January 23, 2025 • 43 mins
UK-based Pemberton Asset Management has widened its scope to stay ahead in the increasingly competitive world of private credit. “You’ve got to have a range of products that people think are relevant and attractive,” said Symon Drake-Brockman, the firm’s co-founder and managing partner, referring to net asset value financing, collateralized loan obligations and risk sharing, among other businesses. “We can build large verticals in each one of those strategies,” he tells Bloomberg News’ James Crombie and Silas Brown, and Bloomberg Intelligence’s Jeroen Julius, in the latest Credit Edge podcast. Drake-Brockman and Julius also discuss relative value between US and European private credit, areas of stress and whether US deregulation will boost competition from traditional lenders. “If you’re a chief executive of bank, you’ve got to make sure the pendulum doesn’t swing back the other way in four years’ time,” said Drake-Brockman.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:17):
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Simon Drake Brockman,
co founder and managing partner of Pemberton, a London based
private credit manager.
Speaker 2 (00:30):
How are you, Simon, I'm great, Thanks, James.
Speaker 1 (00:32):
Great to have you on the show. We're very excited
to hear your credit market views. Also delighted to welcome
back co host Juruon Julius from Bloomberg Intelligence. Hello are
you run? Hi James, and join us from Bloomberg News.
Silas Brown, our private debt expert in London. Great to
see you again, Silas. How's it going.
Speaker 3 (00:46):
I'm doing very well, Thanks James.
Speaker 2 (00:48):
Great.
Speaker 1 (00:48):
Okay, So, just to set the scene at the top pier,
credit markets are hot. Borrows a globally art taking advantage.
This month could set a record for debt issuance by
US companies and banks. Most of it is for refinancing.
There's a lot of debt coming that means more cash
returning to investors who have already received a ton of
inflow over the past year and are very keen to
buy Given how high all in yields are. You can
get almost five and a half percent right now on
(01:11):
US high grade publicly traded corporate bonds with a very
low chance of default. That's the highest in six months,
and it makes you wonder why you need to venture
into private markets or leave the US at all to
get good returns in credit. But there's not enough supply,
so investors are having to look elsewhere. Structured finance and
private debt are very popular and spreads are higher outside
of the US. Some people fear that the demand supply
(01:33):
and balance is also leading to complacency and mispricing of
risk throughout credit markets, which is only expected to get
worse in twenty twenty five. Is more money piles in. Meanwhile,
everyone's loaded up on assets in the US, which is
growing faster than other parts of the world and expected
to get a boost from a new market friendly administration. Europe,
by contrast, faces multiple economic and political challenges which make
(01:54):
global debt investors very nervous. In some private debt is hot, Europe.
Speaker 3 (01:59):
Not so much.
Speaker 1 (02:00):
But what's your view, sigmon, Are we being too negative
on Europe? What's the opportunity as you see it?
Speaker 2 (02:05):
Yeah, I think James. You know, most people look at
the headline numbers in Europe and question, you know, the
growth and sometimes the politics in that space. But I
think if you actually get down into the numbers of
what's going on inside of Europe, it's quite an exciting story.
Europe is going through sector consolidation in the mid market,
(02:26):
which is probably twenty maybe thirty years behind the United States,
and what it's doing is it's starting to bring together
a group of companies in different parts of the market
to build large pan European champions And if you look
at the opportunity set that creates, there's growth through both
synergies are bringing these companies together, and there's growth through
(02:48):
client acquisition. So these companies in five maybe ten years
time are going to look very very similar to the
US companies with billion to three billion turnover in that space.
Do that you need to bringing them together and building
an interesting Pan European platform, and I think that's where
private equity sees a great opportunity. They're bringing a lot
(03:10):
of money in and I think if you then look
at the returns that we can offer inside of Europe,
you're getting you know, as you touch on at the beginning,
wider margins, better documentation and covenance inside the deals, and
larger upfront fees. And that's driven by the fact that
the demand for financing is greater than the actual capital
(03:31):
available today because of the changes that are going on
in the banking industry. So I think super positive tailwinds
for the industry inside of Europe, and I think a
very very attractive investment environment for investors.
Speaker 3 (03:46):
For direct lending, fund managers, people who haven't yet launched
private debt strategies in Europe.
Speaker 2 (03:54):
Is it too late for them now?
Speaker 3 (03:56):
Are the incumbents too far ahead, too scaled, two staffed
up already, those fledgling firms too far behind.
Speaker 2 (04:07):
It's good questions, Elis. You know, certainly if you want
to be a very niche, niche player, you know, I
think the opportunity set still there. But I think Europe
has already got a number, you know, probably ten of
us who have large scale platforms. You know, we have
ten offices across Europe, two hundred people focused on originating
and investing in these opportunities. And I think that scale
(04:30):
servicing two hundred plus private equity firms really creates a
massive competitive advantage, and Europe is a different market to
the US. You know, it's important to be in Germany,
it's important to be in France, Italy, explain etc. Where
we are, and I think having local nationals on the
ground really is a competitive advantage to sourcing transactions and
(04:52):
building that deal flow and in credit, the most important
thing is you've got to have a big pipeline of
opportunities so you can pick the ones that you really
want to do. And I think most people starting from scratch,
that's an awful lot of infrastructure you've got to put
in place to try to catch up with a group
of us.
Speaker 3 (05:08):
So if you were, if you were kind enough to
offer advice to appear, would you say it's too late
to join the party?
Speaker 2 (05:16):
You know, you can never say it's too late, but
you know, and you know, we've seen in the banking
industry people come in and build platforms. But what I
would say is, if you're going to do it, you
need to really have the investment capital to put boots
on the ground and have a scalable platform. I don't
think you can come into this industry today with half
(05:37):
a dozen people and say I'm going to build a
platform because I think you're competing with true scale with
the rest.
Speaker 3 (05:44):
Of us, and you touch on the dispersion in terms
of scale. Are we also starting to see dispersion in
terms of performance?
Speaker 4 (05:53):
We've been through COVID, We've been through are we're going through.
Speaker 3 (05:57):
A prolonged period of high interest rates and people's portfolios
have been tested arguably for the first time in European
direct lending kind of writ large, are you going to
see a dispersion in performance? And also attached to that,
how flight are your investors? Do they move from fund
manager to fund manager depending on performance?
Speaker 2 (06:19):
Yeah? I mean the industry has now been going for
ten plus years inside of Europe, so people have an
ability to really look back over a period of time
and look at the type of businesses, the performance of
those businesses, how the managers have managed with a fairly
volatile environment since twenty twenty with COVID and inflation and
(06:40):
price increases and all of that. So there is definitely,
you know, a reordering of in people's minds of who
are the ones the managers they want to work with.
And you know, I think there's been a number of
managers inside of Europe whose businesses haven't gone as well
as they would like over the last three or four years.
(07:01):
But I think if you look at it fundamentally as
an asset class, I think it's been incredibly robust. And
I think if you talk to LPs, even the managers
that they feel haven't done as well, the returns are
still positive, maybe not as positive as they want, but
still significant and certainly still probably better than fixed income.
(07:21):
So you know, I think we've gone through a fascinating
period of really validating an asset class. And people often
say to me, has it been tested? And you know,
if you go back, I mean, when was the last
time you had inflation at ten percent? Interest rates go
up four hundred basis points, and you know, salaries and
(07:42):
other inflationary products going through as well as a energy
crisis all hit at the same time. And you know
that happened a couple of years ago now and the
companies have got through that. So I think it's a
very different underwriting environment to what we saw in two
thousand and five six where Euphorio you know, got to
a point where we had a lot of problems in
(08:04):
eight nine.
Speaker 3 (08:05):
So for the sort of super cynics he would speak
about private credit blowing up or some you know, big
catastrophic problem with private credit. I think what you were
saying is that, Yeah, why are there to be any
catastrophic stress or whatever. It should be isolated to a
fund that has done kind of odd underwriting or kind
(08:28):
of offbeat underwriting that actually the market as a whole. Yeah,
the mainstream of the market has performed basically quite robustly
through this.
Speaker 2 (08:36):
Absolutely, you know, is going to be selective funds and
selective managers who have underperformed. It's not an asset class
issue like we saw in US mortgages in you know,
two thousand and seven in that space. And I think
if you want to just characterize why it's different, if
I put it that way. You know, if you look
at what happened in the US residential mortgage market, it
(08:58):
was an original warehouse and then hand it over to
Wall Street to distribute, so the actual underwriter didn't really
hold on to it very long. If you look at
us today, we own these assets for seven years, and
we're fully accountable and monitoring these companies on a day
to day basis. So our business is reliant on the
(09:19):
performance of those businesses as well. So you have massive
alignment between the manager and the LP because we need
to be selecting good companies for our businesses to flourish
and grow.
Speaker 4 (09:30):
Can I then perhaps ask assignment about risk management? And
then I suppose credit risk is the biggest risk that
we focus on. If you compare the risk management function
within the typical private credit company or Palmton, if you
compare it to the traditional banking model, do they are
(09:54):
they broadly similar? Are the key differences?
