Capital Talk: ICG

“ICG today is very different from ICG two years ago, even,” says Christophe Evain, managing director and chief executive officer of the European-headquartered, €14.9 billion investment manager. 

He’s not exaggerating. London-based Intermediate Capital Group (ICG) has expanded its business lines and range of offerings tremendously over the last five years when it was simply a European mezz and credit house. Since 2012, it has established a joint venture with Nomura focused on Japanese mezzanine investments; closed and fully invested its first European direct lending strategy at €1.7 billion; launched a new North American debt fund; set up an open-ended total credit fund and bought out the remaining 49 percent stake in its UK real estate lending platform, ICG-Longbow. 

Other recent strategies include its first Australia Senior Loan Fund and ICG Alternative Credit, a global investment vehicle seeking a return through identifying and trading on price inefficiencies in portfolios of credit including asset-backed securities. The alternative credit strategy is managed by the former Credos Capital team, which ICG bought in 2014. The firm has invested its own capital with the former Credos team and is also seeking third-party capital for its Alternative Credit Fund.
And just when management said they would settle down and consolidate the new lines, they brought in a secondaries team, Benoit Durteste – managing director, head of mezzanine and a member of the firm’s executive committee – tells PDI, laughing.
Evain is cagey on describing the kinds of other opportunities that ICG could move into down the line but says they have not stopped looking and that there are a lot of good teams out there that could be a good fit for ICG. “We have a lot more ideas to bring on board, over time,” says Evain, adding that any new lines must be right for the firm and complement ICG’s business. 

Durteste adds that investors often come forward with requests for ICG to move into new areas and sometimes it overlaps with the firm’s own plans.

LONG-HAUL JOURNEY

Both Evain and Durteste have been with ICG for a significant length of time. Evain’s history with the company is one of business building. After joining in 1994, a few years after the firm was established in 1989 and around six months after it listed on the London Stock Exchange, he opened its first office in Paris in 1995 which was easy in the beginning, because he was alone, he quips. In 2001, he moved to Hong Kong to establish ICG’s Asia-Pacific business which he describes as terribly exciting and a roller-coaster.

“From one day to the next you think you’re going to win your first deal and the next day you realise that the deal has completely disappeared. You spend a long time working on deals that ultimately collapse but it’s exciting because you have the feeling of creating something out of nothing,” explains Evain. 

Realising he was needed at the centre of the operation, the firm brought him back to London in 2004 in the first phase of succession planning as the founders looked towards retirement. He managed part of continental Europe and Asia-Pacific as well as recruiting for the US until 2010 when he became chief executive. 

Durteste has been at ICG almost 13 years. A mezzanine specialist, he started off in banks and has also worked in project finance and leveraged buy-outs. He worked at GE Capital, which included a stint as chief financial officer for one of the US industrial giant’s portfolio companies. 

BIG IN EUROPE

There aren’t many European alternative lenders that can boast the same scale and reach as ICG. Most of the other really large-scale, long-established, non-bank lenders with reach beyond their own region hail from the US. ICG has successfully established a large European base with active businesses in both Asia-Pacific and the US. 

The firm’s capital and assets under management stood at €14.9 billion as of the end of 28 January 2015. ICG publishes its full-year results for the period ending 31 March on 20 May. 

Evain and Durteste decline to discuss capital raising for specific funds but in April, the firm announced it had hit the €2.5 billion target for its sixth mezzanine fund after five months of fundraising. A first close was held and PDI understands that the firm is targeting a final close on the €3 billion hard-cap in the next couple of months. 

The speed and scale of the fundraising for the mezzanine strategy, Europe Fund IV, is notable but is almost overshadowed by ICG’s second direct lending fund, Senior Debt Partners (SDP) II. That is expected to hold a first and final close around the €3 billion hard-cap. The fund is in the process of closing, as reported by PDI in March. 

Asked to ignore their own positive fundraising experiences and consider the environment for credit strategies as a whole, both Evain and Durteste say that the situation has improved a lot over the last few years with more and more investors making room for private debt allocations. The hunt for yield has naturally helped the situation, with some positive collateral effects.
“Something that is not going to go away, is the number of investors that are discovering the space and the asset class, and that’s something that’s extremely favourable for the players and the alternative lending space,” says Durteste. 

Investors that never considered the strategy before can now appreciate the risk / reward dynamic on offer beyond the current low-yield environment that introduced them to private credit, Durteste notes.

