The Age of Private Equity and Credit

well good morning and thank you and again thanks to the Milken Institute for allowing us to be here today and at the cover a subject that I think is more exciting than whatever Mike is talking about in the in the real big room with Ken so first to go through and introduce my panel here starting over here in the right Glen August with Oak Hill who's CEO of that Victor Khosla here who's at SVP global is CIO Greg Lippmann to my left at Libra max he's a CIO Virginie Morgan to his left Lucy EO of Euro CEO and then Raymond's fighter at the end chairman and partner at BC partners so last year there was a panel that I and Virginie were on and we were covering whether there was too much dry powder in the private equity business and we realized on that panel that the biggest subject to talk about was this migration of money from the public markets into the private markets it's it was our own immigration crisis on the one hand but one where you were welcoming all of this money moving at the private capital and so I want to cover some slides as an Italian I could use my hands to make hyperbole in big points but slides here I think are going to help us show how dramatic this is so if I can to the slide man could you give us slide number one please all right slide number one so what you see here is a number of public US companies now if you were a botanist you would identify this as a endangered plant the pollen count has gotten down by 45 percent of the last 20 years slide 2 please now here you have the exact same line which is here in gold but the blue line is the number of companies that are owned by PE now I'm kind of like PE firms but if you were a public aurilla to God you would see this as an invasive species slide 3 now while this has been going on the IPO business is down 70 percent from what would have been the average in the 90s to what's the average today 70% in number of transactions what's interesting though are the transactions that are being done are much bigger than they were before they're in the hundreds of billions of dollars at times whereas in the past a billion dollars was a big deal and they're also staying private longer and and that we'll come back to in a little bit slide five please now here we see what's happening in private equity assets under management and an interesting statistic is that there's been five point seven trillion dollars that's moved into this private capital since 2009 slide six same kind of slope occurring in private credit private debt last year alone it was 110 billion dollars raised slide 7 and if you're a commercial bank you're seeing in the blue your contribution to the capital markets related to let's say financial sponsor work in the mid market being increasingly small being crowded out by a disintermediation being caused by private capital institutional money effectively being in the loan business then finally slide 4 so here just to not kill public markets completely while the percentage or the number of public companies have been reduced the value of those public companies continues to increase and increases at a particularly good rate now first is this is a phenomenon in the US and hopefully a little little later version a might tell us whether she's seeing this and maybe Raymond - whether they've seen any of this overseas but it seems to be pothinus is that the public market is focusing on the big the simple the liquid and and where many of the panelists make their living in the complex the interesting the distressed the levered those transactions are going to the people up here today so what I'd like to do to start is maybe thirty Seconds to a minute will run down the lineup and give us just a background on on what the firm you're with is doing and and kind of how you fit into the whole private private capital scheme one very quickly thanks for being here Glenn August CEO and founder of Oak Hill Advisors I've been doing this for 32 years today we manage about thirty four billion dollars across the whole below investment grade credit spectrum bank loans high yield stress distressed private credit structured credit US and Europe we do it for large sovereign wealth funds and separate account form large pension funds we do it in commingled funds how we do it through a CLO platform as well and I've watched and been a part of the evolution of the leveraged finance market and so both as a student observer participant I find this stuff fascinating still after 32 years and it's nice to be here so thank you Victor Khosla and the chief investment officer of strategic value partners we we focus on distressed debt on event live and debt and we also take control of companies and run them we have a your classic distressed for controlled sort of product about eight billion dollars in assets under management a hundred twenty people and and then when you kind of think of us our business is split almost equally between the United States and Europe if I was to if I was to kind of drive distinctions we find that our business is getting so much more competitive the charts with Jim had larger and larger asset sizes much more competitive business and to distinguish ourselves to have an edge what we really started to do ten years ago we started to do quite a few different things right so we start to source deals directly from commercial banks and today we compete with Wall Street we've got larger sourcing trading teams than Goldman Sachs does for instance and the second thing we did was we said boy there's a lot of low-hanging fruit operationally when a company goes into bankruptcy it you know management is just beaten at that point in time after the last few years there is low-hanging fruit and ten years ago we started to build operating teams in-house so as you look at us today as a firm you see not just hopefully smart investment people but what you see is direct sourcing and origination and operating control of businesses there are 10 businesses today with 15,000 or so employees which we own which we controlled through the distress but restructuring process okay thank you Greg Lippmann I founded Libra max capital in 2010 when we started we were just a hedge fund with 400 million under management and 15 employees and today nine years later we have seven billion across a variety of strategies from from from traditional hedge funds to private equity and we own a CLO manager more 50 people our involvement in direct lending in private credit is more on the side of taking advantage of bank regulation and making loans to finance companies to warehouse assets before securitizations that were typically done by the banks that they're prevented from doing now and in a lot of cases we're able to structure transactions