Speaker 2 (09:57):
It varies quite a bit between managers. We we've followed
a slightly different model to our peer group. So you know,
we have dedicated originators talking to the private equity firm,
so we get to make sure that we know everything
that they're up to on a day to day basis,
so that we have a pretty good sign side of
(10:18):
light of where the deal flow is going to come from.
We then have a large analytics team credit team inside
the firm, and you know, we have twenty two analysts
in that process. Nicole Gates, who runs that, used to
be the senior credit officer at Dressner responsible for their
alternatives area, particularly levit finance. She then actually spent nearly
(10:40):
ten years at GE running their restructuring international Restructuring unit,
so she's got tremendous depth of experience and looking at
from a credit underwriting point of view the transactions, both
primary new ones as well as dealing with some of
the old problem ones at GE and I think that
skill set inside the firm gives us a independent function,
(11:01):
so the portfolio managers work with that credit function to
really understand the companies, to analyze the cash flows, analyze
the sector position, look at the growth trajectory, look at
the business plans that they have inside of that. And
we've done it that way because I think it's very
difficult for originator to be out scouring the market for deals,
(11:22):
to be reading thousands of pages of due diligence on
a deal that they've got, and to do that ongoing origination,
and we wanted to create a partnership across the business,
the originators working with their analytics team, working with our
portfolio management team so that we could really go quite
in depth into the companies and understand what they're doing.
Speaker 4 (11:43):
But perhaps to follow up on that point, one of
the key attractions for a borrower to go with a
private credit provider as opposed to a bank is sometimes
that's the speed of the loan decision, if you go
through the banking process, can be more more of an
administrative nightmare, whereas a credit provider could perhaps act more quickly.
(12:08):
Would would you agree with that?
Speaker 3 (12:09):
Yeah?
Speaker 2 (12:09):
I think there's two key differences. I think, you know,
one is we can tailor a transaction much more to
the client's demands. So sometimes cash flow is a bit
tighter in the first year or so, we can give
them flexibility on you know, picking income in the first
twelve months. You know why they're executing the integration, etc.
(12:30):
So I think that's a much more difficult thing to
go out and explain in a syndication transaction. But if
you're doing a bilateral between us and the borrower, we
can put it into a structure that really really suits
the cash flow and the growth of the company. The
second part is, you know, we ran a huge syndication
business when I was at the bank. You know, when
(12:53):
you're underwriting deals on the concept I'm going to sell
it to sixty different institutions, Lots of people have different
views about is it sellable? Is it not sallable? As
the market rights it's not right. So banks obviously decision
making process can be quite slow at times because you've
got to get the sales desk view, you've got to
get the credits view, you've got to get other people's views,
and you've got to bring that together. That model works,
(13:14):
it's been successful for decades, but it can be time
time consuming. And I think that we have an advantage
because we have accumulated the capital, we know how much
we're willing to lend, and we can do it relatively
straightforward with the borrower.
Speaker 3 (13:31):
Simon, you are one of a collection of beautique lenders
who got in early in European dirret lending. But if
you look across the landscape of your fears, you see
quite a lot of them have actually changed hands now
and a lot of them have attached themselves to broader
kind of I guess global asset managers, and you do
have a steak minority stake from L and G. But
(13:52):
what would be the criteria or the preconditions for a sale?
Is it tempting to kind of jump on the bandwagon
and and sell the business? Do you? What are your
general thoughts about about setting sale?
Speaker 2 (14:05):
I think if I put it correctly, you know, silas
the world has been going off talking to insurance companies
and other people to partner with private credit managers, and
you know, that seems to be a theme at the
moment inside the industry. I think we made the decision
very early on when we set up the firm, we
wanted to be truly European by being in you know,
every country with our ten officers. We wanted to have
(14:28):
a significant European partner inside the business who was well
known and well regarded. So Ellen g became a partner
inside the firm. They've been a fantastic partner as we've
built the business, and you know, we wanted to be
a truly third party manager. So over ninety percent of
our capital comes from other institutions. And you know, I
(14:51):
think we've kind of front loaded I can say that way.
You know, we made all those decisions up front and
then focused on building the platform. I think a number
of our piers went out and kind of started to
build platforms and then decided they needed to go and
find a partner in that space. So we're very happy
the way we are. We think we're on a very
very strong trajectory. More recently, we've opened up the NAB
(15:13):
lending businesses, which is going very very well with the
partnership we announced with Addia coming into work with that,
We've been growing our working capital solutions business. We just
announced the partnership in December with Santander where we're setting
up a joint venture company. So we've really feeled that
across the platform. With the products we've got RSS, our
(15:34):
risk sharing SRT business, our COLO business, we have a
pretty broad based platform. We can bring together those products
into multi strap SMAs for clients. We can build large
verticals in each one of those strategies. And we have
a very supportive shareholder inside the firm who's been very
(15:54):
helpful as we've grown the business. So we think it's exciting.
Europe's going to be a great opportunity and we're out
telling people about that opportunity.
Speaker 3 (16:04):
And what do you make generally of the consolidation in
in among private credit firms Now? I mean, obviously there's
kind of high profile ones ala Blackrock buying HPS. There's
kind of more regional ones going on, you know, probably
as we speak, and yeah, what do you make of it?
Speaker 2 (16:24):
Yeah? But I think it all goes back to the
same point, you know, if I mean, HBS is a
different situation. I mean, HBS is a very successful firm.
You know, it had one hundred and forty billion of
capital in that space, and you know, it was considering
going down the IPO route, and black Rock came in
and made a very very attractive offer in that space.
(16:46):
And I think, you know, that's much more a very
very mature business, you know, like you see in the
M and A market. I think the vast majority of
deals that have been done in the market today if
I look at it, so you know, have been much
smaller man probably more around the ten billion mark or
you know, who are being acquired by insurance groups or
(17:07):
other investors as a platform for them to bring a
lot of capital in to try to grow those businesses
into much bigger businesses. And I think that trend's going
to happen because I think there is a lot of
if I can say, subscale managers in the market who
you know, it's a significant cost to build your institutional
coverage platform. And so you know, we are now you know,
(17:31):
twenty six billion. We think we'll grow to probably you know,
mid thirties over the next twelve months and in that space,
and I think once you start to get to that
size and you've got that scale and you've got the
breadth of products. What we're seeing is people saying, that's
really interesting. Can I do this with you? And can
I do that with you? In that space? If you're
a single product manager just doing you know, unitranch loans,
(17:55):
I think you need a big brother to really grow
the business to the next level. And I think that's
what's driving the M and A activity.
Speaker 1 (18:01):
And the scale numbers you're giving us some simon that's
in euros, Is it because you were talking a couple
of years ago about getting to fifty billion by I
think twenty twenty seven around there in terms of dollars
dollar amount.
Speaker 2 (18:12):
Yeah, No, that's correct, and you know, I think we're
still on track for that, James, and working hard with
our new partnerships that we've announced over the last six months.
Speaker 1 (18:21):
And that's the kind of scale you need to be standalone,
is it in this business?
Speaker 2 (18:25):
So I know, yeah, I think it's an important piece,
and I think to me, scale is less of the issue.
I think you've got to have a range of products
that people think are relevant and attractive, and I think
you have to have you know, high performance or high
quality offerings in those products. I think if you do that,
(18:46):
then scale comes, you know, naturally, because people are attracted
to come with you, and you know, I think people,
you know, if you're a big institution and you want
to allocate five hundred million, it's hard to go and
give that to a five billion manager. You know, if
you're a big institution and you want to allocate five
hundred million, it's much easier to give that to an
institution which has got fifty billion. It's got you know,
(19:08):
three hundred people, it's got the infrastructure, the institutional parts
of compliance, risk, legal and all of that around it.
So they kind of go hand in hand.
Speaker 4 (19:18):
Simon. Earlier this week, Donald Trump was inaugurated as the
forty seventh i think, president of the US. The expectation
is that the new administration is going to postpone the
bars of three end game, as it's called for US banks,
possibly indefinitely. We've already seen a reaction over here in Europe.
(19:40):
In the UK, the PRA has effectively postponed the introduction
of BARSA three point one or BARSA four, whichever UK's
call it, by another year to January twenty twenty seven.
Is there possibility that the pendulums perhaps swinging back a
little to bank deregulation, and as a result of that
(20:02):
is a possibility that banks are going to be able
to compete more effectively with pride credit.
Speaker 2 (20:07):
I think if you go back, I mean the you know,
certainly the pendulum of you know, being kinder to banks
in the United States is definitely happening under the Trump administration.
But Trump will only be here for four years, and
if you're a chief executive of bank, you've got to
make sure the pensulum doesn't swing back the other way,
you know, in four years time. So it's very difficult
(20:28):
I think to run your business model by just looking
at politics. You have to look at the long term trends.
