Ari Jauho, Partner, Certior Capital
Cécile Mayer-Lévi, Head of private debt, Tikehau Capital
Jaime Prieto, Managing partner, Kartesia
Paul Shea, Managing partner, Beechbrook Capital
What would you say is the biggest priority for LPs today?
Ari Jauho: LPs should pay more attention to downside protection when making new investments.
Cécile Mayer-Lévi: Allocate to GPs that are able to deploy efficiently in a diversified manner, and stay disciplined so you are not under pressure to invest. Focus on an asset manager who is immersed in the real economy, who knows the companies and their management team and is able to cope with a potential downturn and underperforming companies.
Jaime Prieto: Finding managers that avoid the crowded sponsored mid-market segment, and that can generate consistent returns.
Paul Shea: Maintaining discipline on credit quality, leverage, terms and knowing that the manager has workout experience.
Describe a type of deal you would steer clear of?
AJ: Project-based deals in highly cyclical industries, such as the construction business.
CM-L: Very high value from an equity perspective implying a very high leverage – above 6x net debt to EBITDA – in a cyclical industry with a buy-in management team.
JP: Deals with binary outcomes. These could arise due to technological shifts, sudden changes in customer preferences and little or no recovery value in distress. Apparel retail combines all of this: it’s great when things go well, but awful when they go bad.
PS: Businesses with no incentive, where management has no skin in the game, or if the business is loss-making or in a dying industry.
Where is the best place in Europe for private debt, and why?
AJ: In general, we favour underdeveloped European markets where there is a favourable supply/demand balance of private debt. At the moment these markets could be Benelux, Ireland, and central and eastern Europe. The problem with these markets is that there are not too many managers to invest in.
CM-L: Continental Europe, and more precisely France, where we have been a longstanding private debt player. Italy, Spain, Benelux and France – where we have offices – but also Germany and Scandinavia are among the most attractive markets. The best situations are those of existing portfolio relationships.
JP: Sponsorless deals in the low-mid market segment offer the best risk-adjusted returns (3-6pp for the same risk). The reason being that it is the most underserved segment, and you are rewarded for your origination and structuring skills.
PS: North-Western Europe. There is economic activity, clear creditor laws and a stable financial ecosystem.
Does private debt’s future lie in Europe or Asia?
AJ: We believe in Europe, because in private debt you will need a solid legal framework that is not necessarily in place in Asia. Also hedging costs to the euro dilute the attractiveness of Asian investments from European investors’ point of view.
PS: Europe because banks continue to retrench and there is better rule of law and supportive regulation.
Tell us when the cycle turns – precise date and time please!
AJ: I think that the cycle turned already, late last year – let us say 27 December 2018. There are many indicators that show that the cycle did peak late last year: things such as the current trading of companies and raw-material price developments.
JP: We are at an inflection point already. The tailwinds are gone, and we still have strong headwinds that make it hard to see when we will regain a solid positive momentum.
PS: It has already turned. Cyclical businesses are pulling back, there are signs of backlogs decreasing and equity return expectations are lower.
The ‘B’ word: What does Brexit mean to you?
AJ: Increased uncertainty with rising hedging costs of pounds to euros. On the other hand, there has been a positive development in terms of underwriting the returns of new deals. We pay a lot of attention to the sectors and avoid UK industrial companies that are dependent on exports.
CM-L: As the British market is contracting, there will be more competition in continental Europe from players who were previously very active in the UK. In general, Brexit is a very grey area and will be a black day for European countries and for the young generation looking for freedom and mixing cultures.
JP: No one is safe from populism, not even the once-pragmatic British.
PS: The downsides are increasing defaults, economic slowdown and the risk for cyclical sectors. The upsides are the new opportunities, given the retrenching banking sector and opportunities in the secondary market as ‘weak’ funds with limited or no restructuring experience fail. The surviving funds will come out stronger.