WORKING CAPITAL

Both Europe Fund VI and SDP II are flagship strategies of the firm, Evain and Durteste agree. And, as with any strategy, deployment is a key issue. 

Looking at the mezzanine market in Europe over the last few years, without knowing ICG’s history in the space, you’d be forgiven for assuming it accidentally added a few too many zeros at the end of the target. In 2014, mezzanine issuance (including syndicated and non-syndicated junior deals) totalled $1.25 million, according to S&P Capital IQ. And that is just one of a string of poor years for syndicated mezz since the global financial crisis. In contrast, ICG deployed just over €1 billion in subordinated debt via 12 deals last year, notes Durteste. 

Fund V deployed its €2.5 billion in capital over the course of three years. PDI asked Durteste how they succeed when other mezz providers have disappeared or diversified. It’s not rocket science, he responds, adding that ICG always had a preference for self-sourced, non-mainstream deals well before the syndicated mezz market dried up. The firm’s approach – to have numerous local offices sourcing deals – is expensive but essential, he claims. 

As a result, the majority of ICG’s subordinated deals are now for non-private equity-backed businesses, explains Evain. “You need to diversify the sources which means you need to go directly to companies, you need to go directly to management teams that are running companies. And with a flexible capital mandate, you can adjust the solution you offer those companies to the situation they are facing,” he adds. 

To illustrate, the two Frenchmen describe a combined mezz and equity deal closed in February for wine barrel-maker Groupe Charlois. The deal refinanced out other debt providers as well as Ardian, which had taken a stake in the company in 2009 when, having been just an oak stave producer, it bought Saury Group, a cooperage business, integrating the barrel-making process. As well as mezzanine debt, ICG bought a 33 percent stake in the family-owned manufacturer, 31 percent of which was sold by Ardian, while Sylvain Charlois, the chief executive, increased his stake from 51 percent to 67 percent. 

The deal was sourced by ICG’s Paris office. With the equity stake forming part of the deal, this is not a straightforward candidate for many mezz providers. ICG has structured the facility to allow for an equity exit, especially since Groupe Charlois is a family-owned business and unlikely to want to sell, explains Durteste. 

Senior Debt Partners, the first direct lending strategy, was a conscious move into ‘sleep at night’ senior risk for ICG. It reached a final close of €1.7 billion, well over the initial €1 billion target, in April 2014. Fundraising for SDP II began very shortly after the first fund – which is now fully invested – closed. The successor fund is expect to close at its hard-cap of €3 billion within the next couple of months. 

The largest ticket size possible for SDP was around €80 million to €90 million. Should SDP II hit €3 billion, it will be able to lend up to €150 million to a single transaction. 

Noting that there are a number of players now active in the direct lending market, Evain explains why size matters: “It is important for us to be a meaningful partner to both private equity and to companies, which means you need to be able to sign a significant cheque.”

As part of that clear differentiated risk approach, aggregate leverage on SDP is around 3.7x EBITDA. The strategy was targeting nine percent returns and has hit gross returns of between nine and 10 percent, Evain adds. 

The ICG duo are critical of how the waters have been muddied around the direct lending label. They feel that it has been appropriated by risky strategies that promised double-digit returns. These deals do not fit their definition of direct lending, which is relatively safe senior loans to companies that are not in financial distress. 

That the definition of direct lending is in dispute will not surprise anyone in the market. A brief discussion with any manager active in the space will throw up examples of vehicles investing in the syndicated loan market that describe their strategy as direct lending. That’s anathema to ICG, says Evain, adding: “Direct lending for ICG means; senior lending, a ‘sleep at night’ level of risk, where we eat our own cooking. We have a team of guys here, they will originate, due diligence, negotiate and close the transaction themselves.”

The majority of deals done by ICG’s first direct lending fund were for sponsor-backed businesses. Some argue that simply disintermediating banks in financing private equity portfolio companies shouldn’t be described as direct lending. ICG does seek out non-sponsored firms to finance but with significant demand for senior debt to back buy-outs, there is a natural bias towards private equity deals, says Durteste. Of the 500 potential deals reviewed for SDP, around 70 percent were sponsor-backed. Evain also points to the low growth environment which has discouraged investment by independent businesses. 