And I think the long term trends inside of banking is,
you know, I would say, a movement out of non
investment grade and asset heavy lending into much more investment
grade and service providing and distribution and rather than being
(20:52):
large scale principles. And they'll still have large lending books,
but you know, I think it's a big shift, and
that shift isn't going to change in this process. I
think if you look at Europe and if your ECB.
ECB has been very vocal that they'd like to see
much more consolidation in the European marketplace. That seems to
(21:14):
be taking a long time, and therefore, I think regulation
will continue to be relatively tight on the European banking
system around single name, concentration, non investment grade, you know,
and these type of things. So fundamentally, in a growing
market where you know, companies need to borrow two hundred
million first time round, four hundred five hundred million, next
(21:35):
time round a billion the time round, institutions that can
bring together large pools of capital are going to be
very very relevant, very very meaningful for those So you know,
the banks, as we have with Santander, you know, can
be great partners and they've you know, there's been other
bank partnerships announced because I think they see it that
they have a big origination platform, we have a large
(21:58):
ability to scale capital together, and they can be a
very harmonious partnership in working together to serve as clients
in that space. And our job for the OLPs is
to make sure we're putting in first class risk management
around that.
Speaker 4 (22:13):
Can I perhaps follow up on that you're talking about
regulation or deregulation, whichever way you kind of look at it.
The ECB has been quite that They've completed a review
looking at private credits last year and they've highlighted the
prevalence of leverage which can be upstream, midstream, or downstream
(22:37):
in the pridate creditor industry. Do you are you concerned
or do you expect regulators to follow up with with
with introducing regulations for the proud creditor industry?
Speaker 2 (22:51):
I think, I mean we are already regulated by for example,
you know, we're most of our funds are based in Luxembourg.
The CSSF is a very very you know, I think,
thoughtful and focused regulator and in that space, and so
you know today there is already regulations and different you around.
(23:11):
You leverage into funds, it's into you know, where we
can distribute and things like that. I think the part
that most people, you know, possibly miss at times is
if we look at where significant credit losses have happened
in the banking industry, it is because of concentration issues
(23:33):
inside you know, the balance sheet, whether that is back
in the early nineties with real estate, whether that is
in two thousand and eight with US mortgages, and you know,
if you actually look at a fund like ours, we'll
have fifty or sixty LPs in there. You know, if
we do a loan for four hundred million or two
(23:54):
hundred million, you know, any LP is going to be
you know, one million to five million ex exposure inside
of that. And if you look at the underlying her
person who's given us the money, they're an insurance company
for example, or a pension fund which has tens of billions,
and so the actual exposure in a single name that
(24:15):
they have coming through us is tiny, and there's no
risk with us because the money is locked up with
us for seven years in our actually ten years in
our fun in that space. So you don't have the
capital flight risk that the banking system saw in two
thousand and eight where deposits got withdrawal and banks were
really under liquidity pressures. And you don't have the concentration
(24:39):
risk that we saw in the banking market in two
thousand and eight as well, because it's diversified through fifty
or sixty institutions. So I think when regulators actually start
to look at that, we're an incredibly powerful and positive
source of capital to come in to grow the European economy,
and that's why you've seen countries like Germany, like Italy
(25:00):
change regulation to give direct lenders like ourselves direct access
to clients. Because you know, when I started the business
ten years ago, I couldn't lend to a German company directly.
I had to ask a bank to intermediate for a
day or two and then I bought the loan off them.
Speaker 3 (25:13):
That's interesting if you regulators seem to be interested in
I guess, different forms of leverage across private markets. They're
interested in valuations on both the equity and the credit side.
And if you look at potential risks for private credits specifically,
(25:34):
I mean, what do you think is the key risk
that is still for latent?
Speaker 2 (25:42):
I don't mean, you know, so if I go back
to it, it is really if you look at the
asset management industry and some of the you know, the
blowups we've had in hedge funds or anything like that,
it's primarily being, if I can say, much more, a
mini match of liquidity or an operational misunderstanding of the
(26:04):
risks that are actually holding in their balance sheet. And
I think if you look at it today, the scrutiny
that we are all put under by our LPs on
line by line explanation of what we have in our
balance sheets. You know, the solevency two reporting that we
do to all of our insurance clients inside of Europe
and now around the world means that they have a
very very granular analysis. If you look at what we
(26:27):
have to do with our regulator independent pricing, using third
parties to value our assets to make sure that we
are being factual around what we think the underlying values
are in that space. I think the industry has come
a tremendously long way, and I think that scrutiny will
only continue to grow as we become a bigger part
(26:48):
of the asset allocation for institutions. So you know, I
think the establishment of the industry is here. The improvement
in as you say, risk reporting or pricing and all
of that will continue to grow. And I think the
regulators are, if I can say, silas encouraging us by
talking about this on an active basis that we keep
(27:11):
making those movements forward, and I think that will happen
and people, you know, our regulators across Europe will continue
to make sure that we're moving in the right direction.
And I think that's why you haven't seen anyone turn
around and say stop doing this, but they just want
to make sure it's best practices.
Speaker 1 (27:28):
What about the default rate those time? Is it increasing?
Are you seeing more payment and kind more amendments that
kind of.
Speaker 2 (27:33):
Thing you certainly you certainly saw, you know, kind of
coming out of COVID and then getting hit by this
massive inflation hit and all of that. Companies having certain
challenges at times on cash flow. I mean, many companies
couldn't pass on the input pricing inflation as quickly as
they needed to, and so therefore Ibadah came down quite
(27:55):
sharply and then has recovered back up in that process.
But I think if you look at where we are
in the cycle, you know, you're now a couple of
years into this process, the companies have held up most
of the input pricing has moved through to the consumer
of the goods in that space. So default rates, I
think most people would say, is much lower than people expected.
(28:20):
And I think the you know, in cases where you
recoveries will be done, they're much much higher than people
have expected. So but it doesn't you know, you will
have people who have you know, portfolios that don't perform
that way. So it's a bell curve, but I think
fundamentally it's come out of it.
Speaker 3 (28:40):
Much better internally institutionally, do you do you look at
default rates? I mean, do you think there are good
spell weather for overall risk in the market, Because it
feels as if the one of the strengths of private
credit is that it can avoid defaults, and so actually
the default rate may be less relevant to understanding I
(29:01):
can know the gyrations of the of the market.
Speaker 2 (29:05):
If I think one of the great strengths of private
credit is the fundamental alignment between the borrower, the lender
and the LP has funded it. And you know, I
think if you start off default rates, you know, it's
a statistical analysis, but it doesn't tell you who to
lend to and who not to lend to. It just
tells you, you know, the trends that are going on
(29:26):
in the industry. Fundamentally, you have to be very, very
focused on the industry sector. You've got to look at
the company's position in that industry sector and the viability
of their business model in that sector. So you know,
if I go back to the early two thousands, everyone
gave you leverage to autoparts, manufacturers today with Tesla and
(29:47):
you know by d you wouldn't even consider thinking about
it in that space because technology has completely changed that sector.
So you know, for me, what keeps us awake at
night is, you know, product redundancy and the life cycle
of products. You know, you all may remember we used
to have a thing called a walkman. You know, today
(30:08):
it's your iPhone. You would you know, my children probably
don't even know what a walkman is in that space.
And I think that change is incredibly fast today. And
you've got to go into industries and go into sectors
where you can reliably predict the next seven, eight, ten years.
And that's why if you look at private equity in today,
(30:29):
it's you know, outsourced business services. You know, I have
firewalls in my business today, it's done by third parties.
I have thirty different programs managing into my company and
that's done by three different providers in that space. Am
I ever going to turn that business off?
Speaker 3 (30:45):
No.
Speaker 2 (30:46):
As a percentage of my cost for running the firm,
it's tiny, and so it's an incredibly stable revenue stream
for the provider. You know, my big cost is labor
people in that space. So if you're a private equity
firm buying a whole series of these companies and rolling
them up to which will end up looking like some
(31:07):
of the big data providers in the United States in
five or ten years time. And these are fascinating industries
with great growth potential and longevity because cloud computing has
completely changed how we store data and what we're going
to do. So you know, to me, as I said,
(31:28):
life cycle of the product, and you know, and is
it going to be there in ten years time or
my inter sector which is going to be completely become
a dinosaur because of technology change, you know, medical genealogy
changes and other things like that. That's really where we're heavily,
heavily focused, and that's where the capital goes.
Speaker 1 (31:48):
Watch out for those dinosaurs making a comeback though time.
And I'm still listening to my vinyl records. So that's
another conversation. But I wanted to go back to what
you said earlier about the relative advantages in the US, sorry,
in Europe against the US. I'm interested in that concept
of relative value between the regions because we are so
loaded up. You know, I'm sitting in New York and
it's all just everybody wants US assets the dollar and
(32:11):
they've been paid for it. They've done really really well
by just sitting here and doing that over and over again.
But when you talk to someone that's outside of Europe
about the opportunity, you mentioned better fees, better margins, upfront
fees as well, I assume better covenants. Well, can you
put that into some kind of context, maybe give us
some numbers around that.
