“Liberating” is how Steve Clark – founder, partner and head of risk at London-based investment firm Omni Partners – describes the change in his career from a short-term to a long-term focus.
Once the co-head of international proprietary equity trading at Nomura International, Clark was responsible for setting up the bank's first European proprietary desk and managed a highly profitable trading book. The stress of the job gave him a love of yoga (which he's been practising for the last 15 years) and also an acute sense of the here and now.
“What I did was just one trade after another,” he reflects. “I made money and moved on. You're constantly thinking about the next tick in prices. It was all-consuming, 24/7.”
Described by colleague Elissa Kluever, partner and managing director of credit and lending funds, as having been “an old-fashioned arbitrageur across markets and currencies”, Clark had had his fill by 2004 when he decided to embark on building a business instead.
It was a lifestyle change that Clark has fully embraced. “It was about building something with value to longevity where things would not revolve around your last decision. You become agnostic to short-term market movements and you can think much more strategically,” he says.
Operating from a London base with an additional office in Irvine, California, the link with Clark's prior career is maintained in the form of Omni's macro and event-driven trading strategies. But it's the other strand to the business, secured lending, which really gets Clark's pulse racing.
“Two or three times in my career have I come across secular opportunities,” he says, making clear that private debt – and the huge growth potential that it appears to have – is one example.
Kluever reflects on the beginnings of the business. “Steve had always been involved in liquid strategies and didn't know credit. He needed to get up the curve. So he decided to do it with his own cash, to experiment and see how it worked. He spoke with credit-focused guys about real estate and asked them whether he should start afresh or buy an existing business. He went for option one and set up clean.”
Initially partnered with a mortgage broker, the business's first loan was made in October 2009 and things proceeded at a sedate pace with just three loans completed in the first three months. The speed was increased between 2010 and 2011 and accelerated further in 2012 when the source of funding expanded to include not only proprietary capital but also a bank line. “Lending shot up dramatically as a result of the greater firepower,” says Kluever.
By 2013, Clark began to wonder whether investors on the liquid side of the business could be encouraged to support an illiquid fund strategy. Starting out with what Kluever describes as “very measured aspirations”, Omni Secured Lending Fund I was launched in February 2014 and raised just shy of $50 million. The fund was the first in a series focused on short-term loans secured against UK residential and commercial properties.
“We were not well known as a closed-ended fund manager and just decided to raise what we could in six months. It was all about proof of concept,” she says. The capital was deployed “very quickly” in 92 loans and was in the liquidation phase with final distributions being made to investors at the time of going to press.
Fund II quickly followed in April last year, eventually closing on $240 million, or roughly five times the amount raised for the debut vehicle. This fund had just ended its investment period as we went to press and was heading into the realisation phase. A press release in February said the fund had delivered a net IRR of 11.1 percent since launch.
And then came Fund III: in late April this year, it was launched with an initial $60 million in commitments and a final target of $400 million.
Reflecting on the firm's fundraising experiences to date, Clark says: “The level of demand has been surprising. We didn't realise how open the door would be. It was slightly more difficult in the early stages to raise money because although we had a track record in origination, we didn't have one in debt. But now we are well recognised and we have that track record.”
Already well supported by family offices, part of the “secular shift” that Clark refers to is the new-found appetite for Omni Partners' strategy – and also those of other private debt funds – from institutions such as pension funds and insurance companies.
At the first closing of Fund III, the firm was able to announce its first-ever commitment from a pension fund (nationality Dutch, identity unknown). Listening to Clark and Kluever, it is clear that they hope and believe that the first such backer will by no means be the last.
“The investor base is shifting,” Kluever asserts. “It's been mostly single family and some multi-family in the past. But what we offer should appeal to institutions, be they pensions, insurance companies, endowments or foundations. The size of our offering is now large enough to get them interested and we've had a lot of conversations with North American pensions and endowments in particular.”
Explaining the historic context, Kluever explains that family investors have been the bedrock supporters of the firm's secured lending strategy. They were drawn to dividend yield as a way of delivering income to family members and were also attracted to what they saw as relatively low risk which provided confidence that wealth would be transferred across the generations.
But family capital may become proportionately less significant as private debt becomes an increasingly large part of institutional portfolios amid the hunt for yield.
