Capital talk: The entrepreneurs

Entrepreneurial vigour, Gallic flair, and a handful of blue chip partners. It’s a potent mix, and one which has seen Tikehau Group grow from a plucky French start-up with just €4 million at hand, to an increasingly diversified European asset manager that’s fast approaching €5 billion of assets under management.

The journey has been an interesting one, with a few hiccups along the way as co-founders Antoine Flamarion and Mathieu Chabran explain when Private Debt Investor interviews them in their London offices on a sunny Spring morning in the City, within a stone’s throw of the Guildhall.

Back in 2004, Flamarion and Chabran were safely ensconced at Goldman Sachs and Deutsche Bank respectively. The pair were friends, having worked together previously in junior roles at Merrill Lynch in the mid-1990s.

It was the early days of the buyout boom, with credit abundant and private equity firms, not to mention the principal investment teams at banks like Goldman, deploying capital hand-over-fist. Yet the pair – both relatively callow in their late 20s – took the plunge and left the ‘prison d’or’ (golden cage) of their investment banks to launch their own firm. “Until the crisis, few people really left investment banking because they were making so much money as employees in that industry,” says Flamarion.

Entrepreneurialism runs in his family. His father set up a real estate asset management group in 1987 called sofidy – growing it from a business that started out with 5 million French francs under management, to one with several billion Euros.

“We saw what my dad achieved with his firm and it seemed like a natural thing for us to launch our own. We started in June 2004 with the premise that we wanted to build a European asset manager, and replicate to some extent what had been done in the US – i.e. multiple asset class, multiple geographies. We started with a company, rather than a fund, to signify our long-term horizon.”

It seems a brave move, to leave behind an investment banking career at the height of the market and forge out on one’s own. How did friends react to the news?

Chabran, an accomplished alpine ski racer, smiles, and gestures at his friend. “He’s a real entrepreneur, so it didn’t surprise anyone who knew him when he went solo.”

THE THESIS

“It was all about the hedge fund culture at that time,” says Chabran. “Launching with big funds, focusing on short term performance to get rich in as few quarters as possible, but we took the opposite view. We wanted very long-term capital, with a pool of shareholders and investors who brought much more than capital.”

And the name? “I spent a lot of time on the Polynesian island [of that name],” Flamarion reveals. “It’s a beautiful atoll. It seemed like a nice name for the firm, a bit different to naming it after a type of stone or a street”, he jokes.

The pair raised €4 million of capital initially, 9 percent of which came from their own pockets. The rest came from friends, family and entrepreneurs including head of LVMH Bernaud Arnault and Belgian billionaire Albert Frère’s family office. They supplemented this relatively meagre pot with co-investment capital from the likes of Goldman, which took a stake in the firm itself two years later in 2006.

Initially the focus was very much on private equity-style deals, but credit was always a key part of the business plan, as Chabran explains.

“In our previous careers in investment banking, Antoine was mainly exposed to direct investment and principal investing, whereas I had more of a credit background, in leveraged finance. So it was really about developing the firm to take advantage of those skillsets,” he says.

“Our first few deals were private equity real estate ones. Then we got into credit later. When we launched Tikehau Investment Management [TIM] in 2007, it was a natural development for us.” Chabran adds. “The timing proved to be rather opportune.” Flamarion chips in: “At the time there were very few credit managers in Europe. Back then we were seeing lots of opportunities to buy debt or lend money, but the market was already starting to turn.”

A BROAD PORTFOLIO

As if to underscore their commitment to credit, the pair managed to lure their former mentor at Merrill Lynch, Bruno de Pampelonne, to join the firm as chairman.

TIM’s fund portfolio has grown extensively, swelled in particular with a number of launches over the last 12 months. It divides its funds into six categories: open-ended credit funds (including the likes of Tikehau Taux Variables, a fund launched in 2009 which now has €317 million in AUM); a SICAV, called Tikehau InCA; mezzanine; real estate (its first vehicle, Tikehau Real Estate 1, launched in March); direct SME lending; and the core private debt funds.

