Tikehau: Being agile during times of uncertainty

Market dynamics suggest a growing need for flexible capital, so providers must be ready to move fast, argue Maxime Laurent-Bellue and Jean Odendall of Tikehau Capital.

This article is sponsored by Tikehau Capital

What type of situations does Tikehau Capital typically provide financing for under its Tactical Strategies platform?

Maxime Laurent-Bellue
Maxime Laurent-Bellue

Maxime Laurent-Bellue: We launched our first Special Opportunity Fund in 2016, which we decided to scale up in late 2019 by setting up a dedicated Tactical Strategies Business Unit to prepare for an increased need for bespoke capital solutions in a fast changing and potentially less benign environment. Since then, we have been hit by the pandemic and we now have the first war on European soil for decades. That volatility has validated our approach.

Our key focus is around flexible capital solutions rather than a pure distressed mandate. We are currently investing our second vintage, having raised €617 million for Tikehau Special Opportunities II last year.

We focus on situations where there is a scarcity of funding, which can be for a variety of reasons. It may be that the business is not performing where we can provide rescue or super senior new money facilities, or simply a business with history. It can be an underserved or unliked sector, or it could be a stretched capital structure where we usually look at subordinated or deeply subordinated instruments as alternative to pure equity for both sponsored and sponsorless deals.

We also see opportunities in the secondary markets whenever there is a liquidity crunch.

We take a holistic approach in that we address real estate and corporate risk, liquid and private markets, across the entire capital structure.

How do you source deals in this environment and how does the Tikehau Capital platform help?

MLB: Our view is that having a broad mandate and the support of the Tikehau Capital platform is critical. The firm manages more than €34 billion across four asset classes – private debt, real assets, private equity and capital markets strategies.

Our mandate is highly complementary to our various business units as our team operates and invests across all of those and draws on the expertise of the whole group, which provides us with very good support, particularly on sourcing and sector intelligence. In real estate, for example, we manage more than €10 billion on the equity side and anything credit-related comes to us. On the execution side, we also leverage the intelligence our colleagues have on each local market, on valuations, and their ability to quickly form a view on any given asset.

That agility has proved key. In 2020, the market window and opportunity set in the secondaries space was much shorter than anticipated and we needed to be quick to deploy capital. Having the support of such infrastructure was a huge enabler.

Jean Odendall
Jean Odendall

Jean Odendall: We have a team of 10 working exclusively on this strategy but we can tap into 120 people and sit in the middle of the Tikehau Capital investment platform, which is cross-asset and cross-geographies.

We also benefit from having local guys sitting in offices across Europe. In Q1, we closed a deal in Spain providing financing for an e-commerce business and that was sourced locally.

Another example of that is the liquid secondary market, where we have strong infrastructure supporting our CLOs and performing credit business. Whenever there is stress in the market, we can leverage that credit research team, which covers close to 500 issuers in Europe. So, when we need to be nimble in assessing an opportunity, we are not starting from scratch.

MLB: More than 75 percent of our private deals are bilaterally sourced. Last year, we financed a data centre in the Netherlands, which was a completely hybrid risk across real estate, infrastructure, corporate and technology. It was not a straightforward situation, sourced by our local office in Brussels who were close to the developer. We provided €80 million of senior secured financing and handled the execution hand-in-hand with our Brussels team. Our local presence provided us with a second-to-none edge in terms of both sourcing and execution.

How has the covid crisis shaped your recent experience? Can you share any examples of recent transactions?

JO: In the very unusual period in Q1/Q2 2020, during that short window that we described, we were able to discuss close to 40 names at our investment committee during a four-week period. We invested in far fewer companies in the end, but thanks to our infrastructure we could screen a broad universe of opportunities quickly.

The window of opportunity that we saw in the liquid secondaries space at the start of the pandemic closed quickly during summer 2020 and we pivoted into a more private strategy. Initially, our focus was on downside protection investments, so we did a lot of real estate financing with good security, mortgage-backed and low loan-to-value towards the end of 2020.

As the situation became clearer through 2021, we deployed more on the corporate side, doing more flexible capital solutions. That highlighted what the Tikehau Capital special situations mandate can do, because being nimble was key. There will always be a need for double-digit financing but the end use is always different, depending on where we are in the cycle and where a company is in its business cycle. Being able to cover nearly anything in Europe helps us deploy in any kind of environment.

How is your strategy impacted by market dislocations, and what opportunities do you see in the current climate?

MLB: Our strategy has been designed to be non-dependent on external factors, so we can and do deploy regardless of the environment. Obviously, when there is an exogenous event
leading to a broader market dislocation, that creates opportunities with potentially abnormal risk-return trade-offs, where we typically try to extract value.

The secondary opportunity has improved since February but, unlike covid where the window of opportunity was extremely short, this is more likely to be a slow burn.

JO: Recently, we have seen more unexpected and potentially quite negative events, which have translated into market repricing. We have looked at secondaries opportunities but those are still expensive. We are cautious: we are doing the work and awaiting for the right entry points across a wide range of sectors and issuers.

Likewise, on the private side it is a bit early to assess the full impact of the situation. We are certainly observing some level of stress and demand for working capital solutions, but the banks are broadly responding for now. Going forward, they may be more cautious and that will create opportunities for us.

This year and beyond is going to see maturities that need to be repaid at a time when growth is slowing and costs are increasing, which will compress margins and put pressure on companies, creating a need for flexible solutions.

Which sectors and geographies are currently exhibiting the most signs of distress?

MLB: We are slowly coming out of a period where the most impacted sectors were hospitality and travel. We are now entering a new paradigm that is less predictable because it is about supply chain issues and global inflationary pressures. That makes it difficult to foresee the medium-term effects.

The key question is how long these conditions will prevail because the longer they go on the more they will impact a broad array of businesses. If current energy prices were to sustain over Q2 and beyond, the impact at European GDP level would be severe. At that point, it becomes difficult to hide. Right now, it is essentially energy-exposed and non-hedged businesses that are suffering but those could be the tip of the iceberg.

On geographies, we have a highly diversified portfolio across Western Europe and the pipeline remains diversified. There is no particular jurisdiction with more opportunities. European countries have all stepped up with different state-sponsored support schemes through covid and so any differences that arise down the line will depend on the sustainability of those mechanisms.

France has announced the extension of its state-backed loan to support companies impacted by the conflict in Ukraine, for example, which is a strong commitment; but is it realistically sustainable?

JO: In all industries, we see issuers that have exposure to energy and commodities experiencing issues. In packaging, for example, companies are either increasing prices materially or shutting down their manufacturing sites, which can have a significant impact.

Any company that needs to buy commodities to manufacture its products and has a limited ability to pass those price rises through to customers is experiencing challenges, especially because going out of covid, balance sheets are sometimes still carrying too much debt. n

What does 2022 and beyond hold in store? Could this be the year that special situations dominate private debt investing?

MLB: Special situations are part of the alternative lending landscape and complementary to traditional private debt. Considering the broader uncertain environment, it is fair to assume that special situations and capital solutions strategies will be in the spotlight both in terms of appeal for LPs and contribution to various funding needs ahead.

Dislocation is not yet back but some idiosyncratic situations arise and sentiment has certainly weakened recently. There’s currently an accumulation of risk factors with supply chain disruptions, inflationary pressures and geopolitical uncertainties leading to a potentially quite dangerous cocktail. Central banks have little headroom and there’s ultimately an increased recession risk, which would not be a great combination with excessive leverage.