Speaker 2 (32:28):
Yeah, And so you know, if you look at Europe today,
upfront fees for underwriting transactions sit in the two and
a half to you know, maybe three percent type region,
where if you look at the United States they're probably
half that in that space. If you look at margins,
you know in there there's you know, twenty five to
(32:50):
fifty basis points I think still premium. And if you
swap euro assets back into US dollars, you're getting, you know,
a significant pick up just because of the interest rate differential,
which has varied between one hundred and fifty and two
hundred basis points depending on markets. And so you know,
(33:11):
if you put that whole package together in that space,
you know, wider spreads, greater upfront fees, the yal curve differential.
Swapping back into dollars. You know, you can be picking
up one hundred and fifty two hundred basis points more
sitting in Europe than you are in the United States.
And you know, we've seen some of the most significant
(33:31):
bell Weather institutions very focused on Europe over the last
twelve months because I think they feel that they are
heavily exposed to the direct lending market inside of the
United States and they want diversification. You know, I met
today with one of the largest asset managers and I
thought they encapsulated it very, very well. They said, you know,
(33:52):
everyone looks at Europe through the eyes of equity, and
US equities are exciting and europe p in equities are terrible.
But if you look at credit, credit actually looks really attractive.
Speaker 1 (34:03):
And within that are there sectors that are a focus
right now for non European investments coming in.
Speaker 2 (34:09):
Yeah. And as I touch on through this, it is
in the new economy. Yeah, I think Europe today is
a two speed economy. You have its old industrial base.
You know, if you look at the industrial base of Germany,
the manufacturers, the car manufacturers and people like that, where
they're really struggling under Chinese and other markets, pressures of
imports coming into Europe, and then you have this new
(34:32):
sector heavily related to technology, heavy rated to healthcare and
services where you know, there is a very large population
that needs servicing with you a very unconsolidated suppliers of
those services, where private equity is coming in and rolling
(34:53):
those companies up and doing it. And it's all parts
of the healthcare sector, all parts of the service sector
in that space. And you know, and still some growth
areas in industrials, but I think in the US you
see a lot of core industrials, hospitality, you know, retail
driven activity. You won't see much of that in most
(35:16):
of the European portfolios. I think they're very much in
the new economy and not in the old economy.
Speaker 4 (35:22):
Simon, could I come back to something you mentioned earlier,
your partnership with the Santander and throughout the private credit industry,
there are a little for those partnerships that have been
announced between banks on the one side and private private
credits firms on the other side. In those instances, who
actually owns the customer relationship if I can call it that,
(35:42):
And how do you approach dividing up the economics of
a partnership.
Speaker 2 (35:49):
Yeah, and I think that's been if I can say,
some of the stumbling blocks to the partnerships, because you know,
the traditional way that it used to get done is
you know, you bring the all the deals and you know,
I'll give you your customers some money and all of that.
You know, we recognized when we went into this deal
with Santander in a very specific area, it needed to
(36:10):
be a real partnership, and so we set up a
company together and we're both are shareholders in that company
that we are working together to serve as that client.
Santander has a huge product range and so it's got
lots of other products they're servicing those particular clients, but
we're a specialist provider in their portfolio in a specific area.
(36:30):
And because we're both partners and shareholders inside the company,
we're working together in that process. And I think that
if I says, you know, dilutes or isn't my customer
or your customer, it's our customer and we're trying to
deliver the best service because we're actually partners in a business.
Speaker 3 (36:45):
Fair enough, You've had a remarkable career, Simon in that
you've been adjacent to Nick Lison in bearings. You've been
in RBS in America, you've been in private credit, You've
seen all of these kind of announcements. Didn't just name
a few, and there's others, but you know, you've been
(37:07):
I guess at the epicenter of a series of quite
significant moments in financial I guess, like modern history, what's
been the most chaotic? Is the most chaotic period still
to come?
Speaker 2 (37:19):
Yeah, well I can answer that one, you know, quite quickly,
so you know, touch you on your point. You know,
I was in the US in nineteen ninety when we
went through the crisis, and you know, City Group nearly
went bankrupt and a number of other US banks. That
was a huge crisis. But you know, I think if
we look back, two thousand and eight was by far,
you know, it was something that none of us had
(37:39):
seen since the Great Depression, and I think still today.
You know, if you talk to the people who were
at the epicenter of that, the world came incredibly close
to a major meltdown of the financial services industry. You know,
if you look at banks in Holland and Switzerland, UK, Ireland,
US and all that, the entire global banking system apart
from probably you know, China and Japan, and you know,
(38:03):
Australia and Canada had to be bailed out in some
format in the major banking site. But I think, you know,
that was you know, kind of set up in my
mind in two ways. You know, I think if you
look at the kind of equity market expectation of banks
in the late nineties going into early two thousands, if
you're a chief executive that wasn't making a twenty percent
(38:25):
return on your equity, then you know, people felt you
weren't really performing at the highest level. And the only
way a bank can get to twenty percent return on
equity is you've got to give your balance sheet up
substantially in that space. And then unfortunately, we got hit
by you know, a very very major asset class. Where
(38:47):
as I said at the beginning of this podcast, the
underwriter of the risk just passed it on to someone
else and just moved. You know, they weren't around for
all of the problems that came out of that, and
that got distributed to everyone in the world. You know,
we had a very large book at RBS, probably you know,
sixty to seventy billion, and you know, most other banks
had pretty similar numbers Barclays, et cetera. And that was
(39:10):
a painful experience. I think the great thing today is
the lesson has been pretty much learned. I would say
in every asset class, if you're going to underwrite that risk,
you need to own it and your business needs to
rely on it performing, you know. And so if you're
looking at the banking industry, they're focused now on distribution
of primarily investment grade risk, and so the risk of
(39:32):
that underperforming is much much lower. You know. The people
who are taking over a larger and larger part of
the non investment grade risk are ourselves who are acting
as principles in that business, and we're managing that on
behalf of our clients in that space. And I feel
that's kind of the old banking world if we go
back to the seventies and eighties, Yeah, I give you
(39:52):
fifty million. You know, you and I are now partners
in that space, and that's what we're doing every day
across Europe with these business and working with their management
teams as they grow those firms.
Speaker 1 (40:03):
I think, to follow on from Silus question, I think
what he's kind of getting at is, you know, you've
you've really seen inside some really turbulent times in our
financial history, and you know, you've seen what can happen,
particularly at times when everyone is most excited and most
positive and most bullish. And you know, the golden age
seems to go on forever when you when you're in it,
and then suddenly it suddenly it's over. Do you think
(40:24):
that we are getting complacent about credit and that you know,
people are just too positive and you know that it
will end up in a reckoning at some point soon.
Speaker 2 (40:34):
I think everyone uses a parallel to US mortgages, you know,
and if you go and lend billions and billions and
billions to people who actually can't afford to repay the
mortgage and then you know you end up with a
car crash. Will you have underperforming sectors? Of course? You know,
we saw the oil and gas sector in the US,
We looked at shale in the US, We looked at
(40:54):
different things and those are very much, in my mind,
sectorially driven and demand driven. And in a credit world,
you're going to have strong sectors and you're going to
have weak sectors. And you know it's the manager's decision
and whether they want to go for outsize return in
the weak sector or whether they want to focus on
(41:16):
the strongest sectors and be benchmark returns for what they're doing.
And there will be managers who specialize on the weak
sectors because they want to be much more closer to
a kind of equity investor in those areas. And then
there's managers like ourselves who are looking to be large
scale fundamental providers of capital in the core sectors and
the growth sectors in the market. And so I say
(41:39):
to every LP, you know, you've got to be focused
on where your manager is putting the capital, both in
the capital structure but also sectorially to understand the risk
profile of the manager. And if you do that, then
you'll work out, you know, do I want to go
for high octane returns or I want to go for
core returns. And you know, we have a range of
(41:59):
fun and our firm, you know where we go all
the way down to know mezzanine inequity, and that's doing
mid teens returns, but we're very clear around you know,
the type of risk we're taking. And then we have
a variety of funds which are just core generating European
yield to probably eight to ten percent net us returns
of ten to twelve percent net and that is just
(42:25):
core income. And you'll all come back to me and say,
you know, how do you manage that risk? And you know,
it's trying to make sure we're in highly resilient industries
and sectors of the market in that space.
Speaker 1 (42:38):
Great stuff, Simon Drake Bruckman from Pemington. It's been a
pleasure having you on the Credit Edge money.
Speaker 2 (42:42):
Thanks, thanks so much, Thanks gentlemen, and.
Speaker 1 (42:44):
Of course I'm very grateful to Ruin Unitus from Bloomberg Intelligence.
Thank you for joining us today. Thank you, James and
Silas Brown with Bloomberg News. Great to see you, Thanks
so much, James. Check out all of Silence's great scoops
on Bloomberg dot com and the Bloomberg Terminal for more
credit market analysis and insight. Follow your ulysses work on
the Bloomberg Terminal. Bloomberg Intelligence is part of our research department,
with five hundred analysts and strategists working across all markets.
