No one can accuse Pemberton, the fund manager based near London’s Victoria rail station, of lacking ambition. In the course of a wide-ranging conversation with Private Debt Investor, Symon Drake-Brockman, the firm’s managing partner, speaks of two new strategic launches in Q4 2016 and then – for good measure – two further strategies to be launched in Q1 2017.
Details of the plans for later this year were not fully available at the time of going to press, but one strategy was UK-focused, while the other was a European strategic credit strategy, with a flexible mandate to invest in subordinated debt and high-yielding recovery plays in the European market.
Already an established European mid-market lender since it was formed three-and-a-half years ago, Drake-Brockman reveals that the firm is seeking to raise a further €2.5 billion in capital across its various strategies over the next year. The European strategy, which had raised around €1 billion at the time of going to press, was seeking a final close at the end of Q3 on around €1.25 billion.
All this seems to fly somewhat in the face of the traditional summer lull (if such a thing does really exist other than in the imagination) as well as the pause for breath taken by many in the market in the face of such volatile prevailing conditions. But Drake-Brockman appears sanguine, if not bullish.
“There are positives for us every time there is uncertainty,” he says. “Europe was looking more robust but, with developments such as the UK Brexit and Italian bank restructuring, there is uncertainty – in the face of which the banks always get nervous, pull back and lending capacity is restricted. Whereas we have committed capital and we want to put it to work.”
The caution of the banks in the post-crisis world, and in the face of regulatory constraints, was a major driving force behind Pemberton’s arrival on the scene. “We saw a significant shift in the banking world out of capital-intensive assets,” says Drake-Brockman. “It was an area where the banks had dominated, and we decided to build a European platform to facilitate continued access to deals.”
The firm was rooted in the belief that there would be less reliance on bank syndication and that thriving direct lending businesses could be built by setting up a network of offices across Europe (the firm is located in Paris, Amsterdam, Madrid, Milan, Frankfurt and Luxembourg, as well as London) and hiring people familiar with the borrowers in each jurisdiction.
In building a 21-strong senior team (according to its website), Pemberton has sought to blend two skillsets – those from the asset management industry bringing portfolio construction skills and those with banking backgrounds to focus on origination, structuring and underwriting.
“We have a bank style of underwriting,” notes Drake-Brockman, “and we have a large pool of credit analysts. Another big thing for me is post-deal risk management. I was in Asia in 1997 during the financial crisis and I worked through the Russian and telco crises in the late 1990s and then came 2008. The lesson is that the world can change a lot in a couple of years and monitoring credit closely is critical to identify any signs of stress. Risk management has become a big focus for us as an organisation.”
He highlights the presence on the team of chief credit officer Conrad Teppema, the former deputy global head of risk management for ING Bank and global head of corporate credit risk.
Furthermore, he adds: “We have people who have run structured finance and leveraged finance businesses in their jurisdictions with 20-plus years’ experience. They have great sourcing skills and an in-depth understanding of what they invest in.”
He says this in response to a question about the extent to which institutions may choose to invest directly – his view being that the skills of the best fund managers are difficult to match.
Drake-Brockman himself has over 25 years’ experience in financial services with the likes of RBS, ING Barings and JPMorgan, holding a number of senior executive positions around the world. At RBS, where he worked from 2001 to 2009, he was latterly global head of debt markets with responsibilities including leveraged finance, high yield, capital markets and loan syndications.
But having the right individuals on board was only one part of what the firm anticipated would be a winning formula – the other was teaming up with the right organisation as it sought to go about winning the trust of institutional capital. It did this by handing a 40 percent share in the business in August 2014 to Legal & General, one of Europe’s largest insurance companies. The recognition that L&G brings is important, says Drake-Brockman, not just in the institutional investor community but also with banks and borrowers.
“We see ourselves as connecting institutional capital to key borrowers and to do that you need to be a partner to the banking community. The borrowers and banks have known L&G for a long time and that gives them comfort.”
He adds: “We work in tandem with key banking organisations and do not seek to push them out of relationships. We might be the largest lender to a borrower, but they will still need the banks for services we can’t provide.”
When it comes to lending, however, Drake-Brockman is convinced that the banks will face a continuing squeeze. “The pressure on the banking community won’t go away,” he insists. “There is pressure in Italian and German banking, for example, where the interest rates are so low, there is a lot of competition and many of them just can’t have profitable strategies.
