Contributed by: Show Editorial Team
Laurel Fitzpatrick, Ken Kencel, Gregory Robbins, Craig Packer, and Mark Liggitt discuss Private Credit at Greenwich Economic Forum (Greenwich, CT)
- Ares Management is one of the largest global alternative asset managers with $145 billion in AUM
- Private credit can address a much larger opportunity set than ever before
- The new opportunity now is in the shift from public market to private markets
INTERVIEW TRANSCRIPTS: Laurel Fitzpatrick, Partner at Ropes and Gray, Ken Kencel, President/CEO of Churchill Asset Management, Gregory Robbins, Managing Director of Golub Capital, Craig Packer, Co-founder of Owl Rock Capital Partners, and Mark Liggitt, Managing Director at Ares Management
Laurel Fitzpatrick – Partner, Ropes and Gray: 00:00
Really tremendous panelists these are the guys that can write the checks and really a huge movers in the credit market. I think they wanted to introduce themselves. So, Ken, you want to start us out cause he’s got a good story.
Ken Kencel – President/CEO, Churchill Asset Management: 00:16
So Ken Kencel. I’m president, CEO of Churchill Asset Management. We are a majority owned affiliate of Nuveen, which is the asset management business for TIAA. So my largest investor and CIO of TIAA was on the second earlier prior panel, Nick Liolis, and he happens to be my, both my largest investor and also an owner. So great to be here. We manage today as of January one, we’ll manage about 20 billion in middle market, private capital. Our primary businesses historically been financing providing senior and Unitron financing for mid-market US companies. And over our history we’ve invested about 13 billion in middle-market senior loans. We focus exclusively on companies that are owned or controlled by leading private equity investors firms. And my biggest claim to fame is that I play in a rock and roll band that was just named by Greenwich magazine as the best look rock and roll cover band in in Fairfield County. So very excited about that and we are available to play so very proud of that. My wife told me I couldn’t say that but oh well.
Gregory Robbins – Managing Director, Golub Capital: 01:39
I’m Greg Robbins. I’m a managing director Golub Capital. For those of you who are not familiar with Golub, we are a firm that specializes in lending to US middle market companies that looks like Ken’s business is owned and controlled by private equity firms. Firms been around for 25 years and today we manage a bit over 30 billion in capital.
Craig Packer – Co-founder, Owl Rock Capital Partners: 02:00
Hi, I’m Craig Packer. I’m one of the cofounders of Owl Rock Capital Partners. We are a relatively new direct lending business. Prior to founding, Owl Rock, ran the leverage finance business at Goldman Sachs. My partner Doug Ostrover was one of the founders of the GSO credit business, which is part of Blackstone. We are a direct lending business. We manage four funds. Three of them are business development companies or BDCs as well as a senior lending fund. The four funds together when they’re fully ramped and fully invested will be about $20 billion of assets. Like other folks up here, we primarily do transactions backed by private equity firms, firstly in second lien and Unitron lending to private equity firms.
Mark Liggitt – Managing Director, Ares Management: 02:43
I’m Mark Liggitt, I’m a managing director at Ares Management. For those of you don’t know areas as $145 billion alternative asset manager. We focus primarily on a credit where 100 billion of that is on the credit. And then within that we focus a large majority of that on, on the private capital side. So $70 billion of our credit businesses indirect lending. And that’s where I spend most of my time. Like Craig, we focus a lot of our business on a sponsor relationships and sponsor investments.
Laurel Fitzpatrick – Partner, Ropes and Gray: 03:19
Great. Thank you. I guess I should give my plug too, which is a, I’m a partner at ropes and gray. And we have a very large asset management practice, about 40 partners, 180 associates that do fund funds of various kinds, including a major focus on credit funds. So, Ken, maybe you can start us out. Tell us what the credit fund space looks like right now. What is the competitive landscape?
Ken Kencel – President/CEO, Churchill Asset Management: 03:44
Well, you know, it’s interesting I would say today you know, the, the credit markets obviously has been a lot of capital raised you know, upwards of 50 to 75 billion per year, you know, continues to be raised in private credit. But, but I would say today, you know, it’s increasingly a story of what I would say are really haves and have nots scale and the ability to deliver scale to private equity firms who are buying companies or even, you know, private businesses for those folks who focus on kind of non-sponsored companies is really a differentiating factor. It’s interesting in many respects, having watched this business now over the last 25 years and have seen it evolve. I would say that in many respects in the four of us here have really replaced the banks as lenders to kind of mid-market corporate borrowers, you know, across the spectrum.