where we have a better attachment point more stringent triggers and protections of our honor assets at wider spreads that are available in the public market some vision you Morgan the CEO of euro Co I've been I joined the company about 12 years ago I wish I could say founded it I'm a big investor in this company which is a listed private equity company we were born French 100 years ago We certainly have some European successes and we have ambition in the US which I decided to build an open to open an office in the US about four years ago we are essentially private equity I've got about 250 people either in Europe or in the US we have invested in more than 300 companies in Europe and in the US and it's basically from venture to gross capital mid-cap large-cap that's essentially what we do bringing significant value so I'm certainly you know quite aware of that shift from public to private market and also you know very well aware of the benefit of being a public company myself which is what has been you you are a CEO for many years Raymond spider I'm the chairman and partner at BC Partners BC Partners has been in business for 33 years and we have three lines of business at the moment we manage about 27 billion dollars of AUM the main line of business which we've been operating in for the past you know 33 years is private equity that's our mature business which we continue to grow you know there we are investing currently our tenth private equity fund and in that strategy which we operate in both Europe which is a legacy in North America you know we buy basically controlled States in mid to large-sized companies you know with a view of course to you know creating value developing those businesses so that's in PE we have a credit business that we started two years ago now where we currently manage two billion dollars of assets where we built the team we've been the origination team we build the foundation and now we're scaling it that business has two components one is a yield business when is an opportunistic business and a bunch of insurance solutions products and we have started about a year ago a real estate business which is European based you know which we are currently developing there's no question that in all of the slides that have been presented so far you know illustrate which we always know which is that you know over many many years now private capital has delivered and as you know enough historical evidence at this point it's time in time has delivered more consistent and higher returns than the public markets you know and I think you know what we're seeing across as the classes which you've seen on the slides is just the illustration of this which you know I don't necessarily believe is something that's going to stop anytime soon so based on on that set of introductions and disclosures of what the panelists work on you can see that what we have up here is is the range that boxes is subject very well we have US and Europe or global we have a liquid and liquid strategies we have debt and equity investors we have distressed in dusters and and good market happy day investors and then we also have public and private companies one public company so we're gonna be able to kind of last sue this and Titans type it up a bit so I'm going to start with Glenn and a bit of a generalist question we've seen what's happening to the markets is it because what you do on the private side is is so attractive or isn't what the public markets do is no longer competitive that that leads to this flow and then flow in your direction so I think investors are looking to construct portfolios to hit a certain return target and that return target for most pension funds institutions is in the range of 6 to 8% and of course everyone would like higher but with interest rates 10-year rates at two and a half it's hard to do that and so the reason why alternatives as an asset class broadly defined including the strategies that we all talk about is simply put because in the core fixed income market with rates where they are you can't generate those returns equities have had obviously an extraordinary run people got excited in December and maybe there was going to be a greater value opportunity that would be more prolonged in that snapped back quickly and so if you're an institutional investor and you're trying to deliver a six to eight percent return for your investors and you think the public equity markets are whether there's six to eight on average five to seven you Peck and two and a half in core fixed income and investment credit spreads have tightened back to 150 then you need alternative investments and so credit and private equity makes sense in portfolios and the question then becomes to me when we talk to investors is where do you want to allocate exposure and your alternatives between private equity and private credit and what I would say without being overly biased because I'm a big believer that private equity makes sense and in portfolio I think private credit has gained a lot of interest over the last couple of years in particular and will continue to grow in interest because on a relative value basis the opportunity to make eight to twelve percent unlevered type returns and have more downside protection and credit versus a private equity portfolio which I'm sure our colleagues up here will say they can make fifteen to twenty percent but the reality is when you look at ten years of data in the more of the greatest bull markets of all time the returns are in the 11-12 range and so private credit makes a lot of sense we can talk a lot more and else we're going to be happy to comment later about portions of private credit whether it's the middle market slide that was shown earlier whether it's actually providing we're very excited about providing direct financing to larger cap transactions on a private basis whether it's distressed on both an opportunistic basis in Europe or elsewhere or whether it's being ready for more dislocation so all those niche strategies whether it's hard asset strategy I mean whether CLS structured credit strategies each of those strategies offer investors a different risk adjusted return profile in the firm like ours is trying to have array of strategies to meet the risk-return profiles of our investors so that's how we think about it I'm going to jump over to Ray or Raymond and Raymond when you look at the what Glen is just covered about private debt your firm has historically been a very big player of global private equity but you've been expanding into private debt can you go through the logic of that and then I'll have a follow up for you of course the first thing I say though is that you know for those of you who are in the room Glen is just