“There is a requirement for income and, historically away from areas like infrastructure, you couldn't get that,” says Kluever. “You can't hit yield targets with a liquid strategy, and to get the high returns on the liquid side may mean adopting a risk profile that many investors are not comfortable with. Private debt offers a better risk-adjusted way to meet return targets.”
“There's an enormous amount of need,” adds Clark. “Private debt will become a standard allocation and will come out of the credit bucket rather than the alternatives bucket – and the former is much bigger than the latter. We've reached the point where, for institutional investors, this development is inevitable.”
EUROPE WARMS UP
Thus far, most of Omni's capital has come from North America where institutions have been involved in the private debt space for some time and have large exposures and a degree of comfort. But another shift can be observed as Europe becomes more receptive to the private debt proposition.
According to Kluever, the Swiss were “the first to jump on board en masse” but now there is appetite also from the Netherlands and Scandinavia. With appetite currently estimated at 70:30 North America versus Europe, this is expected to soon shift closer to 60:40.
UK investors, however, lag behind. “A lot already have a decent amount of property exposure through equity investments,” says Kluever. “We would say equity risk is very different from debt risk and we have persuaded some investors of this, but others say, 'It's all just property and I have enough.' Also, the UK is much more consultant-driven. It's important to get the gatekeepers onside but it can be a long process.”
Both Kluever and Clark believe there is a still a journey to be travelled in educating investors, both about private debt broadly as well as Omni's strategy specifically. The latter involves lending short term – 24 months or less – to professional investors in the UK property market.
Described as “experienced and asset rich but cashflow poor”, these borrowers need to operate at speed. And because of this 'need for speed', Omni can charge premium pricing for its finance, which can typically be delivered in four weeks from enquiry to completion and even as little as a week.
“They [borrowers] view our lending as a project cost,” says Kluever. “It's like the cost of a contractor or a lawyer; it's simply part of the cost of the deal. The price is also based on the level of service we provide. It's not just about the underwriting, but management through the life of the loan – we engage with the borrower and offer them solutions.”
The origination of the loans is undertaken by Amicus Finance, which was founded in 2009 with seeding from Clark and acquired by Omni in November 2013. During the last seven years, the firm has completed more than £615 million of lending. It prices on the basis of risk for each transaction rather than, in Omni's words, “forcing borrowers into standardised products charging fixed rates”.
This intense level of underwriting is, Kluever maintains, “a lot of work for relatively low amounts of cash”. The largest loan completed by Omni to date was £5.5 million, but on average the figure is more like £750,000. The average length of loan is around 10 months and weighted average loan-to-value (LTV) is about 60 percent.
Responding to the suggestion that there must be increasing competition from the swelling ranks of online marketplace lenders, Clark responds: “My sense is that brokers don't necessarily want to go online, they want relationships. They don't want to stick something online and wait for funding. Sometimes, loans that can't get done elsewhere get done online with attractive headline rates.”
However, partly as an attempt to understand the industry better, Omni has made equity investments in a P2P site called Crowdstacker (which Clark stresses does not operate in the same space as Omni) as well as Landbay, an online buy-to-let specialist.
But if online lenders do not keep Clark awake at night, what about the banks? “Will the banks come back and steal the opportunity? No, there are still enormous problems at the banks,” he asserts. “They don't know what their business model should be, they continue to shrink, and they have a cookie-cutter approach to lending.”
Now long removed from the stresses of trading, it seems that it would take a lot to raise Clark's blood pressure these days. Even the regulators are spared his wrath.
“Regulation would have concerned me three or four years ago, but now further regulation only acts a barrier to entry for others, so for incumbents it's not bad news. Overall, the trend in Europe is towards liberalisation of markets and rules being changed to allow non-banks to lend.”
As if forcing himself to think of some kind of potential downside scenario, Clark alights upon an economic downturn – but somehow manages to turn even that into a positive.
“We wouldn't want an enormous recession but there's nothing you can do about it,” he says. “What we can do is build a margin of safety by ensuring the right payment is being made for the risk being taken – good, prudent lending with the right LTV. Plus, as long as you can stay in business, never waste a good crisis.”
Clark adds that an increase in interest rates could be challenging if they rose swiftly but, rather like many economic pundits, he doesn't see that happening any time soon.
Indeed, far from battening down the hatches, he speaks of broadening the firm's private debt footprint in the years ahead. In the process of pondering how to do that, Clark is wallowing in his favourite new pastime: planning for the future.