(43:08):
Coverage includes over two thousand equities and credits and outlooks
on more than ninety industries and one hundred market indices,
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
bpod Go. Give us a review, tell your friends, or
email me directly at Jcrombie eight at Bloomberg dot net.
(43:32):
I'm James Crombie. It's been a pleasure having you join
us again next week on the Credit Edge.
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Simon Drake Brockman,
co founder and managing partner of Pemberton, a London based
private credit manager.
Speaker 2 (00:30):
How are you, Simon, I'm great, Thanks, James.
Speaker 1 (00:32):
Great to have you on the show. We're very excited
to hear your credit market views. Also delighted to welcome
back co host Juruon Julius from Bloomberg Intelligence. Hello are
you run? Hi James, and join us from Bloomberg News.
Silas Brown, our private debt expert in London. Great to
see you again, Silas. How's it going.
Speaker 3 (00:46):
I'm doing very well, Thanks James.
Speaker 2 (00:48):
Great.
Speaker 1 (00:48):
Okay, So, just to set the scene at the top pier,
credit markets are hot. Borrows a globally art taking advantage.
This month could set a record for debt issuance by
US companies and banks. Most of it is for refinancing.
There's a lot of debt coming that means more cash
returning to investors who have already received a ton of
inflow over the past year and are very keen to
buy Given how high all in yields are. You can
get almost five and a half percent right now on
(01:11):
US high grade publicly traded corporate bonds with a very
low chance of default. That's the highest in six months,
and it makes you wonder why you need to venture
into private markets or leave the US at all to
get good returns in credit. But there's not enough supply,
so investors are having to look elsewhere. Structured finance and
private debt are very popular and spreads are higher outside
of the US. Some people fear that the demand supply
(01:33):
and balance is also leading to complacency and mispricing of
risk throughout credit markets, which is only expected to get
worse in twenty twenty five. Is more money piles in. Meanwhile,
everyone's loaded up on assets in the US, which is
growing faster than other parts of the world and expected
to get a boost from a new market friendly administration. Europe,
by contrast, faces multiple economic and political challenges which make
(01:54):
global debt investors very nervous. In some private debt is hot, Europe.
Speaker 3 (01:59):
Not so much.
Speaker 1 (02:00):
But what's your view, sigmon, Are we being too negative
on Europe? What's the opportunity as you see it?
Speaker 2 (02:05):
Yeah, I think James. You know, most people look at
the headline numbers in Europe and question, you know, the
growth and sometimes the politics in that space. But I
think if you actually get down into the numbers of
what's going on inside of Europe, it's quite an exciting story.
Europe is going through sector consolidation in the mid market,
(02:26):
which is probably twenty maybe thirty years behind the United States,
and what it's doing is it's starting to bring together
a group of companies in different parts of the market
to build large pan European champions And if you look
at the opportunity set that creates, there's growth through both
synergies are bringing these companies together, and there's growth through
(02:48):
client acquisition. So these companies in five maybe ten years
time are going to look very very similar to the
US companies with billion to three billion turnover in that space.
Do that you need to bringing them together and building
an interesting Pan European platform, and I think that's where
private equity sees a great opportunity. They're bringing a lot
(03:10):
of money in and I think if you then look
at the returns that we can offer inside of Europe,
you're getting you know, as you touch on at the beginning,
wider margins, better documentation and covenance inside the deals, and
larger upfront fees. And that's driven by the fact that
the demand for financing is greater than the actual capital
(03:31):
available today because of the changes that are going on
in the banking industry. So I think super positive tailwinds
for the industry inside of Europe, and I think a
very very attractive investment environment for investors.
Speaker 3 (03:46):
For direct lending, fund managers, people who haven't yet launched
private debt strategies in Europe.
Speaker 2 (03:54):
Is it too late for them now?
Speaker 3 (03:56):
Are the incumbents too far ahead, too scaled, two staffed
up already, those fledgling firms too far behind.
Speaker 2 (04:07):
It's good questions, Elis. You know, certainly if you want
to be a very niche, niche player, you know, I
think the opportunity set still there. But I think Europe
has already got a number, you know, probably ten of
us who have large scale platforms. You know, we have
ten offices across Europe, two hundred people focused on originating
and investing in these opportunities. And I think that scale
(04:30):
servicing two hundred plus private equity firms really creates a
massive competitive advantage, and Europe is a different market to
the US. You know, it's important to be in Germany,
it's important to be in France, Italy, explain etc. Where
we are, and I think having local nationals on the
ground really is a competitive advantage to sourcing transactions and
(04:52):
building that deal flow and in credit, the most important
thing is you've got to have a big pipeline of
opportunities so you can pick the ones that you really
want to do. And I think most people starting from scratch,
that's an awful lot of infrastructure you've got to put
in place to try to catch up with a group
of us.
Speaker 3 (05:08):
So if you were, if you were kind enough to
offer advice to appear, would you say it's too late
to join the party?
Speaker 2 (05:16):
You know, you can never say it's too late, but
you know, and you know, we've seen in the banking
industry people come in and build platforms. But what I
would say is, if you're going to do it, you
need to really have the investment capital to put boots
on the ground and have a scalable platform. I don't
think you can come into this industry today with half
(05:37):
a dozen people and say I'm going to build a
platform because I think you're competing with true scale with
the rest.
Speaker 3 (05:44):
Of us, and you touch on the dispersion in terms
of scale. Are we also starting to see dispersion in
terms of performance?
Speaker 4 (05:53):
We've been through COVID, We've been through are we're going through.
Speaker 3 (05:57):
A prolonged period of high interest rates and people's portfolios
have been tested arguably for the first time in European
direct lending kind of writ large, are you going to
see a dispersion in performance? And also attached to that,
how flight are your investors? Do they move from fund
manager to fund manager depending on performance?
Speaker 2 (06:19):
Yeah? I mean the industry has now been going for
ten plus years inside of Europe, so people have an
ability to really look back over a period of time
and look at the type of businesses, the performance of
those businesses, how the managers have managed with a fairly
volatile environment since twenty twenty with COVID and inflation and
(06:40):
price increases and all of that. So there is definitely,
you know, a reordering of in people's minds of who
are the ones the managers they want to work with.
And you know, I think there's been a number of
managers inside of Europe whose businesses haven't gone as well
as they would like over the last three or four years.
(07:01):
But I think if you look at it fundamentally as
an asset class, I think it's been incredibly robust. And
I think if you talk to LPs, even the managers
that they feel haven't done as well, the returns are
still positive, maybe not as positive as they want, but
still significant and certainly still probably better than fixed income.
(07:21):
So you know, I think we've gone through a fascinating
period of really validating an asset class. And people often
say to me, has it been tested? And you know,
if you go back, I mean, when was the last
time you had inflation at ten percent? Interest rates go
up four hundred basis points, and you know, salaries and
(07:42):
other inflationary products going through as well as a energy
crisis all hit at the same time. And you know
that happened a couple of years ago now and the
companies have got through that. So I think it's a
very different underwriting environment to what we saw in two
thousand and five six where Euphorio you know, got to
a point where we had a lot of problems in
(08:04):
eight nine.
Speaker 3 (08:05):
So for the sort of super cynics he would speak
about private credit blowing up or some you know, big
catastrophic problem with private credit. I think what you were
saying is that, Yeah, why are there to be any
catastrophic stress or whatever. It should be isolated to a
fund that has done kind of odd underwriting or kind
(08:28):
of offbeat underwriting that actually the market as a whole. Yeah,
the mainstream of the market has performed basically quite robustly
through this.
Speaker 2 (08:36):
Absolutely, you know, is going to be selective funds and
selective managers who have underperformed. It's not an asset class
issue like we saw in US mortgages in you know,
two thousand and seven in that space. And I think
if you want to just characterize why it's different, if
I put it that way. You know, if you look
at what happened in the US residential mortgage market, it
(08:58):
was an original warehouse and then hand it over to
Wall Street to distribute, so the actual underwriter didn't really
hold on to it very long. If you look at
us today, we own these assets for seven years, and
we're fully accountable and monitoring these companies on a day
to day basis. So our business is reliant on the
(09:19):
performance of those businesses as well. So you have massive
alignment between the manager and the LP because we need
to be selecting good companies for our businesses to flourish
and grow.
Speaker 4 (09:30):
Can I then perhaps ask assignment about risk management? And
then I suppose credit risk is the biggest risk that
we focus on. If you compare the risk management function
within the typical private credit company or Palmton, if you
compare it to the traditional banking model, do they are
(09:54):
they broadly similar? Are the key differences?
Speaker 2 (09:57):
It varies quite a bit between managers. We we've followed
a slightly different model to our peer group. So you know,
we have dedicated originators talking to the private equity firm,
so we get to make sure that we know everything
that they're up to on a day to day basis,
so that we have a pretty good sign side of
(10:18):
light of where the deal flow is going to come from.