providing numbers which I'm not sure I totally accurate it's good it sounds better when he's a French guy you were you were expecting me to say that but the reality certainly is that if you invest in the fourth quarter quarter manager that's probably what you'll get but the first and second quartile manager continues to continue to deliver above 20 percent you know as far as your question is concerned indeed we decided a few years ago to get into private debt first of all you know what people need to understand is that if there's one asset class which is the most adjacent and synergistic with private equities it is private debt and that's the reason why we decided to go into it obviously you're investing in the same companies simply you know somewhere else in the capital structure and when you manage both on an integrated basis which is what we do as opposed to separating the the the unit you know it gives you it you know frankly it makes us better be investors because we understand better how to manage the liability piece of the capital structure we understand better where a better appreciation of how the market prices those securities you know with more knowledge and frankly and from the private debt standpoint you know actually our industry expertise because we're organized by sector you know our network of contacts and actually in even in certain cases which has surprised me of sourcing ability in PE you know we've we've been in situations whereby we're looking at IP invest investment which actually generates a proprietary you know private credit and structured credit opportunity so you know that's the reason why we decided to do this I mean the other reason of is that increasingly although it's probably only the beginning at this point in time some not all but you know very few but you know it may it may evolve over time some of the very very large institutional investors are increasingly interested in instead of investing your game you invest in that strategy and that strategy why don't I generate some more of a strategic relationship with you know the GPS that I'm I'm close to and that I value who are good across several strategies and clearly if you only mono products you can't necessarily respond to that demand so that's one of the other reasons why we've done it but the primary reason is the one that I've already explained Jimmie's yeah look I do agree with what Glenn said what Raymond said in a way yeah great growth as you look forward from here feel feel pretty good about it and going and raising money for new asset classes great but one big caution we are late in a cycle the lending today and the public markets are willing to lend you the way they are in private private debt a lot of the lending going on where you can make coupons is for 10 million 20 million 30 million EBIT are businesses and when you are starting businesses from scratch today at this point you you're not you don't have any distinct sourcing and by the way I would just really worry that a lot of the talent we see on offer right as at this late in a cycle which big firms are able to hire they're not really hiring the sort of talent Glenn has for instance in kind of his business right so I my my only concern is not so much Boyer great there's growth but just just watch out this late in a cycle without a distinctive competitive edge just kind of what happens a victory back and I remember 2014 I tried to convince PMO that the world was going to end and we should be doing distressed addresses were you saying the same thing back then and what have you been doing for the last five yeah you know what we what we found is distressed is distressed is not a evergreen strategy it you clearly need a crash or so on to give it some juice right but what we find for ourselves was over the last five years we've been able to build a business which is us Europe we've been able to source directly and I think what we have done over the last five and the last fifteen years is we tend to invest pretty steadily maybe twenty percent of a fund in a year like two thousand eighteen or nineteen and then you get a crash and we go to thirty percent a year thirty five percent a year and I think for us all that as well there was a slide up there could you put slide eight on plays if you look at that slide you know in a market where in the u.s. there hasn't been very much distressed debt if you look at European bank disposals on the right side European banks have been cleaning up their balance sheets a hundred billion a hundred twenty five billion euros a year in the US there's only a hundred billion of non-performing loans and bank balance sheets today right so when you look at this there are ways to make money in these years but you've got to look differently you've got to look elsewhere and and you've got to be ready to lean in when the crash kind of comes so I'm gonna go back to Raymond for the follow-up question that I was that I had earlier so interest rates are a big part you know very low infinite capital available obviously that's driving great returns on the private equity side for you right do you do you have a strategy or concern when those rates or access to capital maybe move the other direction that's for me yeah well first I'm gonna stop maybe by correcting some of the stuff that you've said I don't believe necessarily at all actually that the availability of capital debt capital is creating you know much better returns for the for the PE funds you know the reality is that we are all public market investors distressed in debt investors P investors operating under a an environment where valuation levels are high where we are late cycle so you know the question is not well that's the environment what do I do and you know do I wait for the next distress cycle or the do I sort of stay on the sidelines for the next you know six months one year two years three years for the environment to correct you know the real question is where do you find the right opportunities and the right risk rewards the current environment and the good news is that you know at least as far as what we do on the on the PE side you know you need to be incredibly disciplined you need to hustle you need to have a clear strategy but if you do it's hard you can continue to find you know appropriate risk Awards you know where when you when you take on projects which you know perhaps require a bit more work than you know simply buying in 2010 and then studying in 2014 not sure I totally addressed your question but we asked about her structure because I think that as I go through your investments not a lot of them seem to be interest rate driven and you also have a public-private hybrid of how your money is raised is is is that related what are the