senior middle market direct lending activity from
a risk adjusted perspective. We don't like it in just
one country with like on a pan European basis, and
we're generating really attractive, you know, risk adjusted returns for that.
And so that's that's what we've been focused on in
this partnership and part with Lizard and using our own
investment teams, and so I think that's something we'll come
back hopefully, James, and I'll give you an update in
(45:55):
the coming years.
Speaker 1 (45:55):
No particular industry that you really love for city in
Europe that you love to visit to do this sort
of business.
Speaker 4 (46:02):
We like northern Europe quite a bit.
Speaker 3 (46:04):
We spend a lot of time in Germany, a lot
of time in the Nordics, a lot of time in UK,
and those are pretty rich environments for US.
Speaker 1 (46:12):
And in terms of fundraising, how's that going generally? I mean,
I don't need to getting specifics, but do you find
that there is appetite for what you're describing in terms
of when you go out and see big pension funds,
big institution investors in the US.
Speaker 4 (46:26):
I think there are two themes.
Speaker 3 (46:26):
One is, I think a number of the communities continue
to be investment communities are underweight credit, and with rates
staying at the level they are and so higher for
longer they're in the main, there's interest in credit product,
particularly alternative credit product we can enjoy an uplift and
spread and so we're finding that to be a theme
in many of the geographies the US, the Middle East, Asia,
(46:47):
amongst others. So this movement towards credit. And two is
the geographical which is they've been many investors have enjoyed
the US private markets equity and credit. Now theen a
real compression of returns and therefore they want to focus
on a place where they think there's rule of law,
where they think there's opportunity set and that's really been Europe.
(47:08):
And so that's a theme that it's not going to
be fatish. I think it's one that has, you know,
medium term growth in it, and that's when we've been
enjoying quite a.
Speaker 1 (47:16):
Bit great stuff. Matthew Sestar, President of IRENI, It's been
a real pleasure having you on the Credit Edge money.
Speaker 4 (47:21):
Thanks James, a treat to be here and we'll see
you very soon.
Speaker 1 (47:23):
And of course very grateful to Stephan Kovichef from Bloomberg Intelligence.
Thank you for joining us today. Thank you, and for
more credit market analysis and insight, read all of Stefankovicheff's
great work on the Bloomberg Terminal. Bloomberg Intelligence is part
of our research department, with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
and credits and outlooks on more than ninety industries and
(47:44):
one hundred market industries, currencies and commodities. Please do subscribe
to the Credit Edge wherever you get your podcasts. We're
on Apple, Spotify and all other good podcast providers, including
the Bloomberg Terminal at b pod Go. Give us a review,
tell your friends, or email me directly at Jcrombie eight
at Bloomberg dot net. I'm James Crombie, it's been a
(48:04):
real pleasure having you join us again next week on
the Credit Edge.
Host
James Crombie
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