Q: How did Aequitas get to where it is today?
Jesenik: We started our firm in 1993, so we were structuring private debt before people knew what private debt was, arranging senior, junior, mezz and equity for mid-market private companies across the country through 2000. Around then, our clients were asking if they could invest with us and, secondarily, we felt that we wanted to become an investment manager, not just an originator, and so we did our first mezzanine fund in 2001.
Q: What are Aequitas’ specialisms?
Jesenik: We have concentrations on specific sectors and they have evolved over time as the world evolves, if you will. We were focused on mid-market debt through to 2003 and then we stepped into healthcare in 2003-04, and then in 2009-10 we broadened into education financial services.
Q: And now Europe is on the agenda. What’s your plan for expanding into the continent?
Jesenik: Given the tight credit market in Europe, we’ve also started looking at underserved niches there. Our thesis is that the European market is three to five years behind the US in terms of recovery, so we’re looking for underserved markets with larger potential returns. Our investor base is mainly US so we’re slowly but surely building out relationships in Europe.
MacRitchie: Bob and myself came to Europe two years ago to sample the market. What we got from that was a real interest in what we do and possibly even a greater understanding and comfort with private debt than in the US. We see an opportunity to replicate the Aequitas business model in Europe. The concept of a credit origination, product creation, wealth management group – that three-legged stool that we have in the US – we see the opportunity to build something like that in Europe. The first stage in that is to build our investor base.
Q: You’re offering European investors exposure to your specialty finance strategy via a Luxembourg-listed bond. How does it work?
MacRitchie: We’re offering two different structures: a 6 percent one-year bond and an 8 percent three-year bond. The one-year bond is structured as a five-year maturity, but with annual redemption at the option of the bondholder, so the buyer can lock in the 6 percent rate for five years.
The Luxembourg securitisation vehicle. One of the attractive things is that it has the ability to create compartments, a vehicle unto itself with segregated assets. So we’re creating two compartments and issuing a bond from each. We have the ability to issue more compartments which don’t need to be consistent with the initial investment strategy of previous compartments. So it lends itself to our business particularly where we’re continually seeing opportunities to invest in new credit strategies.
Q: What are the assets underlying the first two bond offerings?
MacRitchie: The underlying loans are originated through Freedom Financial (FF), a decade-old debt consolidation and settlement business. FF will negotiate with creditors to bring their debt back down to a level where the person can service it. For the best creditors, those that religiously pay what they can every month, FF now provides loans to settle the renegotiated consumer debt. We’re currently funding those loans in partnership with a family office.
Q: What’s the volume of assets generated by Freedom Financial on a monthly basis? What’s the risk profile like?
MacRitchie: It’s roughly $10 million to $15 million a month, it could easily grow to $30 million a month. It’s a unique credit profile, you’re dealing with creditors who have taken all their defaults and they’re left with one loan that they’re able to afford and they’re not able to go out and load up the credit cards, even if they wanted to, because their rating has taken a hit.
Q: Are there any investor protections built into the vehicle?
MacRitchie: We’re providing a 10 percent first loss equity slice to align ourselves with investors. We feel really confident in the asset base and the structuring so we’re happy to put our money where our mouth is. We’ve initially pitched the bond offering at $150 million overall. The minimum investment is $1 million and we’ll be doing quarterly closes over the next 12 to 18 months when we expect to reach our target.