advantages of having a public stock private capital and is one of those advantages the freedom to be long-term thinking and have patient capital but is a disadvantage that you might be required to stay away from certain investments like distressed or leveraged deals and thank you Jim okay I mean to your earlier question and Raymond could have addressed it I mean what you showed in terms of us slides us trends you see the exact same thing in Europe even more so I mean less public company having the drop over the last ten years has been thirty percent less public company in Europe and you know explosive private equity private equity markets so certainly some trends even even stronger as far as euro zero is concerned you know the fact that we have a public company meaning permanent capitals the size of the company we are managing about twenty billion dollar 2/3 of this is private equity so investments in companies in private equity type but of this about seven billion is permanent capital so on the band sheet of your a CEO so I think what we in we've been public for many many years so we were born public in a way because the company has been public since the end of the 19th century believe it or not so there's more public company now in in our environment more private equity and becoming public but the size of the capital that we have allows us to do a number of things the first one is to invest very long term if we wish to and I think that certainly helps with V what sort of industry can we we get into or supports maybe we can take more risk and hopefully get more rewards because we know we can hold on to those investments for longer if need be I'm very often asked you know how long do you actually you know keep your investment on on your balance sheet and the answer is not so different than the average you know length period of a private equity fund because it's about five and a half or six years but the fact that you can hold onto your investment for much longer makes an enormous difference it certainly helps in terms of the dialogue that you have with the entrepreneur and the management team it certainly helped in your decision-making so that's one the second benefit of having permanent capital is that we sort of applied to ourselves what we were doing in our portfolio company so I've started thinking about seven years ago but what about buying businesses for your SEO and expanding the firm with more talent more talent pool and we progressively did that by either buying existing companies in private equity either small cap or venture or gross or launching new new strategies so basically either buildups or organic rose same recipe than the one we have for a portfolio company and that's how we've grown so fast over the last years so for public investors they have a diversification in in buying into uracil stock they are basically accessing public equity you know private equity returns but through a public equity investment so they get the liquidity although they also get to discounts on the net asset value which you know we're working out to you know reduce but depending on where you are in the cycle if you're a public company you're likely to have you know a wider or you know shorter discount depending on the momentum so I think that that really allows us to think in a very ambitious and aggressive manner in our own development and certainly you know before you have to convince your LPS or institutional backers that this new strategy that you want to launch makes sense and you have track records if you really believe in what you're doing then your financing hundred percent on your balance sheets is there any tax benefit to being public or private there in the in the u.s. it's a big driver yeah I mean there's this you know become you know move into becoming a full-blown corporation in the u.s. you know we are we are a corporation we are paying tax these lectures like any cooperation depending on the level of profit what's more interesting is how much you own and how much you buy into the company in which we invest and that's that's where the tax structure may play and you certainly have to have control at least a minimum of 5% so no it's not similar to what you have in the US I think you know the big game of being public or private is making sure that you can being a public company the challenge for us and for me as CEO of these companies to make sure that you can serve a regular dividend because a lot of my share there are also here for dividend and that you can create on a recurring basis a share price appreciation so that you can serve regularly and you know increase of both dividend and stock price appreciation of at least 10% a year well one of the things that typically in in private capital you you step out do something new by hiring someone that knows how to do that you go to your old relationships and you get funded acquisitions there's something that your anzio has been doing you know Greg you've recently or you know relatively recently considering your background been getting into private debt and and bought the 6cl ours with trimaran so you you you you've made two decisions one decision is to get into private debt and then to the decision to do it through acquisition could you go through your thinking on that sure my voice I don't know that they can help my firm get as big firms around me if they can anybody could that would be great we recently entered into as we took an investment from tile partners and used some of those proceeds to buy a CLO manager what attracted us about getting involved in cielos was as a hedge fund and in some of our private equity vehicles we've been a longtime investor in CLO tranches and as part of the acquisition we got eight eight credit professionals and access to a library of over a thousand credits so we felt on the business side there was a big synergy in terms of getting smarter about becoming a better CLO trans investor becoming smarter we've been a corporate Direct corporate mostly public corporate investor for a number of years get access to the write-ups for the corporate side I think in addition on a business perspective the CLO manager gives us insight quicker to the turn of the cycle from the corporate perspective as we'll be on top from a monitoring perspective corporate credits so it's going to make us smarter on timing the turn since we all know it's late cycle whatever exactly that means and we're 18 to 36 months perpetually away from the next recession but hopefully the CLO manager will give us a certain amount of insight there and when the cycle turns increasing our distressed allocation should be helpful from all the access to data will have on the CLO side on the private debt side what I would say is you