This latter category includes Tikehau Special Situations I and II, which it calls ‘debt securitisation funds’. They have a flexible mandate and target a 10-12 percent IRR (plus a 3.5 percent coupon on a bi-annual basis) based on TSS II literature.

There’s also Tikehau Preferred Capital, a private debt fund investing in subordinated debt and mezzanine issued by mid-cap European companies. It has a 10 percent plus net IRR goal. The fund garnered €134 million in commitments when its subscription period concluded in December last year, having launched a month earlier.

Rounding out the list is Tikehau Corporate Leveraged Loan Fund, which targets senior debt investments in sponsored-back companies. It has a Euribor + 400 bps target yield, and launched in November.

“The intention was always to be able to play across the credit spectrum,” says Chabran. “We wanted to have the same flexibility on the debt side as we’d had at the holding company level when doing private equity-style deals. We wanted to address loans, bonds and special situations – stressed or distressed. And then later in 2010-11, we brought in direct lending too,” he adds.

Many in the industry believe direct lending is doomed to failure, arguing private debt funds lack the origination capabilities to pursue the strategy effectively, nor can they offer the ancillary services a bank can. Chabran responds: “Private debt funds and banks aren’t competing, they need to work together. We have situations where they [banks] provide the revolver, the daily banking facilities and we provide the term financing. Yes it’s more resource-intensive, but the customer I think values the fact we’re putting the effort in.”

French insurers obviously rate Tikehau’s ability to make the strategy work, selecting the firm last year to manage Novo 2, one of two funds created by a consortium of insurance groups to up to €1 billion in debt funding to SMEs in France.

The firm has always been somewhat contrarian in its approach, and that extended to its choice of fund structure.

“Our very first fund back in November 2007 was structured as a private equity-style draw-down fund, seven year money. The banks who helped were saying ‘That’s a non-traditional structure, credit should be addressed in a liquid structure.’

“From the very beginning we believed that the assets we wanted to focus on were either illiquid or couldn’t support potential liquidity, so a closed-ended structure was best,” Chabran says.

The first fund, TSS I, raised about €125 million, but its closed-ended structured was vindicated in the crisis. “When things got ugly two years later, yes there was a collapse in the asset value but actually the default rate did not skyrocket – we protected the investment strategy by having a closed-ended strategy,” Chabran says.

TIM also raised open-ended funds too, albeit at a slower pace. “From day one we wanted a balance between public and private debt,” says Flamarion.

“You also diversify your client base with a liquid fund,” Chabran adds. “It attracts high net worth individuals, family offices, institutional investors but also retail. It means you’re not overly reliant on one group of investors who might switch their allocations overnight.”

The depth and breadth of the fund portfolio and its pool of investors now is a far cry from the group’s early days, which Flamarion admits were the hardest time for the firm.

“It took us six or seven years to attract big institutional money. Either you drop the pencil or you sit there time and time again, discussing things with them, showing them deals. You have to persevere. An entrepreneur gets excited about an opportunity, but the good ones are patient and know it’s a long-term game.”

Its reliance on high net worth individuals and family offices prior to 2010 was actually advantageous, Flamarion argues.

“Having such people around the table is part of our culture – they bring sourcing, expertise, added value through contacts and so on.”
After 10 years, the firm has built an independent track record as well as sufficient scale to open up a much wider, deeper pool of investors. And the firm’s range of products means it can cater to each LP’s whim.

“Debt offers investors a whole range of risk/return profiles. It’s unique in that respect. You don’t really get the same breadth in the equity markets, private equity or real estate,” says Chabran.

The pair repeatedly refer to both investors and borrowers as clients, underlining their view that it’s important to tailor their offering to both. It’s influenced the way they’ve built their team since inception too. “Back then, investors wanted to see pure players,” says Chabran. “Now you find people tend to favour credit platforms rather than product specialists.”