There are good reasons for non-bank lenders to look beyond private equity deals. The leveraged finance market may be a very natural home for private lenders, but it is undoubtedly a crowded space. ICG sees more money coming into the leveraged loan market with leverage creeping up, though things are not back to unsustainable levels, says Evain.
On the pricing side, European leveraged loan margins have compressed but Evain says that the market is not frothy on that side. He points out that, at around 400bps / 425bps, levels are still well above the 2007 figure of around 250bps with decent fees. However, he does acknowledge that taking the higher pre-crisis LIBOR levels into account, the ‘all-in’ is roughly the same. 

Asked if the European leveraged finance market delivers enough of an illiquidity premium, both Durteste and Evain are adamant that it is priced in. They point to negative yields on European government debt – even governments among the periphery are being paid to borrow by investors seeking somewhere to put money. 

“If anything, the illiquidity premium is quite attractive,” Durteste says, adding that other so-called liquid markets can be anything but when trouble hits.

MORE THAN EUROPEAN 

While Europe is at the heart of ICG, much of its activity and growth over the last few years has been focused outside the continent. In 2012 they approached Salvatore Gentile at Blackstone to come on-board and lead their North American division. ICG North American Private Debt Fund held a first close at $450 million in May last year. A further close on the fund is anticipated soon, as PDI reported in March, and it is targeting $750 million. 

For our April issue, PDI spoke to Gentile about building up the North American business (along with several other European-headquartered managers) and he agreed with Evain’s assessment that having a local expert is key to success in that market.
The firm had invested its own capital in the US since 2007, but Gentile has been tasked with developing the business further. The reasons for ICG’s North American focus are two-fold, explains Evain. As a debt market, it is by far the deepest, and having a stronger US presence is helpful in attracting US investors. 

On the deal side, the US has more borrowers with organic growth that drives borrowing, the pair say. “It’s a very deep market. It’s a much deeper market than the European or Asian market for that matter,” says Durteste. 

But before ICG was in the US, it was in Asia-Pacific, and it was Evain who was tasked with establishing that business.
The Asian debt market is like no other, he says. And while the pipeline looked terrible until recently, that appears to be changing. 

“We haven’t seen as much quality dealflow from our Asian team for a very long time,” notes Durteste.

And though longer established, the Asia-Pacific business is also still growing. The new ICG-Nomura mezz fund, which closed on $190 million (28 billion yen) in December, is also approaching another close. 

HERE TO STAY

So in the sunny environs of the ICG offices with views over the steps of London’s St. Paul’s Cathedral, the future looks bright. For the year ended 31 March 2014, the firm raised a record €3.8 billion of third-party capital, of which, 45 percent was for first-time funds or new strategies. The total was also a 69 percent increase over ICG’s previous high. In full-year 2014, ICG raised just over €2 billion of third party capital, according to PDI Research & Analytics. Much of the recent activity is expected to feed into the firm’s results which are due to be released on 20 May. 

But while ICG is certainly on the ascent at the moment with few peers in what it does, Evain and Durteste claim the firm has no intention of sitting on its laurels. There is competition in every strategy and business line. The names vary from fund to fund, but in each market there are others just as keen to do the best deals and deliver returns. 

“At the end of the day, there is always competition,” says Durteste. “What is true is that we don’t find an entity that exactly looks like us or has the same strategy but that doesn’t mean that we don’t overlap with several competitors, they might be different from deal to deal, but there is always competition.”

As well as being aware of the competition, the firm is also conscious of its role in helping cement alternative lenders globally. The financial crisis may have triggered a rush by investors to seek higher yielding, relatively safe credit investments, but that trend is and should be here to stay, argue Evain and Durteste.

PDI asks them for their thoughts on JPMorgan chief executive Jamie Dimon’s recent annual shareholder letter. It predicts much more volatility in the next financial crisis as well as suggesting that, unlike banks during the 2008 / 2009 period, non-bank lenders will either not support borrowers by rolling-over exposures, or if they refinance, charge punitive rates. Both scoff. They are offended by both the accusation that they would cut off lenders and the claim that banks were supportive through the crisis. 

Citing ICG’s own experience with banks in the period, Evain says that, while not every bank ran for the hills, the majority did.
Durteste chimes in, pointing out that private funds, unlike banks, are lending long-term money to long-term deals: “One item that I think he’s [Dimon] failing to point out is that you are actually much better matching the asset and liability side … You don’t have to mark to market, run for the hill or sell your debt in a panic.”

With a bright outlook and a driven team, ICG are here to prove that point.