know as Marcus mature post crisis everything becomes less about the beta of let me just get assets on because assets are recovering from the crisis and much more about exactly what assets you're gonna buy and how you're gonna risk manage those assets and select them and what we've seen on the public side is markets are maturing there's a big stretch for yield because of where Treasuries are because of Fed policy and the public sector securitizations people are forgetting about what happened pre crisis and issuer friendly structures are becoming more and more prevalent and yields are becoming lower and lower so on the private credit side we're able to manufacture and originate asset back credit that has the characteristics on an underlying loan basis that we like that have attachments that we like on a capital structure basis and that have various triggers and structures that are not able to get as easily in the public market as a result the main reason being issuers are either too small and they need to get warehouse funding because the bank regulation they view these these short-term asset based lending opportunities as short enough duration that they don't really they prefer the liquidity over quibbling over how much yield they're paying out or they're they're maturing businesses and they want to grow and they need growth capital and it's a lot cheaper to pay us too much to give us debt than to take equity investments that's demanded much higher returns I think playing in the in sort of a niche between taking advantage of government regulations so taking risk that banks used to take is where we see levels of attractiveness right now one of the things Greg that that that I think about when I'm going into an illiquid position is a quote back from you about being in a pool without a towel and so being a guy who's so liquidity oriented do you ever find that maybe in the future you could find yourself with some of the private lending you know pool without a towel where you'd then have to turn to the some of the guys am i right for for cover hi well I've never if you're desperately looking for these guys I think what's really important is is to manage sort of the liquidity of your of your of your funds and I think one of the things that we really like about about what we're doing is so generally you know my view about a lot of private debt is its seven-year debt people love it because it's par until it's not par whereas public credit you know it's par it's 90 it's 95 it's 85 and if you can sort of just set it and forget it if you believe that you know like there's a Disney movie all dogs go to heaven do you believe that you know all debts are repaid not having to worry about about the timing of pricing is great but what we love about private credit is actually it's enabled us you know we feel the Goldilocks era that were in now for the last 10 years it's gonna end and it's going to end with either higher interest rates or or recession it's not gonna continue the tenure no it's not gonna stay in like a you know low low to mid twos percent forever and and when it ends if it ends with higher interest rates and sort of a boom I think a lot of things are gonna be hard to refinance and if it ends with a recession there's gonna be a lot higher defaults so what we've done in private credit is we've shortened up our duration a lot we have most of our private credit is one to two years and as we think about your point about needing the towel I think the key is really knowing the liquidity of your funds right so so our master fund is quarterly 90 with a 25 percent investigate our our sort of direct lending is 10 to 15% of the fund 70% of that is one year duration 20% of that is 2 year duration so our view and we're really really confident about the other 10% so where our view is you know that what we're getting in going it's a private credit is we're getting shorter duration than you get in the public market we're getting you know better underwritten collateral with tighter triggers okay I'm gonna go over to both but we'll start with Glen and then Victor so I have so many things to say without a question you could you can you could tag them on to the answer so first in we're at the third time in the in the last 40 years of leveraged finance history where the private multiples are higher than the public multiples and and because Glen you started in the business when you were 10 years old you've been here for all three of those times and the late 80s and then prior to the financial crisis and then now so first and then Victor I want your view on this is this really the leading indicator that we're about to go into a downturn how soon is that calm and what are you guys gonna do to pivot for it so glad I'm so real quick on the question everyone is late cycle the world's coming to an end but as I would highlight as was commented on people have felt that way for a while we're in a different world technology has changed things inventory systems have changed classic business cycles that's not to say that we shouldn't be cautious now when you have higher leverage and you have worse documentation and when you have more money chasing fewer deals the returns are lower I mean the best time to be in private equity is when you have low multiples and low earnings the best time to sell is when you have high multiples and high earnings so that's the backdrop and you just can't go home and say I'm gonna wait for the next five years or one year or three years you just need to manage your portfolio defensively and so that's one two is the business has changed dramatically as it has grown and matured the early days of private equity when you could put up five percent of the capital structure at 95 percent debt with the help of Mike Milken and others that doesn't exist today and so not a shocker when the business gets more competitive returns go down but that all being said even though I may disagree with Raymond on the exact returns for private equity because I know everyone in this room only invests in first quartile funds okay but private equity is a good solid asset class so again the question for investors is worthy allocate capital in a late cycle but a cycle that can still go on for a while and I happen to believe in a much longer discussion it's more about political side it's not about rates rates seem in much better shape I don't think we're going to see a three and a half ten year for a while you could be in low growth for a while Jay Powell thought in October this could go on for a really long time until there's more concerns about global growth that's that's first point secondly the distressed market is a great opportunity at two x one is when there's for sellers recession and dislocation the