Bridgepoint: Private debt emerging stronger from the pandemic

The last 12 months has demonstrated the resilience of private debt as an asset class, say Bridgepoint Credit’s Andrew Konopelski and Hamish Grant, who see busy times ahead for their expanded platform.

This article is sponsored by Bridgepoint Credit

How has the past year been for Bridgepoint Credit as a business, and what did you learn?

Andrew Konopelski

Andrew Konopelski: It has been an exciting, but intense period for Bridgepoint Credit. We started last year by announcing a process to sell the EQT Credit business. We agreed the move to Bridgepoint in June, having transacted through the depths of the covid crisis, and fully came together as a combined business in October 2020. It was an interesting time to integrate, while working largely remotely. Shortly after we combined, we launched two fundraises as well as our first CLO, all of which have received strong support from new and existing investors. It has all led to quite a lot of reflection. We certainly learned a lot about ourselves, our LPs, and the market.

We have been blessed with very strong portfolio performance, which has allowed us to focus on developing the team and the platform and continuing to lend to sponsors throughout the covid period. Returns also remained strong across both Direct Lending and Credit Opportunities despite the volatility.

Our pace of investment has been stronger than ever, partly as a result of the continued growth in the underlying market and partly because of acceleration in our platform. We’ve invested over €4 billion in the last 12 months, reflecting the strength of our relationships and the continued development of our team. We recently opened in Amsterdam to drive local sourcing in Benelux, and we’ve added 17 new people in the last year, taking us to 50 investment professionals in six offices.

Hamish Grant: We also completed an IPO of the firm, which was an early test of how cohesive and integrated the team is. That has proven to be a bonding experience, with everyone enfranchised and coming together as members of the new Bridgepoint Credit. We’ve found the two cultures combined really well: people in this business are serious about work but want to do that in a kind and humane way, with humour, with collaboration, with no sharp elbows, no politics and no egos.

What factors differentiated the winners and losers through the pandemic?

AK: We have always talked about the need to do extensive due diligence to really understand the risks we’re taking. More important is consistency of approach through all market environments. Style drift remains a big concern for LPs. By the time you see the downturn coming it is too late, so you really have to be preparing for something that might never happen. The consistency of our approach held us in good stead, as evidenced by the attractive returns and low loss rates.

We also saw the importance of being local, because that had a big impact on business models and the ability to source deals when travel has been limited. There is clearly a strategic advantage to having a broad network and using it effectively.

Transparency was key. We learned going through the sale process that we needed to over-communicate with LPs, because they want to see that good, open dialogue. They wanted to know how we were doing as a team as well as how their portfolios were performing – what became clear during covid was it’s okay to have issues, but it’s not okay to hide them. That’s what breaks the bond of trust.

The last observation is really that team stability is critical and is a growing focus for investors. It’s important to have a team that has worked well together and has the ability to both support but also challenge one another. It’s especially important in more challenging times.

Hamish Grant

HG: I was on the other side of direct lending in my previous role and saw how the market approaches due diligence processes. There are many managers out there who are AUM gatherers, treating financing as a process and ticking boxes. They are just reviewing the due diligence provided by sponsors. Our model is completely different. We supplement what we are given with our own diligence, using the full breadth of the Bridgepoint network, including our industry advisers, who are business leaders and experts in their sectors, as well as doing a lot of desk research.

AK: At the end of this year, when people have run out of good covid excuses, some managers may need to start taking marks against investments that have been heavily EBITDA-adjusted to now. There will be less room to hide, and that comes back to honest communication with investors. LPs have always wanted more information, but this time they really wanted more of an honest dialogue. They were doing their own due diligence on an ongoing basis and they had risk committees standing behind them.

Ultimately, open dialogue builds stronger relationships, and as a manager you have to run a business and invest in a portfolio that you can be proud of. You have to stand behind it and invest it in your own image. That’s what LPs are looking for: people that they trust to deliver attractive returns in the right way.

How has the private debt asset class matured and evolved over the past year?