We then have a large analytics team credit team inside
the firm, and you know, we have twenty two analysts
in that process. Nicole Gates, who runs that, used to
be the senior credit officer at Dressner responsible for their
alternatives area, particularly levit finance. She then actually spent nearly
(10:40):
ten years at GE running their restructuring international Restructuring unit,
so she's got tremendous depth of experience and looking at
from a credit underwriting point of view the transactions, both
primary new ones as well as dealing with some of
the old problem ones at GE and I think that
skill set inside the firm gives us a independent function,
(11:01):
so the portfolio managers work with that credit function to
really understand the companies, to analyze the cash flows, analyze
the sector position, look at the growth trajectory, look at
the business plans that they have inside of that. And
we've done it that way because I think it's very
difficult for originator to be out scouring the market for deals,
(11:22):
to be reading thousands of pages of due diligence on
a deal that they've got, and to do that ongoing origination,
and we wanted to create a partnership across the business,
the originators working with their analytics team, working with our
portfolio management team so that we could really go quite
in depth into the companies and understand what they're doing.
Speaker 4 (11:43):
But perhaps to follow up on that point, one of
the key attractions for a borrower to go with a
private credit provider as opposed to a bank is sometimes
that's the speed of the loan decision, if you go
through the banking process, can be more more of an
administrative nightmare, whereas a credit provider could perhaps act more quickly.
(12:08):
Would would you agree with that?
Speaker 3 (12:09):
Yeah?
Speaker 2 (12:09):
I think there's two key differences. I think, you know,
one is we can tailor a transaction much more to
the client's demands. So sometimes cash flow is a bit
tighter in the first year or so, we can give
them flexibility on you know, picking income in the first
twelve months. You know why they're executing the integration, etc.
(12:30):
So I think that's a much more difficult thing to
go out and explain in a syndication transaction. But if
you're doing a bilateral between us and the borrower, we
can put it into a structure that really really suits
the cash flow and the growth of the company. The
second part is, you know, we ran a huge syndication
business when I was at the bank. You know, when
(12:53):
you're underwriting deals on the concept I'm going to sell
it to sixty different institutions, Lots of people have different
views about is it sellable? Is it not sallable? As
the market rights it's not right. So banks obviously decision
making process can be quite slow at times because you've
got to get the sales desk view, you've got to
get the credits view, you've got to get other people's views,
and you've got to bring that together. That model works,
(13:14):
it's been successful for decades, but it can be time
time consuming. And I think that we have an advantage
because we have accumulated the capital, we know how much
we're willing to lend, and we can do it relatively
straightforward with the borrower.
Speaker 3 (13:31):
Simon, you are one of a collection of beautique lenders
who got in early in European dirret lending. But if
you look across the landscape of your fears, you see
quite a lot of them have actually changed hands now
and a lot of them have attached themselves to broader
kind of I guess global asset managers, and you do
have a steak minority stake from L and G. But
(13:52):
what would be the criteria or the preconditions for a sale?
Is it tempting to kind of jump on the bandwagon
and and sell the business? Do you? What are your
general thoughts about about setting sale?
Speaker 2 (14:05):
I think if I put it correctly, you know, silas
the world has been going off talking to insurance companies
and other people to partner with private credit managers, and
you know, that seems to be a theme at the
moment inside the industry. I think we made the decision
very early on when we set up the firm, we
wanted to be truly European by being in you know,
every country with our ten officers. We wanted to have
(14:28):
a significant European partner inside the business who was well
known and well regarded. So Ellen g became a partner
inside the firm. They've been a fantastic partner as we've
built the business, and you know, we wanted to be
a truly third party manager. So over ninety percent of
our capital comes from other institutions. And you know, I
(14:51):
think we've kind of front loaded I can say that way.
You know, we made all those decisions up front and
then focused on building the platform. I think a number
of our piers went out and kind of started to
build platforms and then decided they needed to go and
find a partner in that space. So we're very happy
the way we are. We think we're on a very
very strong trajectory. More recently, we've opened up the NAB
(15:13):
lending businesses, which is going very very well with the
partnership we announced with Addia coming into work with that,
We've been growing our working capital solutions business. We just
announced the partnership in December with Santander where we're setting
up a joint venture company. So we've really feeled that
across the platform. With the products we've got RSS, our
(15:34):
risk sharing SRT business, our COLO business, we have a
pretty broad based platform. We can bring together those products
into multi strap SMAs for clients. We can build large
verticals in each one of those strategies. And we have
a very supportive shareholder inside the firm who's been very
(15:54):
helpful as we've grown the business. So we think it's exciting.
Europe's going to be a great opportunity and we're out
telling people about that opportunity.
Speaker 3 (16:04):
And what do you make generally of the consolidation in
in among private credit firms Now? I mean, obviously there's
kind of high profile ones ala Blackrock buying HPS. There's
kind of more regional ones going on, you know, probably
as we speak, and yeah, what do you make of it?
Speaker 2 (16:24):
Yeah? But I think it all goes back to the
same point, you know, if I mean, HBS is a
different situation. I mean, HBS is a very successful firm.
You know, it had one hundred and forty billion of
capital in that space, and you know, it was considering
going down the IPO route, and black Rock came in
and made a very very attractive offer in that space.
(16:46):
And I think, you know, that's much more a very
very mature business, you know, like you see in the
M and A market. I think the vast majority of
deals that have been done in the market today if
I look at it, so you know, have been much
smaller man probably more around the ten billion mark or
you know, who are being acquired by insurance groups or
(17:07):
other investors as a platform for them to bring a
lot of capital in to try to grow those businesses
into much bigger businesses. And I think that trend's going
to happen because I think there is a lot of
if I can say, subscale managers in the market who
you know, it's a significant cost to build your institutional
coverage platform. And so you know, we are now you know,
(17:31):
twenty six billion. We think we'll grow to probably you know,
mid thirties over the next twelve months and in that space,
and I think once you start to get to that
size and you've got that scale and you've got the
breadth of products. What we're seeing is people saying, that's
really interesting. Can I do this with you? And can
I do that with you? In that space? If you're
a single product manager just doing you know, unitranch loans,
(17:55):
I think you need a big brother to really grow
the business to the next level. And I think that's
what's driving the M and A activity.
Speaker 1 (18:01):
And the scale numbers you're giving us some simon that's
in euros, Is it because you were talking a couple
of years ago about getting to fifty billion by I
think twenty twenty seven around there in terms of dollars
dollar amount.
Speaker 2 (18:12):
Yeah, No, that's correct, and you know, I think we're
still on track for that, James, and working hard with
our new partnerships that we've announced over the last six months.
Speaker 1 (18:21):
And that's the kind of scale you need to be standalone,
is it in this business?
Speaker 2 (18:25):
So I know, yeah, I think it's an important piece,
and I think to me, scale is less of the issue.
I think you've got to have a range of products
that people think are relevant and attractive, and I think
you have to have you know, high performance or high
quality offerings in those products. I think if you do that,
(18:46):
then scale comes, you know, naturally, because people are attracted
to come with you, and you know, I think people,
you know, if you're a big institution and you want
to allocate five hundred million, it's hard to go and
give that to a five billion manager. You know, if
you're a big institution and you want to allocate five
hundred million, it's much easier to give that to an
institution which has got fifty billion. It's got you know,
(19:08):
three hundred people, it's got the infrastructure, the institutional parts
of compliance, risk, legal and all of that around it.
So they kind of go hand in hand.
Speaker 4 (19:18):
Simon. Earlier this week, Donald Trump was inaugurated as the
forty seventh i think, president of the US. The expectation
is that the new administration is going to postpone the
bars of three end game, as it's called for US banks,
possibly indefinitely. We've already seen a reaction over here in Europe.
(19:40):
In the UK, the PRA has effectively postponed the introduction
of BARSA three point one or BARSA four, whichever UK's
call it, by another year to January twenty twenty seven.
Is there possibility that the pendulums perhaps swinging back a
little to bank deregulation, and as a result of that
(20:02):
is a possibility that banks are going to be able
to compete more effectively with pride credit.
Speaker 2 (20:07):
I think if you go back, I mean the you know,
certainly the pendulum of you know, being kinder to banks
in the United States is definitely happening under the Trump administration.
But Trump will only be here for four years, and
if you're a chief executive of bank, you've got to
make sure the pensulum doesn't swing back the other way,
you know, in four years time. So it's very difficult
(20:28):
I think to run your business model by just looking
at politics. You have to look at the long term trends.
And I think the long term trends inside of banking is,
you know, I would say, a movement out of non
investment grade and asset heavy lending into much more investment
grade and service providing and distribution and rather than being
(20:52):
large scale principles. And they'll still have large lending books,
but you know, I think it's a big shift, and
that shift isn't going to change in this process. I
think if you look at Europe and if your ECB.