Ken Kencel – President/CEO, Churchill Asset Management: 04:37
So and the ability to deliver a commitment to a company of 200, 250, $300 million, which all of us can do is really become a differentiator. And I would say that while there’s been a lot of capital raised, a lot of it is actually focused on seed or smaller funds, newer funds focus more on, you know, kind of higher yielding and so more aggressive strategies. But I would say that in the core middle market lending business that all of us participate in I would say that scale and relationships have really become a major differentiator. So while there’s been a lot of capital raised, and certainly we all we partner with each other, we compete with each other, we often do deals together. It’s a little bit like the banks used to be, you know, in the old days.
Ken Kencel – President/CEO, Churchill Asset Management: 05:27
And, and I would say that in, in many respects I, I’d say we’re in kind of the golden age of private credit. You know, when I think about 20 years ago when the lending we did was done by bank of Boston and fleet and chase and many Hanny and chemical bank. And the reality today is we’re a good size middle market company of tend to, you know, as much as a hundred or more million in cash flow. We’re the guys in many respects getting those calls. So it’s a great to do what we do. It’s maybe not quite as competitive as people think because it’s a big space. The private credit market today is, you know, upwards of $1 trillion. So it’s about the same size as the kind of a liquid leverage loan market. But I would say that the dynamics and the opportunity today and private credit is probably is attractive as its ever been in certainly institutions, you know, across the world. Are allocating to our space probably as much now or more than they ever have it.
Craig Packer – Co-founder, Owl Rock Capital Partners: 06:20
Maybe just to add onto that, I think that there may be some that hear that might conflict with their expectation because there’s been a lot of headlines about more competition in the private credit space and more capital raised. And if I could, the way I would reconcile that difference is the opportunity set that private credit can, can address now is much bigger as bigger pools of capital formed and we all have pretty sizeable pools of capital. We can do private credit solutions for much bigger companies who would have previously tap the syndicated market. So we’re not, it’s not the same amount of capital chasing or a bigger amount of capital chasing the same deals. It’s a bigger pool of capital chasing a wider set of deal opportunities.
Craig Packer – Co-founder, Owl Rock Capital Partners: 07:09
We focus on upper middle market companies. Our average EBITDA is 75 million. Five years ago they would’ve had to do a syndicated deal. There wouldn’t have been an option then for them to do a three, $400 million directly place deal. But as more capital slowed to the space those options are available. I would suggest those are generally bigger and therefore I would say better companies. So while there’s more capital being put out, I think the industry, the direct lending industry as a whole is actually in a better place because they’re doing bigger companies that have more, more wherewithal. So that’s how I would address that. The last point I would make is private equity is exploded and you know, depending upon what number, you’ll look at 1.2 to 2 trillion of dry powder and private equity firms. And if you just take a simple assumption of 50% loan to value in private equity deals, and maybe that might be conservative assumption, but that would say there’s a demand for 1.2 to 2 trillion of financing over the next few years. You know, in the numbers Ken was signing earlier, a private credit, 50, 60 billion a year. It’s, it’s really kind of a drop in the bucket in that context. I think that’s why we’re seeing all the opportunities that we are to transact.
Mark Liggitt – Managing Director, Ares Management: 08:19
I think the other interesting point too that at the scale point in terms of when you get to some of the credits that we’re all looking at in terms of the upper middle market and some of even the bigger transactions, the interesting dynamic from a competitive standpoint, Laurels and there’s not as many investment professionals in the space and, and funds in this space that can speak for the scale that we’re talking about. And so one of the things that I think we’ve seen on our side that we’ve been able to do in the transactions that some of us have worked on together is we’ve actually been able to drive terms that are more friendly from a lender perspective. Because there is, while it’s competitive it’s a market that we think is one that you know, is one that we can and do invest in.
Mark Liggitt – Managing Director, Ares Management: 09:04
But we are able to drive terms that are more you know, friendly from a lender perspective. And I think when you take that, if you take it from an area’s perspective, the large majority of the transactions that we invest in in response or clients, and I think when you get into that larger realm and the ones that are more sophisticated and understand how the markets work, I think they’re very understanding of how to work through that in a transaction in a way that benefits them and benefits us when we can speak for this bale the scale that we can with the speed of execution, that certainty that we provide.
