Prepared for a rocky period, and also for opportunity

Everyone has their own story of how supply chain issues are making it difficult to obtain certain goods. Paul Burdell, co-founder and chief executive officer of London-based fund manager LCM Partners and a fan of Asian food, is vexed by the difficulty of obtaining sriracha, the hot chilli sauce, due to problems sourcing the right kind of plastic bottles. What it means, for sriracha manufacturers, is that goods can’t be sold in sufficient quantities and revenues will fall as a consequence. It’s the same story for countless other businesses and industries.

Burdell reflects on how it felt like a major economic event was round the corner pre-covid “because everything was overvalued. There wasn’t a recession on the horizon and then along came the pandemic, which wasn’t in anybody’s playbook”. Rather than the short sharp shock that characterised the 2020/21 period, Burdell now foresees a period of prolonged economic malaise that he describes as a “slow burn”.

“There’s lots of cash in the economy that governments pumped in, but it’s going to be eaten up by inflation,” says Burdell. The only tool left in the toolkit, apart from targeted subsidies such as those to help mitigate high energy prices, is pushing up interest rates. “You have to try and stabilise prices, and they’re a long way off stabilising at the moment,” he says. “In terms of the economy, I’m not feeling very confident.”

But while such concerns about the economic future persist, Burdell is able to reflect on strong performance within LCM’s Credit Opportunities Strategy (COPS). The fourth iteration of the strategy is looking likely to close on just shy of €4.2 billion – versus a €4 billion target – with the commingled fund generating an unleveraged net internal rate of return pre-carry in excess of 20 percent at the end of the second quarter.

Focusing on consumer and SME debt, Burdell thinks the rocky period ahead will offer the fund plenty of opportunities. But the challenge for the time being is not to jump in too quickly. “There’s a great old saying that the road is strewn with dead heroes and you’re not likely to be rewarded for going out and deploying capital at the very beginning of what we consider to be a turbulent period. We’re retaining our discipline, we have lots of dry powder and, in our view, there won’t be a quick fix. The opportunity set should favour us for years to come.”

Burdell says the firm’s direct lending strategy, known as SOLO, has also fared well during covid, helped by its asset-backed nature. “What we’ve targeted with SOLO is high-quality borrowers in niche areas,” says Burdell. What he didn’t envisage – but which came to pass nonetheless – was that the strategy could be adapted to having an ESG focus.

New ESG vehicle

The upshot is that LCM is in the process of creating an Article 8 product under the EU Sustainable Finance Disclosure Regulation. “We’ve been working with LPs to develop a robust ESG framework for SOLO. The challenge for the industry is that much of the ESG-related regulation is new and evolving, and ESG means different things to different investors. As a result, we’ve been collaborating with our limited partners to establish a framework that we’re all happy with from the outset, and that we believe will be fit-for-purpose for close-ended vehicles.” SOLO’s Article 8 strategy is expected to target capital commitments of up to €3 billion overall.

Creating partnerships has been very much on Burdell’s mind. In March 2018, global alternative asset manager Brookfield acquired a 25 percent strategic interest in LCM, and last September exercised an option to increase that stake to almost 50 percent. Since then, the two firms have been cooperating closely. For example, SOLO was able to provide financing for some Brookfield portfolio companies’ customers at their point of sale. Burdell speaks of continuing to “join the dots” where there is mutual benefit, including with Oaktree Capital Management, in which Brookfield acquired a stake of more than 61 percent in September 2019.

“We are focused on being a good partner to Brookfield and Oaktree and to leverage the strength of our franchise,” says Burdell. “Because of the breadth and depth of strategies we have, it would be very rare for an opportunity to arise that one of us can’t benefit from.

“We don’t do large scale real estate so, if we saw something, we would be passing it over to one of our partners. Recently, we were doing business with a large industrial company in Germany and we made an introduction which could turn out to be very useful. The key thing is making sure there’s that understanding of what everyone does well in order to ensure that we maximise our synergies.”

LCM has built a substantial infrastructure over its 23 years’ existence. It now boasts 14 offices in Europe and around 1,100 employees. The firm has its own proprietary operating system managing close to 3,000 debt portfolios and nearly €60 billion of loan value on behalf of over 5.1 million customers. Target investments are granular across both the COPS and SOLO strategies and cover unsecured and secured consumer and SME loans including credit cards, mortgages, personal and commercial loans, retail credit, auto loans, leasing and asset finance, utility bills and student loans.

Burdell says that LCM is benefiting from banks stepping back from the market. “In the environment we find ourselves in today, banks are considering withdrawing from certain specialist areas. They’re not getting the scale they want and are concerned about the margins they need to make based on the running costs of their platforms. We can offer two solutions; we can manage the run-off of the existing loans via COPS or, if they want to maintain the client relationships, we can provide the capital and servicing for the product on a white-labelled basis via SOLO.”

Re-ups and references

As mentioned, the firm is close to closing above target on its latest strategy, Credit Opportunities 4. Burdell concedes that fundraising has had its challenges – including the period during covid when pensions on both sides of the Atlantic largely called a halt to commitments with new GPs. “We’re very grateful to those investors who helped us successfully raise the COPS 4 strategy, both in terms of their re-ups and the personal references they provided to new LPs.”

Burdell envisages continuing issues for those seeking capital – not least because of private debt’s intrinsic characteristics. “Recently, several LPs have told me that they have limited capital available to allocate to private credit because, as with other private markets strategies, performance has been strong and they are bumping up against their asset allocation limits,” he says.

His advice to new managers on the fundraising trail is to think very carefully about whether you have a sufficiently differentiated offering. “If you are planning to launch a strategy that the larger managers are already

providing, you will probably fail. However, if you develop something that’s either a first mover or unique then you’re very likely to get an audience. It’s an easy thing to say but the only reason we were able to get world-leading LPs into COPS was because, although they did special situations already, they didn’t have anything like us in their portfolio and, moreover, we complemented their current strategies.”

It’s differentiation, and the ability to evolve, that gives Burdell the belief that LCM will continue to prosper in the tricky economic times ahead.