HG: The asset class is still young, having only really emerged in the wake of the global financial crisis. For the first decade, we focused on the relative market position of private debt versus banks, with funds taking market share and convincing sponsors to accept direct lending. Come covid, the risk was that LPs would run away as GPs started struggling.

We welcomed that test. There certainly will be some consolidation, because when the tide goes out there will no place to hide and you will more easily see who has well-constructed portfolios that aren’t overly exposed to cyclical industries. The pandemic demonstrated the resilience of the asset class and further weakened the position of the banks, who we expect will retrench further to make direct lending the dominant sourcing of lending to the European mid-market.

AK: The market has increased in stature because of its ability to provide creative capital in difficult times, which creates stronger relationships. We are seeing more sponsors looking at this and more LPs talking about increasing allocations.

In Credit Opportunities, a bit of volatility proves the thesis. Managers need to be able to invest across the capital structure and there are attractive investments to be made when the market is under stress.

What advantages do you have as a multi-credit manager?

AK: From our experience, being a multi-product credit platform has become increasingly important in order to be relevant. The best way to be relevant – to the sponsors, the entrepreneurs, the companies we’re dealing with, as well as to our investors – is to be able to provide the creative financing solutions they need across the capital structure in both good times and bad. You need a set of funds and a talented team to deliver against that. It’s a huge competitive advantage because, regardless of the situation, you have the knowledge, skillset and cost of capital to address a particular requirement. You can listen to what’s needed and come up with a solution. Increasingly, sponsors want to deal with fewer lenders and to work with trusted partners.

Secondly, on the sourcing side, the objective of this industry is to see as many deals as possible, so you can be competitive and build a robust portfolio by having a set of credit products that access a flow of deals, along with local teams driving access.

Third is a knowledge advantage gained by having multiple skillsets and backgrounds in a single platform, which we can leverage for the benefit of both borrowers and our investors. It helps us find more creative solutions, more seamlessly deal with any issues and also avoid investment mistakes.

HG: This has been the single biggest surprise to me. A few years ago, if we had discussed the future of our credit business before the acquisition of EQT Credit, I would have said we wanted to build a credit opportunities fund with flexibility to do both primary and secondary opportunities, but I would have envisaged distinct teams with limited interaction. In fact, the way our business now works is by pooling our people in the early stages of their careers, and then later on having them specialise and focus their career according to their preference and skillset, but building a very collegiate team that is used to sharing information, listening to each other’s opinions and collaborating as a team. That means sharing networks and insights, knowing who to contact and what to ask, and bringing skills together for the benefit of everyone. The total is definitely greater than the sum of the parts.

What key trends do you see for the industry over the next five years?

HG: There will be further consolidation, with private debt taking further market share from banks and some changes in the list of leading managers as certain portfolios take a hit.

ESG is probably the single biggest change for the asset class and the global dialogue in the last two years and for many of our investors it is now the most important topic. We have tried to take a leadership position, developing a framework for analysis early on for considering portfolio companies, moving away from a blacklist to a much more thoughtful approach to how companies can engage on the E, S and G. That’s been important for how we construct our portfolio and meant we declined to invest in quite a number of companies.

This is a place where we keep moving and a year ago we started to introduce ESG-linked margin ratchets on loan agreements, which we are now trying to do on every deal to deliver a clear signal that we are focused on it and we want to align with management teams that are too. Most importantly, that gives us a right to engage with the management team and the sponsor on the topic, rather than being kept at arm’s length. We want to extend that and we are working with an environmental consulting firm to ask more questions about our portfolios and to generate more granular analysis for our investors.

ESG is at the heart of financial risk, market risk and business risk, so you have to be thinking about these topics to be making good investment decisions.

AK: To build a strong team, we are finding that people want to invest in things they believe in and in portfolios they are proud of. The younger members of our team view that as central. If you’re not prioritising ESG and responsible investing, you’re not going to retain your best talent and we are always in a war for talent.

Andrew Konopelski is managing partner and Hamish Grant is deputy managing partner at Bridgepoint Credit