Gregory Robbins – Managing Director, Golub Capital: 09:37
I want to build on a point that Craig mentioned from the opportunities set cause I think it’s really important, the theme that I can mention about the shift from banks to non-banks that’s played out. It’s something we’ve talked about for the last five or 10 years. It’s happened. That’s old news. It’s not fake news, but it’s old news. The new opportunity now is the shift from public markets to private markets. It’s happened in equities, right? Public equity to private equity, $2 trillion raised. Why isn’t the same phenomenon going to happen in private credit? It’s already happening. Give you a real time example. Last week we announced we’re leading a transaction. It’s a one point $6 billion one stop financing for a company called risk strategies. It’s a Kelso portfolio company, 1.6 billion in the private market. Five years ago, that transaction would have been possible. Now this was clubbed up with eight lenders, all of whom have dry powder to grow with the business.
Gregory Robbins – Managing Director, Golub Capital: 10:40
So that type of transaction is going to grow the attention of other sponsors that are going to wonder, should we be doing that? What are the advantages or disadvantages of having a private transaction versus a syndicated deal? There’s a dislocation that’s happening right now in the BSL market. That’s going to drive, I think, some more opportunities towards the private markets as well. So I completely agree with you that this opportunity set is increasing. And I think we’re at a very interesting point in our market that is just at the beginning of, I think what it’s potential could be.
Mark Liggitt – Managing Director, Ares Management: 11:15
Maybe just to allude to the point that Greg thinking in terms of the specific example of our strategies is a very sophisticated client who’s a very active user of the capital markets, both on the private side and on the public side. But you know, in order to raise 1,000,000,006, you know, we were able to originate terms that I think are more favorable than what you’re seeing in the more public markets. So for example, that deal has a covenant where if you look at the public markets, it’s a very different landscape. And I think that’s an example of what I was referring to earlier as it relates to, you know, our ability to speak with the scale that we are and the capital that we bring to bear gives us an advantage as it relates to structuring deals that are more favorable to us and our investors.
Laurel Fitzpatrick – Partner, Ropes and Gray: 11:54
So pretty good markets. So how do you source the deals? What are the new sort of strategies for sourcing or maybe a little bit the big distinction obviously?
Ken Kencel – President/CEO, Churchill Asset Management: 12:07
And you’ve heard from all of us and we spend a lot of time in the private equity world, I would say. I mean, we hear different numbers, but I would say private equity in the middle market. I mean, first of all, I would say the middle market overall, if it were a standalone economy, third largest in the world. So we’re talking about a very big market space, right? A big space in all of the middle market in terms of financing. You know, private equity backed companies probably represent 60% 70% of that universe in all four of us focus on that world.
Ken Kencel – President/CEO, Churchill Asset Management: 12:36
So, you know, the big distinction oftentimes is you focus on private equity firms and working with them and you kind of call on them to find your deals, you know, or are you, you know, I have jokingly say, cause I live in Greenwich, are you driving around, you know, kind of, you know, port Chester looking for companies. I mean no, so we’re focused on businesses that are owned by private equity. And I would say in that sense, as Craig pointed out, lots of dry powder, lots of activity. The current market environment, more dominated by new deal activity. That’s a big distinction. You know, when we go through periods where refinancing is big, particularly where rates are coming down, refinancing starts to emerge more and more. That’s when we start to lose some of our ours, right? Because they get to a certain size and they said, well, you know what, I can go issue in the broadly syndicated market and I can raise, you know, more leverage, no covenants, you know, lower pricing.
Ken Kencel – President/CEO, Churchill Asset Management: 13:29
So I think we’re in many respects in kind of the, you know, the just right phase right now where there’s more new deals going on. The scale that we all bring to the table helps put us in a position where we can deliver. We’ve got this, we’ve got certainty, we’ve got confidentiality, you know, we’re not going to kind of do a distributed deal to finance. We can actually commit and own the loan. So I would say the current market environment particularly in the private equity side, is a good place to be right now. And I think there’s certainly the institutions that we work with, best majority of ours are actually in Europe and in Asia. You know are looking to the US market saying we think this is a pretty good place to invest. So allocations particularly in Europe, in Asia right now are increasing.
Ken Kencel – President/CEO, Churchill Asset Management: 14:11
They have kind of slowed a bit in the U S but I would say investor wise Asia is still allocating and we were chatting earlier that you know a number of our partners, my partner Randy Schwimmer is also a Greenwich resident, is in Tokyo right now. A number of your partners are running around in the middle East and other places. So I think it’s indicative of the fact that this market represents very good value for a risk adjusted standpoint in private credit with top managers.
