Global is a word that many firms like to tack onto their marketing documents and product names, though few are truly ‘global’ when it comes to where they invest. In private debt, global usually means the US and Europe with the occasional exception also covering Asia-Pacific. The managers are typically headquartered in one place or another and are better known among investors in the country where they’re domiciled. While most of the headlines have been about US firms gaining footholds in Europe, there are also a handful of firms going in the opposite direction.
The most successful European firms in the US have acquired firms with an established presence in leveraged finance, or hired local experts with track records and relationships. Some of these firms still have most of their US assets in CLOs, though. Both 3i Debt Management and CVC Credit Partners told PDI in earlier Capital Talk interviews about big plans for North America, and while both are now managing a sizeable portion of their assets in the country, most of that money is in CLOs.
3I AND CLOS
John Fraser, managing partner at 3i Debt Management US, who came over to the firm as part of its Fraser Sullivan Investment Management acquisition in 2012, admits the mid-market lending arena in the US is getting crowded, which is part of the reason the firm hasn’t expanded into all the other areas it planned to yet. Though it has done well in CLOs. The firm recently closed its latest CLO, the Jamestown VI CLO, at $750 million: its largest across the US and Europe. The firm manages $11 billion, of which 43 percent, or about $4.7 billion is invested in the US. 3i DM was also PDI’s award winner for the CLO Manager of the Year category in Europe this year.
“We wanted to expand in to the US and wanted to do so with an established platform and established track record,” Fraser explains, which is what his firm, Fraser-Sullivan brought to the table. “All we did was change the name on the door and we began managing capital under the 3i name immediately,” Fraser says.
The fact that the American market is well saturated and competitive is why European firms’ active in the US say there has been more traffic in the other direction. “You are seeing a lot of US firms going to Europe right now to test the senior lending space, especially in direct lending. This is a market that ICG knows well, and has success in, having been a significant debt investor throughout Europe since 1984,” says Salvatore Gentile, head of North America for ICG, explaining that the leveraged finance market is younger in Europe, less entrenched, and is at a later stage of recovery from the financial crisis compared to the US, which is why American firms migrating to Europe see greater opportunity.
Gentile and Brian Spenner, director of mezzanine, North America at ICG, started the corporate debt group at Blackstone in 1999 and left after Blackstone acquired GSO Capital Partners. They were subject to lengthy non-compete clauses before joining ICG in 2012.
ICG has invested its own capital in the US since 2007, but made a formal effort to open a US office and start a third party asset management business in New York in 2012. “I think the key is to do it with locals, as opposed to expats,” Gentile says. “ICG’s effort to build a robust US franchise is a continuation of a strategy the firm has employed in other geographies, where senior management will identify an opportunity and enter that market with some combination of local talent and people from our London office. The team will validate the market opportunity and the ability for ICG to be a long-term player and then build a more fulsome team of local professionals to execute that strategy in a more significant way,” Gentile explains. The firm also manages Asian strategies.
ICG launched three CLOs in 2014 amounting to $1.2 billion. They suspect they were one of the few firms to get that many CLOs off the ground in their first year of entering the US market. To do that, they partnered with Citi as the underwriter, which both Gentile and Seth Katzenstein, director and portfolio manager on credit funds management in New York, have worked with previously. Citi has been instrumental in helping the firm structure the offerings and find investors. “When I joined ICG in June 2013, I was the first hire for our US bank loan business. For us, the first thing we had to do was establish the team and work with our colleagues and counterparties in Europe to develop the process, systems and infrastructure and that took several months,” Katzenstein explains.
The firm is also in the process of raising $750 million for its first US private debt fund, as PDI previously reported. ICG executives declined to comment on fundraising.
The invasion of European capital appears almost coordinated. ICG, 3i and CVC all came to the US in 2012. CVC Credit Partners also handles mostly CLOs and other liquid products in the US, having acquired Apidos from Resource America that year.
“In Apidos, CVC was acquiring a team with close to 20 CLO’s under management and a credit hedge fund as well. Their track record in both performing credit and credit opportunities was excellent and very similar to the top tier performance that the CVC Cordatus team had delivered over time,” says Tom Newberry, head of private credit funds at CVC Credit in New York. “The idea was to expand the product offering and diversify the platform, building on a market presence that was well-established. Although growth takes hard work and fundraising is never easy, we started from a great foundation,” says Newberry.
Since acquiring Apidos, CVC also made some noteworthy hires, including Newberry, who was previously the head of leveraged loan capital markets at Credit Suisse, in September 2012. Stephen Hickey joined in April of that year as chief risk officer. He was previously at Goldman Sachs for 20 years in various senior roles including global head of leveraged finance. In August 2013, Caroline Benton also came over to CVC Credit from Goldman Sachs, where she worked in the proprietary investing and risk management functions in the special assets, global bank loan and distressed investing departments.
Though the group hasn’t yet expanded into as many products as it intended to launch in the US, CVC is in the midst of raising a $750 million global direct lending fund, which will invest in both the US and Europe. And the firm has also considered establishing a BDC.
TO BDC OR NOT TO BDC?
Many European managers envy the US its business development companies (BDCs), US-specific publicly traded vehicles created to lend directly to companies. As listed entities, BDCs can be a good way to access permanent capital. A European equivalent doesn’t exist.
London-headquartered Alcentra by dollar value has the most capital invested in the US at $11 billion. It listed its BDC, Alcentra Capital Corp., on the NASDAQ last June. The firm is well known and liked among US investors, and actually thought of as global, partly because it acquired a US manager in 2003, but also mainly because of its link-up with Bank of New York Mellon, which acquired Alcentra in 2006. Some of the firm’s US mezzanine funds are branded with both the BNY Mellon and Alcentra labels. The firm also absorbed a US high-yield bond team from another BNY Mellon subsidiary, Standish Mellon, in 2012. Alcentra recently launched an open-ended global loan fund and is working on multi-asset credit strategy and planning another direct lending fund for later this year.
ICG, though, has no plans for a BDC, and Spenner points out something interesting: BDCs, because of the way they are regulated, are required to be fully invested at all times, whereas fund managers can hold ‘dry powder’ if conditions are adverse or the timing is not ripe. “Private debt funds, where capital is drawn from our investors as needed, allow managers to maintain their dry powder and invest opportunistically. Other investment vehicles, like BDCs, have pressure to remain substantially invested at all times,” Spenner says.
One US firm recently bypassed the BDC route and actually went over to Europe for its permanent capital. Chicago-based Victory Park Capital raised £200 million ($296 million; €279 million) from a share offering for its permanent capital lending vehicle, VPC Specialty Lending Investments, on the London Stock Exchange in March. The vehicle will deploy the money raised via marketplace lending platforms.
Whether it’s BDCs or other structures, many of these firms have new products in the works, and many of them are trying their hand at global funds. 3i is considering an open-ended global fund, Alcentra has a global open-end loan fund that it is already offering and CVC is in market with its own global direct lending strategy.
Though one cross-border credit executive wondered whether global funds are even of interest to investors or whether they’d rather divide and conquer. This year seems to be a big one for global fundraising, with US domiciled managers, like Sankaty Advisors, Oak Hill Advisors and Babson planning or actively marketing global funds. How much interest and capital they actually garner from LPs will be telling.
In the meantime, the Europeans in the US continue their march to raise and invest capital across a variety of strategies and with some success.