Capital Talk – Big in Europe

The trio of partners with whom Private Debt Investor sat down at CVC Credit Partners’ London office on the Strand are in jovial mood – somewhat  at odds with the dismal weather outside. There’s plenty of reason for cheer: the firm slipped past the $10 billion assets under management mark just a few weeks earlier with the completion of its latest US CLO, and after a round of firm-wide get-togethers, its strategy is mapped out for the foreseeable future.  

There have been a few changes in the upper echelon of CVC Credit Partners, with founder Marc Boughton and chief investment officer Steve Hickey staking out more clearly delineated roles, as Boughton explains.  

“After successfully merging the CVC Cordatus and Apidos platforms, now seemed like a natural time for us to separate our responsibilities. Steve is the chief investment officer. He’s responsible for managing the four core aspects of the day-to-day business: people, investment processes, operations and capital-raising. I provide oversight and support on the areas you’d expect: business strategy, acquisitions, interaction with key investors, and working with the CVC Group.” 

Each of the firm’s eight-strong global leadership team has a clearly delineated role, Hickey explains. Jonathan Bowers runs the firm’s performing credit operations in Europe, while Gretchen Bergstresser handles the US operation. Mark DeNatale, a relatively recent arrival from Goldman having joined last year, leads the firm’s growing credit opportunities unit – “Stressed and distressed investing basically”, Hickey explains. Christopher Allen acts as chief operating officer and also looks after structured credit. Brandon Bradkin leads the firm’s investor relations function, which the firm is in the process of augmenting further.  Tom Newberry runs the firm’s private debt business. “By that we mean any form of origination-oriented activity,” Hickey says, “mid-market lending, direct lending. To the extent that we do a listed vehicle, which in the US would be a BDC, that’s Tom’s jurisdiction. He was the global head of leveraged finance capital markets at Credit Suisse so has a lot of experience, and has the grey hair to prove it!” he jokes. 

The three are obviously very much at ease in each other’s company, no doubt down to familiarity bred over a decade of working together on deals, albeit not always at the same firm.  

Newberry elaborates: “Steve and I worked together for several years in the late 1990s. Mark DeNatale worked with Steve for most of the 2000s. Gretchen Bergstresser and Chris Allen have worked together for a long time. I’ve known Gretchen from the buyside since my days as a salesperson in the mid 1990s.  So we’ve all known each other for 15+ years – that’s one of the nice aspects of our team. There hasn’t been a huge net addition in personnel but the people we’ve recruited we’ve worked with before. It’s not just throwing a group of people into a room and seeing if it works.” 

 

Genesis 

CVC Credit Partners has come a long way since its inception in 2006. Back then, Boughton had been running the in-house financing team at private equity firm CVC Capital Partners, structuring, sourcing and arranging finance to underpin the firm’s buyouts since 2000. “We recognised that with a network of 12 European offices, each of which was doing deals on a regular basis, the speed of change in the financing markets meant that centralising our market experience and building the right relationships with the financing market would allow us to become best in class at raising debt capital. We were one of the first firms to do that,” Boughton says. 

That coincided with the growth of the institutional market in Europe, with the first CLOs appearing in late 1999 and early 2000. Europe had been a bank dominated market with institutional capital barely featuring. CVC had observed US rivals like Carlyle, Blackstone and Bain Capital branch out into credit. “We’d spoken to investors in our PE funds and the issue in Europe had been one of sponsor acceptance: how would sponsors feel about other sponsors owning a piece of the debt in their businesses?” Boughton asks. “That took some time to change – even in 2005 it was quite difficult – and they could get all the liquidity they needed without going to sponsor affiliates.” 

It reached the conclusion that sponsors would be happiest with the firm managing a CLO. “Small pieces of their deals, no control, et and largely in senior debt, so away from their equity,” Boughton says. “They also observed that a lot of the managers and investors of these CLOs were people they’d never heard of anyway, and it was a question of gaining confidence with sponsors that we were a supportive long term partner for their business.” 

Boughton approached the CVC board with a business plan that began with CLOs and branched out to include mezzanine. The latter, it was felt, was closer to the firm’s private equity DNA, but the idea was soon mothballed over fears other sponsors might not be keen on a rival buying up junior debt in their deals. And from an investor perspective, many already had exposure to the mezz tranches of CVC deals through existing third party funds. CLOs then would form the basis for the firm’s credit operations. It duly rolled out several, and the financial crisis occurred. “So we battened down the hatches, and performed very well through the crisis and waited for the next opportunity,” Boughton adds, citing their top decile performance figures in Credit Suisse research. 

As the global economy emerged from the wreckage of the financial crisis, Boughton and his colleagues formulated a plan to broaden the credit unit’s strategy. Rather than just buying and holding debt in a CLO, it would buy debt with a view to trading it – essentially an event-driven strategy. 

Investors were starting to consolidate their views on managers, Boughton adds, and sponsors’ attitudes were changing too. “In the beginning sponsors requested managers who could offer solutions globally and across the capital structure; we could only invest in senior and mezzanine in Europe”, Boughton explains. “The bond and institutional loan markets were growing, US liquidity was becoming more important, investors were looking for managers who could offer broader credit offerings through the cycle, strong origination and risk management. We needed to increase our scale, reach and product offerings.”