Gregory Robbins – Managing Director, Golub Capital: 14:52
I think the sourcing of collateral is critical. The closer you can be to the assets is where you want to be. You want to be the folks that are doing the due diligence, meeting management, touring the facilities, structuring deals, negotiating them. We have two primary sources of origination. Our private equity sponsors. We have a core group of about 200 private equity firms that have done multiple deals with us. That’s out of the ground and 1500 in the US so it’s a very large population that we can call upon. But 200 are our core to us. And in a given year, about 80 to 90% of our business is with that core group of sponsors. The other source of origination is our portfolio. We’re a lead lender to about 250 middle market companies. These are companies that are growing, they’re doing well. And as the lead lender we’re in the pull position when they want more capital for an add on acquisition or a cap ex expansion program with a like to come back to us. So about half of our lending each year is simply by growing with, with our portfolio companies.
Craig Packer – Co-founder, Owl Rock Capital Partners: 15:44
Yeah, I would just add some flesh it out. So you’ve heard, I think touched on a little bit sponsor versus non sponsor. There are some lenders out there that really try to do non-sponsored transactions. You can get better terms and non-sponsored sponsors more sophisticated, but the sponsors are all so generate deals and so it’s an a more efficient market. And then you’ll also hear gradations based on really on company size. So, and the, there was no hard and fast rule, but at the 25, 30 million or EBITDA or less be a blow that you’ll hear lower middle market or here kind of core middle market at 25 to 50 call it. And then above that you’ll hear upper middle market. The economics are different than those in those markets. The types of companies you lend to, the types of covenant structures, the types of issues you face as a lender are a little bit different.
Craig Packer – Co-founder, Owl Rock Capital Partners: 16:34
But as you talk to folks in the private credit space tend to fall into one of those quadrants based on size and based on backing. I’d say the thing I is not always appreciated. We work on transactions that we’re looking at for months when they come in. Someone’s approaching us on a deal that they’re thinking about doing for a company that may or may be sold. And we work alongside a private equity firm as they’re figuring out from their own standpoint, if they want to own it, doing the due diligence, we get access to all of that information. We do our own due diligence and it’s during that typically three month process where you’re doing your underwriting and deciding whether you are comfortable making the loan. And obviously there are checkpoints along the way to make sure it’s a good use of time. And then the deal gets announced. It’s night and day versus the syndicated markets, the public markets, a deal gets announced on a Monday at deal’s going to get priced charitably, I’ll say within a week to 10 days. What amount of due diligence are you able to do as a public market investor on a deal being prepared by banks. So give her a bank book where you don’t have access to visit facilities. You’re not going to really have access to the management team. If you ask too many questions, you know it’s going to affect your allocation cause you’re being annoying.
Craig Packer – Co-founder, Owl Rock Capital Partners: 17:50
You know, it’s really a problem and you have no covenant and you have no covenants, which I, so I just, I don’t I don’t know that folks, I think they perceive that what we’re doing is we’re waiting for someone else to big the deal and then we decide whether we want to do it. We are actually the architects of these transactions and in some way, shape or form, we’re all managing our own resources to focus on the deals we want to do. And then everything else we ignore. Whereas in the public markets, more or less, you’re playing to match an index if you’re going to play a little bit of every deal. And so the resources that we all spend on the origination, structuring and diligence and credit selection are incredible. And we, we I’d like to think you get as close to perfect information to make a decision. Doesn’t mean the companies can’t have issues, but when you go in, you feel like you’re really understand the risks and the rewards and you can make an educated decision.
Mark Liggitt – Managing Director, Ares Management: 18:41
Yeah, I mean, I would add onto that. I think you’re right, Craig. I think there is a misconception out there about how some of the origination at least on the private side of the world does come about. I can get areas we and have for a very long time, have a lot of experience and a lot of relationships and I think that’s what we bring to bear on the deals that we do. You know, much like Greg was talking about, we have a very sponsor oriented business. We have over 500 sponsor and actually non sponsor clients that we spend time with. We have a very robust origination platform of a hundred plus investment professionals who focus their time with those sponsor relationships. So we think over the long-term those relationships and the experience that we have, you know, has benefited us in terms of being able to see along with our scale, you know, the vast majority of the flow in the market and then, you know, the ability to be selective on that basis.