“In the long term, that will lead to consolidation in European banking at the regional level already seen in Spain. In Japan, where you have had low interest rates for a long time, it put pressure on profits and we have seen consolidation into four large banking groups. And every time the banks get consolidated, you see lending limits become smaller than when they were separate entities.”
Drake-Brockman thinks there will be a transfer of loans from banks to institutional investors, and also that investors will gain access to a wider range of investing options that will match their needs more closely.
“Insurers need more transparency around risk because of Solvency 2,” he says. “There will be more segregation of risk in Europe going forward. From a narrow corridor of leveraged loans, we are seeing options opening up from sponsor and non-sponsor deals and working capital facilities through to asset-backed lending.”
Pemberton has chosen to focus more on the non-sponsor side than many of its private debt peers, with such deals accounting for around half of its total. “Non-sponsored deals take longer to process, but we do a lot of work on the due diligence side and we find they are often extremely well-run companies. If they are a key supply chain to multinationals, then they will have had to go through a rigorous process to assess and validate their credentials.”
As long as these companies are leaders in their niches, Drake-Brockman believes they should be fairly recession-resilient. “They will have a strong order book even in downturns,” he reasons, “because the multinationals need to keep their key supplier relationships going. But if you’re a marginal player you only get excess orders in the good times and then the multinationals switch you off in the bad times.
“They are often multi-generational family businesses that need acquisition finance and growth capital. The banks have in many cases been supporting them for 15 or 20 years but, as they are non-investment grade, the banks now have limited appetite to put them on their balance sheets due to Basel III.”
On its website, Pemberton says it has expertise in sectors including media and telecoms, energy and power, wholesale and retail, food & beverage, manufacturing and engineering, pharma and healthcare, consumer goods and support services. Drake-Brockman describes the investment approach as “very diversified”, but says that all target companies boast “long-term visibility of contractual cashflows”.
He sees this ability to diversify as playing a crucial role in the ongoing broadening of the investor base. With interest rates so low, there continues to be pressure on the likes of pensions and insurance companies to diversify away from low-yielding bonds. Drake-Brockman thinks that this creates a great opportunity for private debt over the next 10 years as capital migrates into the asset class.
“But managers have to show the ability to deploy capital and offer a diversified portfolio. If you want to be in direct lending you’ve got to show you’re doing deals in all parts of Europe and you’re not just the same as the CLOs.”
Asked about what he sees as the most important aspect of the deal process, and what separates a winning approach from the less successful, Drake-Brockman responds: “We spend a lot of time in the early phase of a deal looking at a variety of economic scenarios. You can stress test against 2008, but there is a difference between theoretical analysis on a spreadsheet and the actual event happening and you being on top of it.
“You have to make sure that all of your best-in-class management is implemented when the worst happens. Sometimes, the best management teams can get blinded by their own belief in the success of a business.”
As the conversation draws to a close, Drake-Brockman brings it back to the theme of ambition. It’s clear that this is a firm happy with what it has achieved so far and continuing to think big. “We created the partnership with L&G, we have built a private debt and direct lending platform and we see the business expanding into other asset classes,” he says.
Asked to look ahead to where he wants the business to be in five or 10 years’ time, Drake-Brockman pauses before replying: “We’ve had a great couple of years and a very strong reception from investors around the world. In my view, there is no reason why we cannot ultimately build a €30 billion AUM business in Europe.”
THE UK IS STILL OK
Given the surprising (to many) Brexit vote, talk turns to prospects for the UK. Thus far, Pemberton has only deployed around 30 percent of its capital in the UK – which is relatively low compared with many peers that have a European focus – but he sees no reason to be negative about the country’s prospects.
“No one thinks Brexit will create a 2008-type event,” says Drake-Brockman, “although there is some concern around an economic slowdown and business activity over the next 18 to 24 months. There are slightly fewer transactions amid caution from the banks, but that caution is a positive for us. The UK remains one of Europe’s most attractive markets due to its labour laws, enforcement rules and the performance of the economy over the last few decades.”
IN THE DRIVING SEAT
It’s a familiar response when PDI asks interviewees about pursuits outside of work: “taxi service”. Drake-Brockman is no exception. In his case, this involves his twin 14-year-old daughters, who, he says, are making the gradual transition from riding horses to being ferried around in the back of a car.
Any other spare time is spent either on the golf course or renovating his home in Marlow, Buckinghamshire, which he says has been a three-year project (and counting). Drake-Brockman is a self-confessed country lad at heart, having grown up on a large farm in Australia.