market and all of us can make a lot of money when that happens and then the second time is the more more idiosyncratic segments of a market industries that are in distress were those investors who really have capability can find opportunity I entirely agree with Victor buying assets from the German banks that have been selling has been a great opportunity for us and for others on the on this panel because they're not prepared to execute what needs to be executed on the structured credit side as Greg was talking we've built in our business a fifteen billion dollar loan business we sponsored 15 billion of cielos and we managed a three billion dollar portfolio trading in and out of other people's debt and equity in their structure deals and we're ready when that opportunity comes when as this location like there was in the first quarter of 2016 and everyone was walked everyone who had a large energy exposure in their cielos was walking out of the pool with no towel and there was a massive dislocation and a great opportunity so our job pier on a daily basis and all of us have our own strategies to take our spots where we have our own industry knowledge where we have our own proprietary sourcing analysis management teams relationships cease on those opportunities generate good risk addressed returns regardless of the environment and the last thing I saw say on this private credit when I think about the evolution of leveraged finance in the early days it was Drexel during the high-yield bond financing then the banks bought up a lot of the the the banks the banks bought the investment banks who were doing the financing in the third decade of leveraged finance guys like ourselves and Apollo and GSO got a lot Blackstone got your gist of lexer got a lot larger and now in this fourth generation of leveraged finance there's these giant pools of capital run by professional firms like ourselves there's giant pools of private equity and the banks not only in the smaller cap world but in the larger cap we're getting disintermediate because why not just work with a relationship you have for decades and just go directly we can write those same checks so you got to be careful you got a pic credit managers really do make a difference and you gotta be opportunistic Victor you up you know let me just add one more thing to the thinking on this right so you know the we all tend to we're all conditioned to think about a recession and a great opportunity it kind of creates for credit investing for distressed investing right and if you think of it the world like that you say boy I only invest in 2002 and 2008 and no other time you know what has happened in Morton finance something something quite troubling has happened in modern finance in the last ten years the amount there's a real mismatch in liquidity you have today in classic high-yield you've got a high-yield market which is seven times the size of what it was 20 years ago 25 percent of it is daily liquidity it can just redeem out ETFs mutual funds one day daily liquidity the total amount of trading capital on the other side has shrunk it's a fraction of what it used to be so now in today's financial markets and by the way I love it okay what I'm gonna tell you next you could have a perfectly reasonable economy in the u.s. we had a fine economy in 2011 high yield spreads gaped out to a thousand over in 2015 high yield spreads capped out to 900 over liquidity mismatch high-yield funds loan funds want to sell there isn't enough demand of that so I think so I think when we think about opportunities I wouldn't think of it as just oh boy it's a recession which is going to do it it's going to be these liquidity driven crises there were two of them in 2018 in February and in the fourth quarter 2015 was big 2011-12 was big all this is happening even in a US economy which is growing right and that is for people like us that is the opportunity well years ago an exporter of mine from Drexel and two others had started a restructuring shop and as the investment banker I am I went in one time to call on them and they had a big big painting in their conference room of three vultures one of each representing batches they did and what I find funny Victor is if I look at what you guys do I can't use that metaphor for what you do so is it distressed is kinder gentler is the branding better or is it because you're more operationally oriented than my old client would have been people like us at in place III have a sense of some of your businesses but look people like us are not buying distressed debt to flip it that flipping stuff went out ten years ago for us we're buying distressed dirt to take control of businesses and you heard me describe it earlier some of these businesses are grossly mismanaged the last one or two years before bankruptcy to improve that right so now now look is that vulture issue I don't know you know we're working out a deal input and we're having the US ambassador believe it or not we've got the US ambassador helping us a little bit in Portugal with this deal and I love the way he said it when he went to the Portuguese government to talk about us he said these guys are Eagles I've never heard that before I loved it it's Trump's ambassador in the new real estate developer ambassador in Portugal but that's that's that's the world we're in so there are clearly different distress are you there are clearly very different distress strategies and the ability to add operational expertise is clearly just becoming another private equity player which makes sense but the reality is that if you buy into a company that has too much debt and you're able to buy that debt at a sufficient discount you can lead as we have done as many up here have done you can convert that debt tech what are you in Star to new and so or it can be in an industry like shipping or certain segments in real estate and Europe and particularly where there's been such dislocation where the banks have thrown in the towel and have chosen to sell or choosing not to execute the right optimization strategy well you can make very attractive returns with a good downside protection so again I don't think that is necessarily vulture ish and you can work in a very very constructive way with the parties but anyways it's just a few I mean I think we were sort of looking in the mirror and back in the mirror okay let's let's sort of look forward and I'm going to make a few statements which are probably and expects it hey I think there's no there's there's there's less money after more deals because you say Jim that there's more dry powder than ever I don't think this is right I think there's about the same dry powder today in 2019 than they used to be in 2007 but guess what there's twice as