A sensible space

Q – How do the opportunities in the lower mid-market differ from those at the higher end of the market?

In the lower mid-market, the financing environment is not as crazy. With any company with $50 million plus EBITDA, the banks are willing to act like banks and financing terms [tend] to be quite aggressive. That market has gotten somewhat heated. When we see portfolio companies that are refinancing or being sold, the offers are up to 6x EBITDA for first and second lien, covenant lite.

So some of the things we saw in ’06, ’07, have now come back to the mid-market space. Lower mid-market, we see less of it. These tend to be club deals, and even though there’s a lot of debt available, it’s not been crazy. People are generally still keeping to below 5x EBITDA first and second lien. Maybe if you combine it with a little bit of mezzanine it goes up to 5.5x, but not at a 5.5x-6x [you see] for the bigger companies.

Q – Do you expect the well of refinancings to get shallower?

Yes, I think refinancing activity has actually quietened down somewhat.  In the next two or three years, there will be a rich source of dealflow in the marketplace. Refinancing is one source, but the study that [mid-market investment bank] Lincoln did recently, where they surveyed 450 mid-market companies, showed that in H1 more than half had negative EBITDA and revenue growth. In the mid-market in general, it’s been pretty flat in terms of EBITDA growth. But covenants are tightening. So if you have flat growth and tight covenants, I think it’ll drive some restructuring activity.

Q – Is that trend something institutional investors are recognising as well?

I see investors from all over the world looking at credit and leveraged loans because they’re looking for yield – there’s a lot of interest. Much of it ends up in the CLO-type space, the syndicated, traded and rated credits, which is not what we do. We play in a slightly different, lower on the balance sheet segment where the competition is not so crazy.

Q – From what allocations are investors committing to you? Private equity, or fixed income?

People traditionally have fixed income, equities and alternatives silos.  In recent years, investors have started doing more credit within the fixed income allocations. And then the sophisticated CIOs said, “Hey, there are opportunities that don’t fit squarely into every bucket.” So almost every sophisticated CIO has carved out an “opportunistic bucket” for strategies that are a hybrid of credit and private equity.

If you look at our track record, it is as good as any credit / mezzanine fund, but our returns are a multiple of some of those. We find we can fit into someone’s private equity bucket, an opportunistic credit bucket or [as an] enhancement to their credit portfolio. It really depends on where they have room.

Q – And how has the LP base evolved since you launched this strategy?

PineBridge was previously a part of AIG Investments and our largest LP was AIG. Since becoming an independent firm, our fund has a variety of investors that include insurance companies, corporate pension plans and family offices. We have LPs from Europe, US and Asia – even Australia. We have established a pretty broad base, which took a couple of years to develop.

Q – Speaking of family offices, do you find them to be more flexible in establishing new strategies? They don’t have the same obligations as a public pension, for example.

Yes. They tend to be less siloed. So it’s not like there’s one person, or one department, that’s fixed income and another department that’s only private equity. They do have room to do something that is somewhere in between or not exactly in one silo. 

FT Chong is managing partner at PineBridge Investments’ New York office, having joined the firm in 1999.