Ken Kencel – President/CEO, Churchill Asset Management: 19:40
I think sometimes what’s lost as well is that, you know, well we are, obviously we compete from a fundraising perspective, right? And we each have our nuances in terms of how we do the business and, and our track record and performance and all of that, which is great in case of all of us and we all been doing a long time. But I’d also say that we often work together, right? And so it’s a very interesting dynamic, right? On one hand, you’re competing from a fundraising standpoint. You’re also competing in many respects to win the transaction. But oftentimes the sponsor we have all have our core of relationships. Oftentimes a sponsor will say, well, you gave an example of a you know, a 1,000,000,00 transaction, three of what we’re going together. Yeah, we’re strategies. We’re in it, we’re an existing lender and moving it.
Ken Kencel – President/CEO, Churchill Asset Management: 20:24
So, I would say that in many respects it’s a, it’s kind of an ecosystem where we’re competitors, but we’re also partners. And by the way, we’ve all seen the three of us have actually worked together, which is not the point. But I would say that that’s actually very important because in a broadly syndicated loan bank underwrites the deal, they distribute the deal. And as Craig said, they call a meeting at the wall door. If they invite 500, you know, investors and then that’s it. They sell the whole deal. They’re out. They don’t even own the deal. You can remember you get rubber chicken, exactly the rubber chicken at the Waldorf, but had been, in our case, we do the deal, we compete. But at the end of the day, in many cases we find ourselves working together and we’re going to hold the loan paid. So, if there’s a problem, we all trust that we are going to operate in a very commercial way. And the sponsor’s trusting us to say, Hey, you know what? We’ve got Churchville, Ares or Gulliver or I’ll walk in the deal. And so we’re going to be, you know, attuned to that relationship going forward, not just with the private equity firm in the borrower, but also with each other. So there’s a responsibility that comes with that. And I would say a healthy respect.
Ken Kencel – President/CEO, Churchill Asset Management: 21:40
Nobody has that question about the equity markets, right? It’s always credit lenders, you know, what site, where are we in cycle? I would much rather be top of the capital structure as you say, maybe 40% loan to value, you know, four to four to five times levered in a company that that’s being purchased for 10 or 11 or 12 times with a, with an owner that has access to additional capital and management resources and history track record of performing and fixing problems where they exist. To me that’s a much better dynamic than playing, you know in a potentially a more volatile, you know, equity environment. So I think as we think about late cycle, I think more conservative, senior secured floating rate, good loan to value.
Ken Kencel – President/CEO, Churchill Asset Management: 22:33
Not a bad place to be. Even with all the noise about, you know, are we in the 10th inning or 11th inning or whatever. I still think it’s certainly for quality managers we’re seeing some pretty nice companies trade hands. These are not cyclical kind of, you know bottom of the barrel businesses. These are businesses that are, you know, that are being purchased for 10 to 12 times cash flow. Now I think as you go across the spectrum and you kind of go down the food chain, there are private credit managers that will focus on higher risk situations. I would say that as a general matter, you know certainly I would say for ourselves and I would say the others, we’re generally targeting pretty high quality businesses. We’re not going for kind of the marginal credits, but there are smaller firms that have less access to capital that don’t really have the relationships that are targeting nine, 10, 11, 12% and at some point you are getting into a higher risk profile. And that’s generally not where we play.
Craig Packer – Co-founder, Owl Rock Capital Partners: 23:45
The other topic that comes up a lot is covenants. And I think this is where there’s just a lack of understanding and then I understand it because our loans are private and you can’t see our documentation and there’s this there’s a narrative that can develop that the weak documents are being used in the public. Syndicated markets are comparable to what’s being done in the private markets and I think it’s really just false and just lack. There’s just lack of information. We are typically all getting maintenance covenants and our incurrence covenant package beyond the maintenance covenants, it’s really strict. It’s really tight. You read these headlines about some of the accesses in the public markets, which is a covenant light market, but it also has very poorest credit documents where assets can come out. You can get layered lien, there was no lien protections, lots of debt and currents, you know, none of us could possibly run our business where we could afford to lend to a company would have that type of flexibility because we’re holding the loan, the maturity and we’re oftentimes one of only a couple of lenders. It’s, you know, I get asked frequently, do you lay awake at night about these types of scenarios?
