A Spanish national, Cristobal Cuart arrived in London just under 20 years ago to work in banking before eventually moving into fund management with Apollo. Marc Ciancimino had also carved out a banking career at the likes of Citibank and Bankers Trust before the two men came together in 2008 to launch a new European credit business at KKR.
It was little more, says Cuart, than a great brand name and a blank sheet of paper – but, 10 years later, KKR was able to boast a long-established mid-market European credit business.
Then they decided to start from scratch all over again with the launch of London-based All Seas Capital. “Marc and I really wanted to start something ourselves and wanted to serve a part of the European market that neither direct lending firms or other capital providers were really focused on,” reflects Cuart. That ‘something’ was a fund manager that would ignore the heavily populated sponsor-backed direct lending space and focus instead on providing flexible capital for entrepreneurs and family-owned businesses to grow, often through M&A strategies.
“We could see there were 40,000 companies in Europe that were privately held,” says Ciancimino. “A very small proportion of them were looking for change of control but many owners were thinking, ’I want capital, I want to accelerate my plans, I know I could get some expertise if I had an institutional investor, but I don’t necessarily want to sell a majority of the business yet.’”
The two men were confident that they could help not just with the kind of capital solutions these businesses wanted, but also – based on their large-cap private equity experience – bring a hands-on approach to drive growth and good corporate governance.
Ciancimino says the idea is to bring about real change rather than be a passive investor. “We don’t back companies so they just bumble along sideways, we want to be a catalyst for a step change in the earnings of the business during our investment period and that will help drive a subsequent exit or liquidity event.”
All Seas generally invests around €20 million to €75 million (possibly more alongside partners) in businesses with EBITDA of between €5 million and €20 million at the point the investment is made. The firm is sector-agnostic but devotes a lot of time to business services, healthcare and financial services as well as parts of the consumer sector.
Once invested, the governance of the business – which may have been in entrepreneurial or family hands for decades – is a major priority. Ciancimino says All Seas bases its approach on the types of things that will come under the microscope during the next liquidity event – including having a proper board, the right type of chief financial officer, excellent reporting to investors and a compelling ESG strategy.
Another weakness that All Seas identifies relates to organisation inefficiency. Says Cuart: “In most situations in which we invest, whether it’s a family or entrepreneur-led business, you see very high-quality talent throughout the organisation but not a proper organisation of that talent. You have in many cases 20 to 25 people reporting to the chief executive officer, which is very hard to manage.”
Ciancimino says entrepreneurs and families have a tendency to concentrate on the day to day running of the business rather than forming a long-term plan – which is where the firm’s active management (and equity participation) comes in. “We try and bring that type of PE discipline to the approach but investing on a credit-oriented basis,” he says. “The capital we provide is structured as credit but with material equity participation in the deals.”
Cuart says the firm always conducts its own due diligence, contrary to direct lenders, which may rely on whatever is handed to them by sponsors. “Direct lending in general is very passive, it receives monthly accounts from the sponsor and as long as there’s no covenant issue they sit passively and go along for the ride,” he says.
As well as focusing on the business, its financials and the market context, All Seas’ due diligence places emphasis on the management team: what’s their background? How have they dealt with difficult situations? What do former employees say about them?
“We obviously want to be invested in a situation where we like the tailwinds in the industry and we think the business model makes sense but all of that doesn’t count for anything unless you’ve got the right people who can make it a success,” says Ciancimino.
All Seas’ approach to financing
Cristobal Cuart explains that All Seas generally provides a credit-like instrument that is either senior or second lien in the structure, probably sitting behind a layer of bank debt, together with a slice of equity that can be anywhere between 10 and 40 percent depending on how deep in the structure the credit instrument sits.
He says this allows the firm to concentrate on both downside protection and upside incentive driven by the growth of the company through such things as M&A strategies and geographic and/or product expansion.
“We think about our credit return as capped but providing something a little bit higher returning than the typical direct lending fund from a credit aspect but then really focused on the upside through our warrants or equity attached to the credit instrument,” says Cuart.