Warren Buffett’s assertion that “only when the tide goes out do you discover
who has been swimming naked” remains a useful image in the credit market. We should therefore treat the Sage of Omaha’s folksy saying with due seriousness by looking at who is wearing ‘PANTS’. In our market, this could stand for: people, alternatives, networks, trust and sustainability. The asset managers that are wearing this essential hosiery are most likely to retain investors’ support as we go through the inevitable market shift.
People: Who has been through a crisis?
More than 150 direct lending firms have been founded since 2010. None have been through significant market change. Some mid-market firms, however, have incorporated people with strong distressed workout experience in the initial negotiation of deals. This helps makes a ‘people’ and an ‘asset’ case to investors.
Alternatives: The ability to change tack
In 2008, some mezzanine managers switched to recovery strategies and senior lending. ‘Sponsorless’ lenders working with management-owned firms may be well-placed if the M&A market takes a hiatus. Negotiating restructurings or providing debtor-in-possession finance may be capabilities that come to the fore.
Networks: Who you really know
Asset managers with the biggest and deepest bank, sponsor and advisor networks will be best placed to continue to find assets and negotiate. These will not necessarily be the biggest players. Some local firms have deep networks in specific geographies or are in touch with the right players in key industry sectors.
Trust: A data advantage?
Asset managers that can prove they have the earliest and most complete information will retain investor trust. Investors are given a large amount of data transparency when working with SME tech platforms. This ability to ‘show and tell’ could become an advantage for the ‘2.0’ sector as the cycle progresses.
Sustainability: In it to win it
Few alternative lenders have significant leverage at the firm level. They should therefore be better partners in a credit crisis to SMEs and investors than the banks and structured funds were last time. When the tide goes out, they will need to demonstrate that they are not exposed.
James Newsome is managing partner of alternative credit advisory firm Arbour Partners