Craig Packer – Co-founder, Owl Rock Capital Partners: 24:33
And I don’t, because I know how thorough we are in our documentation. And I think the industry as a whole is, is quite thorough. You know, what I like to say is I think the worst private credit document is better than the best public document that’s being done in the public markets by a lot. It’s not even close. And so I think that’s a concern because a documentation of the public markets has gotten so weak. And so institutional investors reading that, and sometimes the press doesn’t make that distinction. They just lump it all together and assume it’s about the same. And you know, I just don’t think that’s true.
Ken Kencel – President/CEO, Churchill Asset Management: 25:07
But you know, if you think about it, they’re not going to give him that three pack. But what the liquid investors are technically relying on is liquidity, right? I mean, the publicly traded markets will say, Oh, we’ll be faster, quicker, smarter. We’ll trade out of that credit before it goes down. Well, the reality is, as we saw in the GFC at the exact time, you want the liquidity, it’s not there. And the LCDX traded is 65. Right. Nobody could get out. Right. So, so there’s this premium place on liquidity and we hear all about liquidity premium and we certainly capture, you know, a hundred, 200 basis points in our lending, you know, over the liquid markets. And the reality is that that liquidity is a bit of a misnomer, right. At the end of the day, when you actually want it, it’s a lot. A bit of a misnomer.
Craig Packer – Co-founder, Owl Rock Capital Partners: 26:06
Yeah. And the leverage finance space, when markets are trading off, Nope. No bid there is, the bid-ask is dramatic. And so what should, so what does that mean? If you’re a public debt investor, you need to invest in the biggest deals with the most liquidity. So that if there’s a problem you can trade out and you pay a big premium to do that. And direct lending is predicated on if we’re willing to accept that lack of liquidity, we’re going to charge a big premium for that lack of liquidity. And we think for institutional investors that that’s actually a very attractive trade. As long as you’re working with a manager that’s going to do good underwriting, have good performance and be conservative in their credit selection.
Laurel Fitzpatrick – Partner, Ropes and Gray: 26:31
So the answer really this late in the cycle, you just do more of the same more frost. That’s really the best quality.
Mark Liggitt – Managing Director, Ares Management: 26:44
But I think also going back to the point we were talking about earlier, one of the things that we’ve very much is important to us is about 2/3 of the origination that we do is with our portfolio companies. Back to the point that was made earlier. And you know, we take that as a competitive advantage no matter where you are in the cycle. Because we’re dealing with, you know, our best borrowers. We’re picking and choosing the best management teams. We have intimate knowledge of those credits and what they’ve done. And we’ve been able to analyze those credits over a long period of time. And so we have the ability to, you know, be very selective and markets that are like this. Where on our side, you know, we’re, we’re investing in, you know, 4% of the deals that we see and a large portion of that, two thirds of it is coming from our existing borrowers where we feel like we have a leg up on everybody else. And I think no matter where you are in the cycle, that’s a, we think a very good place to be as it comes to, you know, picking and choosing the investments that you invest in.
Ken Kencel – President/CEO, Churchill Asset Management: 27:35
Yeah. I mean we did, we have our portfolio, same thing. I mean we did a hundred deals last year. We did about 4 billion in origination and half of it came, came from the portfolio. You know, we know the company getting the reporting, you know, the CFO, you’re in dialogue with the sponsor and the boards as well. So, it’s that familiarity that that is very important to drive in that quality that we’re talking about.
Craig Packer – Co-founder, Owl Rock Capital Partners: 28:00
But the answer to us are where, so where do you, relative to what see people say, well, you know, at a private credits late in the cycle, but like relative to what if you think that private credit is going to go through a cycle where, what’s that cycle going to do to equity prices and what’s that cycle going to do to every other asset class? We think it’s defensive, right? Cause where the top place in the capital structure, floating rate, all of the things that Ken said in an app without an isolation. Every asset class looks, it has risks to it, but relatively, I think it’s still very attractive.
Gregory Robbins – Managing Director, Golub Capital: 28:29
And I think there’s another important point in this type of back to the gentleman who spoke during lunch, the skin in the game, alignment of interest. We’re all investors in our product and our firm, we own the loan, it doesn’t do well. That impacts us personally. The worst thing you can do in the credit business is compensate and originator based on short term volume. Anyone can originate a loan. The question is, is that loan going to repay you at par in three to five years? So having the right compensation model, having the right incentives we think is critical.
