In brief:
- Private debt is favourable for private markets institutional investors in the current economic climate
- Among alternatives, private equity is still much larger as an asset class than private debt
- Size matters: Larger, more established managers with the best track records will attract more and more of the available capital from LPs
- Services, healthcare and industrials are among sectors receiving focus from ICG’s flexible investment platform
Watch the interview
Read the conversation
Dani Burger, Bloomberg TV
I’m pleased to say joining me now is the ICG CIO and CEO Benoît Durteste. Well, thank you so much for joining early in the morning. Great to have you here. Look, it’s undeniable that at this conference, everyone is very excited about private credit. I know you’ve already been successful to start the year we reported that you had a first round close around 6 billion euros; that was just the first round close for the European direct lending fund. Take me through your two-decade history at ICG and of course longer in finance. Is there any historical corollary for the moment we’re in for private credit right now?
Benoît Durteste, CIO and CEO, ICG
I don’t think there is, which is why there’s so much enthusiasm for the asset class. If I look back in my own experience – so, you’re right well it’s over 20 years at ICG – but even before, for debt strategies, I don’t remember a time when the environment was so favourable. And the reason for that is you almost have all the stars aligned. You’re in an environment – it’s not a great economic environment – but we’re not experiencing a significant recession. And so, you’re in an environment with low defaults; you’re in an environment with higher interest rates; and for private debt strategies, they’re all floating rate, so they’re all benefiting from these higher rates; returns are coming up; and because you have very limited refinancing activities, money multiples are also going up. So, you’re in a situation where you have low defaults, higher returns – it’s double digit returns for senior debt right now (I’ve never seen that in my in my career) – and you’re getting higher money multiples, so it’s ‘what’s not the like’. You can understand why investors are so keen on the asset class.
Dani
What about from the borrower side, I mean, 12% yield sounds nice, but if you have to pay that, that’s difficult?
Benoît
Yes, for sure, and so – in a sense – it’s self-selecting. Which is another aspect, if I look at what’s coming to the Investment Committee right now, it’s only strong businesses with strong cash flow generation, because they are the only ones who can actually take that level of interest payment. It also means that leverage levels need to be addressed as well, which is exactly what’s happening.
Dani
So UBS figures that for private credit the default rates for the first half of next year will peak at about 10%. Does that sound right to you?
Benoît
Not at all. One, there’s no experience of that because there was no real history of that. And so I don’t know whether they’re basing that on the public market and loans, but they’re very different markets and incidentally, even in that market, only at peaks did you reach these levels. On average, typically you are at 2% or lower. But for private debt, I think the levels of default will be very low, because again, unless your assumption is that we go through a very severe recession, there’s just not an environment where these debt portfolios will be severely impacted. It just won’t happen. Portfolio companies today – and that’s across the board, it’s not just at ICG –are doing rather well, and many are still experiencing double digit growth. That’s not an environment where you’re going to see debt portfolios being severely impacted. And the other aspect is that for existing transactions, existing portfolios – and certainly going forward – you have a very significant equity cushion.
Dani
Yes.
Benoît
And that’s essentially because that’s the gap between valuation and the amount of leverage you can put on these businesses. Because valuations have been high, admittedly, for quite some time, if you’re putting – you know – 10, 12, 15 or more times EBITDA as a valuation, your leverage is still around five, six times. And so, your equity cushion is very, very significant in most of the deals that are out there. Certainly in our portfolio. That’s what we’re observing. That’s a lot to go through before your debt is ever impacted?
Dani
So there’s more room there, but let’s talk about it from the equity side of things. Because of course, you’re not just credit you have a huge equity business. You even have some hybrid funds also.
Benoît
We do.
Dani
What does it mean for equity right now to see credit kind of take the mantle? Do you think private equity can ever get to the place of the favourite child again, in private capital? Are we in a new era?
Benoît
Well, I think we need to put things in perspective. There’s a bit of a catch up that’s happening. I mean, you know, private equity was always the favourite child in alternatives. What’s happening now is there had been a very significant growth and constant growth in private debt and appetite for private debt. What’s happening now with this environment is it’s just shining a light on that asset class, but most investors – whether sovereign funds or pension funds, institutional investors,– they came into this phase of the past call it three, four years under allocated to private debt meaningfully so – so what you’re observing now, is there’s just a shift in allocation. Private equity is still much larger as an asset class than private debt.
Dani
But it may not be so at this moment, though. Sorry, slower.
Benoît
Yeah, of course. It is. Although, I mean, as you’ve seen, you’ve seen a few announcements. The strong managers are still raising money in private equity; you can still raise money; it’s not just all for private debt. And even in private debt a lot of the capital goes to the more established managers with a longer track record. So it’s not a black and white picture. There’s more appetite for private debt, for sure. It’s top of the agenda for investors for the reasons we’ve just discussed. But you know, I think, I wouldn’t discount private equity at all.
Dani
But it’s interesting you talk about, you know, the strong managers are the ones who are still doing well. Do you expect consolidation then?
Benoît
It’s already happening. Yes.
Dani
And what form does that look like?
Benoît
You’ve seen some M&A happening, but I think there’s also the more typical form in our industry, which is the slow evolution, where some managers just diminish in size progressively over a long period of time, while others are growing and the gap widens. That’s what we observed, you know, post the GFC [global financial crisis]. That’s clear and I think we’re going to observe more of that where, you know, the larger, more established managers with the best track records will just attract more and more of the capital. It’s particularly true – I think it’s true across the board in alternatives – but it’s particularly true for debt strategies, because in debt strategies, size matters a lot. And so there’s almost a: you get into a virtuous circle.
Dani
Yeah, but Benoît before I let you go, I know we’ve been talking kind of from a bird’s eye view. Right now I want to get on the ground. We only have a little bit of time here. But – and this is a big question for a little bit of time – but what opportunities are the most attractive to you? What sectors do like at this moment?
Benoît
I think the sectors that buyouts have always been focused on – such as services – remain attractive. You know, there’s higher cost, there are things you need to take into account, but they remain attractive. Healthcare is perhaps more difficult than it was but a lot of healthcare areas still are incredibly attractive, and something which is new or coming back, Industrials, which had been out of favour for quite some time, essentially, because people were outsourcing. With in-shoring, we’re seeing a renewed appetite for industrials. And so, I wouldn’t be surprised if we’re looking in the next 5-to-10 years that you see much more of those industrial companies.
Dani
Even with strikes and maybe higher labour cost there though?
Benoît
Yes, we’re in France today; strikes are something that we’re used to and that you have to deal with, but yes, I do think that industrials are, again, going to have their time in the limelight.
Dani
I’m afraid we’re going to have to leave it there. Thank you so much for joining. Enjoy the rest of the conference. That is the ICG CIO and CEO, Benoît Durteste, here with me at the IPEM conference in Paris.
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