many companies and the private equity ownership whatever you call it the private equity ownership so our addressable market is way bigger than he used to be in 2007 second I think the private equity has to be super proud of what we are collectively bringing to the company that we support in private debt private equity even distress that because we've brought so much competence to those companies we're talking a lot about returns here leverage and liquidity and credit but what about talking about bringing values expertise responsibility ESG operational expertise how much investment are we all made in hiring the greatest people in the industry coming from the corporate world operating partners bond member that's what we bring to those companies so there's no just luck or miracle that those public company become private because we actually bring competence expertise ambition way more than just money then third I think everything that we do here around this panel is going to last pretty long and actually coexists at the same time together I don't foresee something as similar as what happened in 2009 I think they'll be private equity investment in high-growth companies good companies expanding internationally they'll be private debts I mean I in my portfolio company for at least 2/3 of those companies we want to have private debt financing and we know we're paying more of course and what we can access to bathroom banks but why are we doing this because this is flexibility this is one partner that we can discuss with rather than having a pool of banks and this is what we had back in 2007 or eight we had too many banks that we could not sort of talk to or negotiate with and guess what that handed it to you know receivership liquidation you know distress that buying into those that so private that brings way more than just an instrument it's a partner that's the way I see private that a knife in private that is going to rise big time because it's a partnership approach with the private equity guys and then in some sectors they'll be need for distressed investors because although there's gross capital because there's some industries which are growing super fast well they're still there are some industries being heavily disrupted and they will need partners who have the guts to be investing as a distressed investors so I think whatever we're trying to project that we've been through over the last ten years is is completely wrong I think something by definition different is going to happen so we can continue to forecast and you know the major you know change the major disruption on the major you know a market correction but that's not going to happen unless we continue to Auto realize that because we're making it happen we are less investing in companies where suddenly risk-averse we're trying you know to be protecting our investment so let's try to think that there are a number of us around you know this panel and in this room who are needed to be supporting a wide different type of universe of companies and you know what we've been through in oh nine or ten it's not going to happen again this is a big mistake to think the same way at least we have to learn that from our you know past mistakes but you you also have a pretty diversified portfolio of of involvement from startup branding bringing those brands global venture capital even so do you feel that perhaps you're well diversified so you don't need to be as concerned about the nature of the next turn down because it certainly won't turn down everything that you're doing of course I'm concerned but I'm sort of more concern inform for the companies that we support and we invest in and I think you know the learning of the past is that you have to be more diversified and I think what we're all trying to do here is not just you know get access to this enormous pool of capital that seems to be willing to invest in alternative asset management yes we're doing that the reason why we're trying to diversify is that we are then able to offer to our clients being either public investors or private investors LPS you know the best of all worlds being more diversified in what we do and bringing you know better and more resilient for sure that's what you're a zero did by know you know having more diversified businesses different pool of capital different investment strategies because I'm a public company so I need to make sure that I can provide to my public shareholders some good returns across cycles but yes and I think this is not going to change and I think diversification is not going to be creating some some you know failures I think diversification of what we do we do it NAT Jason sees that Raymond was saying private debt is actually quite close to private equity you need France or mezzanine type of financing it's very close to private equity so this is what we do because the public market doesn't really provide to the companies what they need so Raymond don't want to go back to you even though you're expanding BD sees credit business you know the foundation of your of your business has been traditional private equity so when you see black stone or KKR or Apollo go public or if we look back in history and we see owners of many companies being diversified conglomerates now in the US grace or ITT integrated resources Beatrice company how is the way you're organized to run this portfolio of separate individual companies benefited by going public or benefited by staying private avoiding what what KKR and Carlyle try to do how do you think about that sure first of all I'd say I totally agree with what Virginia said and I don't think I could have said it better it's totally true you know back to your question look first of all as far as we're concerned which I forgot to mention in the introduction we were born you were born public who are born as a partnership and the DNA of a partnership is very important and clearly when you go public from a partnership that DNA changes so you know for us the partnership is a strength this is not something that's holding us back the second as far as pot as far as the diversification is concerned you know we are a people people business you're good in private equity if you have good investors experience you know a diversity of talent the reason why we went into private debt is because eight made sense right typically but more importantly it is because we found you know exceptional talent that instead of setting up shop on their own decided to partner with us and to become a real partner with us to build the business exactly the same thing in in real estate so the way we're doing yet in terms of management you know actually hasn't been that complicated yet I'm saying yet because those businesses were