Ken Kencel – President/CEO, Churchill Asset Management: 29:05
Nope. We manage capital obviously for third parties, but we also have, and as I mentioned earlier, Nick Liolis, our CIO of TIAA is about a third of our capital. So, so every loan we make, 30% of the loan is actually for TIAA. So we are, you know, you know, probably as aligned as anyone in seeing that. The other thing I would say and, and nobody’s mentioned this, but I think it’s actually a very important point. We’re also as a very large LP at through TIAA and many of the firms we work with. And I think that the track record of the private equity fund is also a very important dynamic, right? So when we do business with a private equity, we’ve got the ability to say, okay, well what’s their track record? Not just doing the private equity side, but have they lost money for their lenders?
Ken Kencel – President/CEO, Churchill Asset Management: 29:48
So there are some private equity firms that have a very good return profile, but it’s kind of like a casino, you know, six good deal. More like venture capital, you know, six good deals and then lost money for their lenders on three. We like private equity firms, they have a very consistent profile. And I would say all of us look at that. You know, we look at, okay, you know, this is a firm that’s been in business 20 years. They’ve raised consistent, you know, private equity funds. And they got it. They have an approach that, you know, within the constraints of kind of commercial reasonableness. They’re going to do everything they possibly can to fix the problem, including potentially, you know, changing management or bringing in additional equity dollars into a business. So the private equity ownership aspect I think is really big for us and certainly an important thing that we look at.
Laurel Fitzpatrick – Partner, Ropes and Gray: 30:35
So I guess one last question. We’ve heard a lot about interest rates today where, and we heard people think they’re going up, people who think they’re going down, people would think they’re staying flat. Where do you think industries are going and how does that affect the way you’re managing your business?
Mark Liggitt – Managing Director, Ares Management: 30:51
I don’t have the crystal ball either. So I’m not in a position to, to say with certainty exactly where it’s going. I think we all see the same screens and the same forward curve that everybody else in the room does. And I think, you know, from our perspective, we’re in a low rate environment. We’ve been in a low rate environment for a very long time. You know, despite the fact that for you know, a couple of years in the more recent past here, you know, we’ve seen rates that were going up on a relative basis, still very low rate environment. I think generally speaking, we’ve been in a kind of long-term secular decline from a rate perspective and I think it’s hard to believe that that’s going to change anytime soon. I mean, you’ve got, you know people out there talking about zero rate and negative rates.
Mark Liggitt – Managing Director, Ares Management: 31:39
So you know, I think on our side, you know, Ares and as well as my counterparts here up on the stage, you know, a lot of the investing that we do is on a floating rate basis. Obviously the rate environment’s very important to what we do from an investing perspective. You know, one of the ways I think in this market that we’re in, that we try to, and we have been for a long time with rates as low as they are and potentially going lower to manage around that is to, you know, manage around a return profile. And one of the ways we do that is by having live floors in the deals that we do. It’s kind of interesting because I think, you know, it’s something that’s been around in the market for quite a while. But I think you know, if you compare it to what’s happening in the broadly syndicated market, it went away. It went away real fast. And it really hasn’t come back. And, you know, 80% of the deals within our portfolio areas have light four floors of 1% or more. And I would say that any of the deals that are in our pipeline today that we’re looking to invest in will absolutely, all of them will have livewire floors. It was very different than what we’re seeing on the syndicated side. And so I only can trust it because it goes back to the point that kind of I was making at the beginning, which is I think given where we come from, from a private perspective and the competitive advantages that we bring to the table for the sponsor relationships that we do have the ability to both drive terms and maintain terms in a way that we think is advantageous to us as lenders. So you know, that’s kind of how we’re managing around it. At least, you know, in the book right now.
Laurel Fitzpatrick – Partner, Ropes and Gray: 33:13
So what’s the livewire replacement? Anybody agreed on that?
Gregory Robbins – Managing Director, Golub Capital: 33:17
I think there’s a recommendation, but I think on the, on the declining rates, and I agree with everything that Mark said, there’s another implication, which is what is the impact on institutional investors? If rates are starting to go down, which they have been, how are institutional investors going to earn a decent return for their shareholders, their pension obligations? The 60/40 model doesn’t, doesn’t work. And I think that’s going to shift more and more capital to alternative asset classes like private credit where you can get premium returns.
Craig Packer – Co-founder, Owl Rock Capital Partners: 33:54
I mean, just to say it, you know, the way in addition to the library, the underlying Livewire rate, you know, we, we lend on a spread basis and you know, we all adjust ours, the spreads that we’re charging borrowers based on where the underlying rate is. So there’s some counterbalancing effect there. And you’ve seen that in the last few years. You know, three, two, three years ago I was at zero, spreads were wider, rates went up, spreads came in, rates go back down again. I think you’ll see spreads go wider so we can all generate the returns for our shareholders that that we’d like to generate.