ECB has been very vocal that they'd like to see
much more consolidation in the European marketplace. That seems to
(21:14):
be taking a long time, and therefore, I think regulation
will continue to be relatively tight on the European banking
system around single name, concentration, non investment grade, you know,
and these type of things. So fundamentally, in a growing
market where you know, companies need to borrow two hundred
million first time round, four hundred five hundred million, next
(21:35):
time round a billion the time round, institutions that can
bring together large pools of capital are going to be
very very relevant, very very meaningful for those So you know,
the banks, as we have with Santander, you know, can
be great partners and they've you know, there's been other
bank partnerships announced because I think they see it that
they have a big origination platform, we have a large
(21:58):
ability to scale capital together, and they can be a
very harmonious partnership in working together to serve as clients
in that space. And our job for the OLPs is
to make sure we're putting in first class risk management
around that.
Speaker 4 (22:13):
Can I perhaps follow up on that you're talking about
regulation or deregulation, whichever way you kind of look at it.
The ECB has been quite that They've completed a review
looking at private credits last year and they've highlighted the
prevalence of leverage which can be upstream, midstream, or downstream
(22:37):
in the pridate creditor industry. Do you are you concerned
or do you expect regulators to follow up with with
with introducing regulations for the proud creditor industry?
Speaker 2 (22:51):
I think, I mean we are already regulated by for example,
you know, we're most of our funds are based in Luxembourg.
The CSSF is a very very you know, I think,
thoughtful and focused regulator and in that space, and so
you know today there is already regulations and different you around.
(23:11):
You leverage into funds, it's into you know, where we
can distribute and things like that. I think the part
that most people, you know, possibly miss at times is
if we look at where significant credit losses have happened
in the banking industry, it is because of concentration issues
(23:33):
inside you know, the balance sheet, whether that is back
in the early nineties with real estate, whether that is
in two thousand and eight with US mortgages, and you know,
if you actually look at a fund like ours, we'll
have fifty or sixty LPs in there. You know, if
we do a loan for four hundred million or two
(23:54):
hundred million, you know, any LP is going to be
you know, one million to five million ex exposure inside
of that. And if you look at the underlying her
person who's given us the money, they're an insurance company
for example, or a pension fund which has tens of billions,
and so the actual exposure in a single name that
(24:15):
they have coming through us is tiny, and there's no
risk with us because the money is locked up with
us for seven years in our actually ten years in
our fun in that space. So you don't have the
capital flight risk that the banking system saw in two
thousand and eight where deposits got withdrawal and banks were
really under liquidity pressures. And you don't have the concentration
(24:39):
risk that we saw in the banking market in two
thousand and eight as well, because it's diversified through fifty
or sixty institutions. So I think when regulators actually start
to look at that, we're an incredibly powerful and positive
source of capital to come in to grow the European economy,
and that's why you've seen countries like Germany, like Italy
(25:00):
change regulation to give direct lenders like ourselves direct access
to clients. Because you know, when I started the business
ten years ago, I couldn't lend to a German company directly.
I had to ask a bank to intermediate for a
day or two and then I bought the loan off them.
Speaker 3 (25:13):
That's interesting if you regulators seem to be interested in
I guess, different forms of leverage across private markets. They're
interested in valuations on both the equity and the credit side.
And if you look at potential risks for private credits specifically,
(25:34):
I mean, what do you think is the key risk
that is still for latent?
Speaker 2 (25:42):
I don't mean, you know, so if I go back
to it, it is really if you look at the
asset management industry and some of the you know, the
blowups we've had in hedge funds or anything like that,
it's primarily being, if I can say, much more, a
mini match of liquidity or an operational misunderstanding of the
(26:04):
risks that are actually holding in their balance sheet. And
I think if you look at it today, the scrutiny
that we are all put under by our LPs on
line by line explanation of what we have in our
balance sheets. You know, the solevency two reporting that we
do to all of our insurance clients inside of Europe
and now around the world means that they have a
very very granular analysis. If you look at what we
(26:27):
have to do with our regulator independent pricing, using third
parties to value our assets to make sure that we
are being factual around what we think the underlying values
are in that space. I think the industry has come
a tremendously long way, and I think that scrutiny will
only continue to grow as we become a bigger part
(26:48):
of the asset allocation for institutions. So you know, I
think the establishment of the industry is here. The improvement
in as you say, risk reporting or pricing and all
of that will continue to grow. And I think the
regulators are, if I can say, silas encouraging us by
talking about this on an active basis that we keep
(27:11):
making those movements forward, and I think that will happen
and people, you know, our regulators across Europe will continue
to make sure that we're moving in the right direction.
And I think that's why you haven't seen anyone turn
around and say stop doing this, but they just want
to make sure it's best practices.
Speaker 1 (27:28):
What about the default rate those time? Is it increasing?
Are you seeing more payment and kind more amendments that
kind of.
Speaker 2 (27:33):
Thing you certainly you certainly saw, you know, kind of
coming out of COVID and then getting hit by this
massive inflation hit and all of that. Companies having certain
challenges at times on cash flow. I mean, many companies
couldn't pass on the input pricing inflation as quickly as
they needed to, and so therefore Ibadah came down quite
(27:55):
sharply and then has recovered back up in that process.
But I think if you look at where we are
in the cycle, you know, you're now a couple of
years into this process, the companies have held up most
of the input pricing has moved through to the consumer
of the goods in that space. So default rates, I
think most people would say, is much lower than people expected.
(28:20):
And I think the you know, in cases where you
recoveries will be done, they're much much higher than people
have expected. So but it doesn't you know, you will
have people who have you know, portfolios that don't perform
that way. So it's a bell curve, but I think
fundamentally it's come out of it.
Speaker 3 (28:40):
Much better internally institutionally, do you do you look at
default rates? I mean, do you think there are good
spell weather for overall risk in the market, Because it
feels as if the one of the strengths of private
credit is that it can avoid defaults, and so actually
the default rate may be less relevant to understanding I
(29:01):
can know the gyrations of the of the market.
Speaker 2 (29:05):
If I think one of the great strengths of private
credit is the fundamental alignment between the borrower, the lender
and the LP has funded it. And you know, I
think if you start off default rates, you know, it's
a statistical analysis, but it doesn't tell you who to
lend to and who not to lend to. It just
tells you, you know, the trends that are going on
(29:26):
in the industry. Fundamentally, you have to be very, very
focused on the industry sector. You've got to look at
the company's position in that industry sector and the viability
of their business model in that sector. So you know,
if I go back to the early two thousands, everyone
gave you leverage to autoparts, manufacturers today with Tesla and
(29:47):
you know by d you wouldn't even consider thinking about
it in that space because technology has completely changed that sector.
So you know, for me, what keeps us awake at
night is, you know, product redundancy and the life cycle
of products. You know, you all may remember we used
to have a thing called a walkman. You know, today
(30:08):
it's your iPhone. You would you know, my children probably
don't even know what a walkman is in that space.
And I think that change is incredibly fast today. And
you've got to go into industries and go into sectors
where you can reliably predict the next seven, eight, ten years.
And that's why if you look at private equity in today,
(30:29):
it's you know, outsourced business services. You know, I have
firewalls in my business today, it's done by third parties.
I have thirty different programs managing into my company and
that's done by three different providers in that space. Am
I ever going to turn that business off?
Speaker 3 (30:45):
No.
Speaker 2 (30:46):
As a percentage of my cost for running the firm,
it's tiny, and so it's an incredibly stable revenue stream
for the provider. You know, my big cost is labor
people in that space. So if you're a private equity
firm buying a whole series of these companies and rolling
them up to which will end up looking like some
(31:07):
of the big data providers in the United States in
five or ten years time. And these are fascinating industries
with great growth potential and longevity because cloud computing has
completely changed how we store data and what we're going
to do. So you know, to me, as I said,
(31:28):
life cycle of the product, and you know, and is
it going to be there in ten years time or
my inter sector which is going to be completely become
a dinosaur because of technology change, you know, medical genealogy
changes and other things like that. That's really where we're heavily,
heavily focused, and that's where the capital goes.
Speaker 1 (31:48):
Watch out for those dinosaurs making a comeback though time.
And I'm still listening to my vinyl records. So that's
another conversation. But I wanted to go back to what
you said earlier about the relative advantages in the US, sorry,
in Europe against the US. I'm interested in that concept
of relative value between the regions because we are so
loaded up. You know, I'm sitting in New York and
it's all just everybody wants US assets the dollar and
(32:11):
they've been paid for it. They've done really really well
by just sitting here and doing that over and over again.
But when you talk to someone that's outside of Europe
about the opportunity, you mentioned better fees, better margins, upfront
fees as well, I assume better covenants. Well, can you
put that into some kind of context, maybe give us
some numbers around that.
Speaker 2 (32:28):
Yeah, And so you know, if you look at Europe today,
upfront fees for underwriting transactions sit in the two and
a half to you know, maybe three percent type region,
where if you look at the United States they're probably
half that in that space. If you look at margins,
you know in there there's you know, twenty five to
(32:50):
fifty basis points I think still premium. And if you
swap euro assets back into US dollars, you're getting, you know,
a significant pick up just because of the interest rate differential,
which has varied between one hundred and fifty and two
hundred basis points depending on markets. And so you know,
(33:11):
if you put that whole package together in that space,
you know, wider spreads, greater upfront fees, the yal curve differential.
