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LP view: Why TransGlobe is keen on mezzanine

Franck Lee, senior supervisor at the Taiwanese insurer discusses his firm’s approach to the US private credit market and why mezzanine is its favoured strategy.

TransGlobe Life was established in 1994 as a mid-sized insurance company providing professional life insurance services and products to local customers in Taiwan. As of the end of 2015, TGL had more than NT$834 billion (€23.6 billion; $26.6 billion) in total assets and NT$76.2 billion in total premium income. It also reported more than NT$5.4 billion in overall profits and EPS of NT$8.54 with a risk-based capital ratio of over 300 percent.

Private Debt Investor sought the views of senior supervisor, Franck Lee, on current opportunities in the US and elsewhere.

What do you think about the US private credit market?
FL: There are certainly a lot of opportunities in the US credit space. We are particularly interested in mezzanine funds because we see that a lot of US banks are backing off in the lending space.

What is Transglobe’s exposure to the global private credit market?
FL: By regulation, we are only allowed to allocate two percent of our AUM to alternative investment, and we put 40 to 50 percent of that into the private credit space. We currently have 50 percent in Europe (four exposures), 30-40 percent in the US and 10 percent in Asia for private credit.

How would you compare the private credit market in US and Europe?
FL: In Europe, there are lots of funds in the direct lending space. In recent years, a lot of direct lending funds have been set up and we see that this has become a very attractive strategy in the region because European banks don’t have the capacity to lend to the mid-market.

In the US, direct lending opportunities are definitely growing. Traditionally, there is a structural difference between the US and Europe. In the US, there are lots of business development companies and we could not invest in such BDC structures. But that has started to change because a lot of BDC firms’ market prices are too low and they are no longer able to provide capital in the market. That has created opportunities for mezzanine funds to come out and start fundraising. And for non-US investors, there isn’t any tax implication to investing in mezzanine funds.

What kind of direct lending strategy do you prefer in the US?
FL: We prefer the mezzanine strategy. Unlike investing in Europe, most non-US investors are subjected to Effective Connective Income (ECI), a tax that takes up to 30 percent of your capital gain for direct lending funds with a senior secured strategy. But for mezzanine, because they have an equity component and therefore are not subjected to this, the return is much better.

Does Brexit have an impact on your private credit investments globally?
FL: Yes. Because of Brexit, we have slowed down our investment pace in Europe. We are still studying whether we should allocate our resources to the US or maybe Asia, but it will not necessarily benefit the US. In the current situation, we might actually see more opportunities in other debt strategies in Europe, such as the European NPL market.