still scanning them so of course you know if at some point our private debt is like gso which is going to take some time given the size of it year so but you know at that point in time we'll have other management issues to sort out but at the moment it's managed by the teams you know it's relatively segregated and you know frankly the only person the only persons that have involvement across the platforms or a all of the support functions and finance and organization and compliance and stuff like that which does not interfere by definition with the investment side of the business and ii myself because I sit on the investment committee of both of those the other strategies you know which is something that you know it's manageable from a time standpoint and then the rest of the cooperation the synergies happens by itself because it's a win-win when we in private equity have to deal with liability management I just need to go down to down the hall and talk to Ted and the rest of the team and sort of figure out an expertise that I don't have when they need sector expertise they just walk down the other hole of the outside of the hole and find us and you know sort of know because we're a small firm as well so that's how it works and it hasn't been disruptive so far it has actually been incredibly constructive and positive for all of us well we're gonna be in the lightning round phase of this panel and so I wanted to do is leave the biggest possible question for the 30 seconds you each have to answer it which goes back to social responsibility you know we've been at panels here and and capitalism better stand up to its obligation whether it's the minorities the gender or to the distribution perhaps of capital or of wealth so I'll run right-to-left starting with Glenn you know how does the seat that you're in and your organization feel of responsibility or how you addressing things whether it's ESG or or or perhaps democratization and distribution of wealth thirty seconds is enough but what I will say is that ESG recruiting a diverse employee partner base working to be good citizens in the community working with our companies and really understanding what they're doing and how they're doing and elevating it is not only good business it's business that has to get done and so it's important to us it's important to our investors we live in a new in a different world today from a government standpoint that could be on the tipping point of potentially changing and unless we make an investment of our own then we might not like how how it comes down the other way so it's all incredibly important on all sets at a very personal level I've got to really go back to what Virginie said earlier it's we started doing business in Europe about 15 years ago and what that did to us as a firm just in terms of thinking about social responsibility to thinking about ESG I I think Europe has been further ahead on that than the United States and I can only and I can only just see the changes which have taken place in our firm as we as we made that full-on transition I think you know diversity of viewpoints is always additional and makes you smarter as ambassadors so diversifying the workplace is a key way to generating you know better long term returns at you know at the same time you know we're certainly aware of ESD we've made a variety of direct lending and other investments in the solar space but we're not an ESG focused fund so we also need to always remember you know what is the best risk adjusted returns we can get while I guess avoiding there some of the sin businesses where you can okay just a few things while the my team and especially the one I've built in the u.s. from scratch is completely gender balance and what would you expect from a woman's heel it's actually more difficult to change you know a bigger firm so back in Europe I probably have 40 person women in the team which is better way better than the average in our industry but still not completely satisfactory so that's one second about 10 years ago we took the decision by conviction that our companies needed to be ESG where is the experts and committed and engaged there was a lot of you know reluctance from a number of our CEOs for good reason your time money but when you bring ESG to the table and you show that you're effectively you know doing good to your P&L either savings or you know say saving some costs by avoiding a number of things being ESG compliant or gaining businesses so if you transform ESG into you know a dollar driven approach that works pretty efficiently even with the more reluctant use of the companies so 10 years later as a public company euros o is part of the five index indices in the world which recognized ESG in the u.s. in Europe and I think we had the only one in the industry to be part of those five index so but it's been 10 years work and ten years commitment I've got a dedicated team at euro Zoo which only does ESG for portfolio company that sort of how it works thank you very much your your the last word today yeah I don't have much to add I mean the only thing I'd say is that you know clearly I think being European does you know this perhaps been but longer and deeper focus on ESG you know so for us you know this is our legacy it's part of our culture we've been amongst on P we've been amongst it and the first funds to ideal to the unp I if I remember correctly the acronym principles and you know as far as diversity is concerned you know I wish we had 40% we're not there yet but we are certainly on our way and we've improved dramatically now you know diversity is not a question of just the gender it's also a question of you know diversity of origin and on that front certainly in the New York office I think we beat anybody in our business given the diversity that we have we have a Frenchman myself a Brit an asian-american an iranian-american an Italian an American who was from a family in Bangladesh and the last one is someone with Indian origin those are the seven partners on the p-side in New York so I feel from a diversity standpoint this is very rich set and they were set of experience and it does help us I think you know have more a better rounded you know perspective on things generally they will thank you so while the panel was was was going on wrote the list of the five other panels that Mike should in the Institute should do next year and I would recommend these five panelists they uncalled for that thank you very much for your time and and your experience and wisdom thank you to to everyone that that showed up today and let's give [Applause]

Channel: Milken Institute

Views: 31,474

Keywords: Milken, Institute

Id: Os9ZWWD6tVI

Length: 61min 52sec (3712 seconds)

Published: Thu Jun 13 2019