Swapping back into dollars. You know, you can be picking
up one hundred and fifty two hundred basis points more
sitting in Europe than you are in the United States.
And you know, we've seen some of the most significant
(33:31):
bell Weather institutions very focused on Europe over the last
twelve months because I think they feel that they are
heavily exposed to the direct lending market inside of the
United States and they want diversification. You know, I met
today with one of the largest asset managers and I
thought they encapsulated it very, very well. They said, you know,
(33:52):
everyone looks at Europe through the eyes of equity, and
US equities are exciting and europe p in equities are terrible.
But if you look at credit, credit actually looks really attractive.
Speaker 1 (34:03):
And within that are there sectors that are a focus
right now for non European investments coming in.
Speaker 2 (34:09):
Yeah. And as I touch on through this, it is
in the new economy. Yeah, I think Europe today is
a two speed economy. You have its old industrial base.
You know, if you look at the industrial base of Germany,
the manufacturers, the car manufacturers and people like that, where
they're really struggling under Chinese and other markets, pressures of
imports coming into Europe, and then you have this new
(34:32):
sector heavily related to technology, heavy rated to healthcare and
services where you know, there is a very large population
that needs servicing with you a very unconsolidated suppliers of
those services, where private equity is coming in and rolling
(34:53):
those companies up and doing it. And it's all parts
of the healthcare sector, all parts of the service sector
in that space. And you know, and still some growth
areas in industrials, but I think in the US you
see a lot of core industrials, hospitality, you know, retail
driven activity. You won't see much of that in most
(35:16):
of the European portfolios. I think they're very much in
the new economy and not in the old economy.
Speaker 4 (35:22):
Simon, could I come back to something you mentioned earlier,
your partnership with the Santander and throughout the private credit industry,
there are a little for those partnerships that have been
announced between banks on the one side and private private
credits firms on the other side. In those instances, who
actually owns the customer relationship if I can call it that,
(35:42):
And how do you approach dividing up the economics of
a partnership.
Speaker 2 (35:49):
Yeah, and I think that's been if I can say,
some of the stumbling blocks to the partnerships, because you know,
the traditional way that it used to get done is
you know, you bring the all the deals and you know,
I'll give you your customers some money and all of that.
You know, we recognized when we went into this deal
with Santander in a very specific area, it needed to
(36:10):
be a real partnership, and so we set up a
company together and we're both are shareholders in that company
that we are working together to serve as that client.
Santander has a huge product range and so it's got
lots of other products they're servicing those particular clients, but
we're a specialist provider in their portfolio in a specific area.
(36:30):
And because we're both partners and shareholders inside the company,
we're working together in that process. And I think that
if I says, you know, dilutes or isn't my customer
or your customer, it's our customer and we're trying to
deliver the best service because we're actually partners in a business.
Speaker 3 (36:45):
Fair enough, You've had a remarkable career, Simon in that
you've been adjacent to Nick Lison in bearings. You've been
in RBS in America, you've been in private credit, You've
seen all of these kind of announcements. Didn't just name
a few, and there's others, but you know, you've been
(37:07):
I guess at the epicenter of a series of quite
significant moments in financial I guess, like modern history, what's
been the most chaotic? Is the most chaotic period still
to come?
Speaker 2 (37:19):
Yeah, well I can answer that one, you know, quite quickly,
so you know, touch you on your point. You know,
I was in the US in nineteen ninety when we
went through the crisis, and you know, City Group nearly
went bankrupt and a number of other US banks. That
was a huge crisis. But you know, I think if
we look back, two thousand and eight was by far,
you know, it was something that none of us had
(37:39):
seen since the Great Depression, and I think still today.
You know, if you talk to the people who were
at the epicenter of that, the world came incredibly close
to a major meltdown of the financial services industry. You know,
if you look at banks in Holland and Switzerland, UK, Ireland,
US and all that, the entire global banking system apart
from probably you know, China and Japan, and you know,
(38:03):
Australia and Canada had to be bailed out in some
format in the major banking site. But I think, you know,
that was you know, kind of set up in my
mind in two ways. You know, I think if you
look at the kind of equity market expectation of banks
in the late nineties going into early two thousands, if
you're a chief executive that wasn't making a twenty percent
(38:25):
return on your equity, then you know, people felt you
weren't really performing at the highest level. And the only
way a bank can get to twenty percent return on
equity is you've got to give your balance sheet up
substantially in that space. And then unfortunately, we got hit
by you know, a very very major asset class. Where
(38:47):
as I said at the beginning of this podcast, the
underwriter of the risk just passed it on to someone
else and just moved. You know, they weren't around for
all of the problems that came out of that, and
that got distributed to everyone in the world. You know,
we had a very large book at RBS, probably you know,
sixty to seventy billion, and you know, most other banks
had pretty similar numbers Barclays, et cetera. And that was
(39:10):
a painful experience. I think the great thing today is
the lesson has been pretty much learned. I would say
in every asset class, if you're going to underwrite that risk,
you need to own it and your business needs to
rely on it performing, you know. And so if you're
looking at the banking industry, they're focused now on distribution
of primarily investment grade risk, and so the risk of
(39:32):
that underperforming is much much lower. You know. The people
who are taking over a larger and larger part of
the non investment grade risk are ourselves who are acting
as principles in that business, and we're managing that on
behalf of our clients in that space. And I feel
that's kind of the old banking world if we go
back to the seventies and eighties, Yeah, I give you
(39:52):
fifty million. You know, you and I are now partners
in that space, and that's what we're doing every day
across Europe with these business and working with their management
teams as they grow those firms.
Speaker 1 (40:03):
I think, to follow on from Silus question, I think
what he's kind of getting at is, you know, you've
you've really seen inside some really turbulent times in our
financial history, and you know, you've seen what can happen,
particularly at times when everyone is most excited and most
positive and most bullish. And you know, the golden age
seems to go on forever when you when you're in it,
and then suddenly it suddenly it's over. Do you think
(40:24):
that we are getting complacent about credit and that you know,
people are just too positive and you know that it
will end up in a reckoning at some point soon.
Speaker 2 (40:34):
I think everyone uses a parallel to US mortgages, you know,
and if you go and lend billions and billions and
billions to people who actually can't afford to repay the
mortgage and then you know you end up with a
car crash. Will you have underperforming sectors? Of course? You know,
we saw the oil and gas sector in the US,
We looked at shale in the US, We looked at
(40:54):
different things and those are very much, in my mind,
sectorially driven and demand driven. And in a credit world,
you're going to have strong sectors and you're going to
have weak sectors. And you know it's the manager's decision
and whether they want to go for outsize return in
the weak sector or whether they want to focus on
(41:16):
the strongest sectors and be benchmark returns for what they're doing.
And there will be managers who specialize on the weak
sectors because they want to be much more closer to
a kind of equity investor in those areas. And then
there's managers like ourselves who are looking to be large
scale fundamental providers of capital in the core sectors and
the growth sectors in the market. And so I say
(41:39):
to every LP, you know, you've got to be focused
on where your manager is putting the capital, both in
the capital structure but also sectorially to understand the risk
profile of the manager. And if you do that, then
you'll work out, you know, do I want to go
for high octane returns or I want to go for
core returns. And you know, we have a range of
(41:59):
fun and our firm, you know where we go all
the way down to know mezzanine inequity, and that's doing
mid teens returns, but we're very clear around you know,
the type of risk we're taking. And then we have
a variety of funds which are just core generating European
yield to probably eight to ten percent net us returns
of ten to twelve percent net and that is just
(42:25):
core income. And you'll all come back to me and say,
you know, how do you manage that risk? And you know,
it's trying to make sure we're in highly resilient industries
and sectors of the market in that space.
Speaker 1 (42:38):
Great stuff, Simon Drake Bruckman from Pemington. It's been a
pleasure having you on the Credit Edge money.
Speaker 2 (42:42):
Thanks, thanks so much, Thanks gentlemen, and.
Speaker 1 (42:44):
Of course I'm very grateful to Ruin Unitus from Bloomberg Intelligence.
Thank you for joining us today. Thank you, James and
Silas Brown with Bloomberg News. Great to see you, Thanks
so much, James. Check out all of Silence's great scoops
on Bloomberg dot com and the Bloomberg Terminal for more
credit market analysis and insight. Follow your ulysses work on
the Bloomberg Terminal. Bloomberg Intelligence is part of our research department,
with five hundred analysts and strategists working across all markets.
(43:08):
Coverage includes over two thousand equities and credits and outlooks
on more than ninety industries and one hundred market indices,
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
bpod Go. Give us a review, tell your friends, or
email me directly at Jcrombie eight at Bloomberg dot net.
(43:32):
I'm James Crombie. It's been a pleasure having you join
us again next week on the Credit Edge.
Host
James Crombie
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!