Ken Kencel – President/CEO, Churchill Asset Management: 34:23
I think it shows some discipline that maybe, you know, historically didn’t exist in the same way. I mean, we all are accountable to our investors. At the end of the day, if you look at yields and kind of the traditional senior secured lending marketplace that we live in, they’ve been hovering around 7-8%, you know, pretty consistently over the last decade. And I think that’s a direct result as Craig said, of managers that know that their investors have certain term return parameters and they’re going to have to live within those and meet those. So I think there is an element of discipline that exists when you’re a buy and hold lender as we all are as opposed to a market environment where, you know, the large cap market where you know, they’re originating to distribute. I mean those folks are really in the moving business right there. They’re in many cases not holding any of the loans they originate. So, you know, the fact that we hold all or virtually all of what we do, I think enforces a sense of discipline both in terms of covenants but also in terms of pricing and rates and structure. So you know, that I think at the end of the day is a big change certainly from the business, you know, 10, 15, 20 years ago where, you know, it was the large banks were underwriting, selling off exposure and not really having, you know, skin in the game.
Laurel Fitzpatrick – Partner, Ropes and Gray: 35:34
So we did want to leave a little bit of time for questions. Do we have any questions out there? Oh, they’re great.
Speaker 1: 35:38
Craig, you talked about the fact that there’s differentiation, the a large core and lower middle market components. Do you expect any differentiation in the performance of those markets? Should we go through a downturn?
Craig Packer – Co-founder, Owl Rock Capital Partners: 35:59
Sure. Look, our strategy is middle to upper middle market. I mentioned earlier, you know, the 75 million of EBITDA. So our I think our view is that bigger companies have a lot more wherewithal to withstand in an economic cycle or other things that might affect their business because they’ve got importance in their individual marketplaces. So even if they stumble there’s a potential acquire or reason for that company to exist and they’ve got the kind of resources and flexibility to take costs out and attract new capital. And we think the smaller the business, you know, the more challenging that is now, there will be some that will take the other side of that. I appreciate, but we really liked the upper middle market. It’s a core part of our strategy.
Craig Packer – Co-founder, Owl Rock Capital Partners: 36:46
The other thing, which is odd, but I think it’s probably intuitive is although I would suggest the smaller companies are riskier there’s a wider competitive set for the smaller deals because the amount of capital you need is smaller. And so, you know, there’s a lot of folks that can write a check for 25 or $50 million. So the smaller company actually has more options, even though I would suggest they’re riskier deals. And we’ve all talked about as you get to the bigger companies, it’s actually less competitive because there are fewer financing providers that that can provide it. But size is not the only variable. Obviously the credit selection, the sectors they’re in, how cyclical they’re going to be. Those are all going to take effect as well. But we feel good about where we are.
Mark Liggitt – Managing Director, Ares Management: 37:31
Yeah, I’ve actually seen some credit documents in the smaller end of the world that are a lot worse than we’ve been able to construct on the larger cap side of the world.
Gregory Robbins – Managing Director, Golub Capital: 37:41
I agree that the one advantage in targeting slightly smaller companies is that you can grow with these businesses over time. So we focus on 10 to a hundred below 10. I completely agree. Those companies are way too fragile. They’re reliance on, you know, one customer or one key employee or one system. It just, bad things can happen too easily. But imagine you get a foothold into a company and really high quality company that has 15 million of EBIDA that’s being acquired by a sponsor. Three years later it gets sold to next sponsor and now it has 25 we keep it in our portfolio, it goes to fifth we did together, done exactly that. I mean it’s over a hundred million dollars in cashflow and I mean we’re still in it. The risk strategies deal that I mentioned, the $1.6 billion started out with us as a $500 million financing a few years ago. So there is a minimum threshold. I completely, but there’s some value in getting that incumbency and growing with these businesses over time.
Ken Kencel – President/CEO, Churchill Asset Management: 38:41
What you generally see a certainly below 10 million of EBITDA is kind of a red line for, for a lot of us. I mean, even in a kind of a, a buildup strategy, I think all of us, you know, in our careers have seen that, you know, a company with two or $3 million in EBIDA, you know, in a downturn gets crushed. I mean, just the reality, right? So, so I would say there is an optimal size, we probably all would define it slightly differently, but it’s in that, I would say 25 to 75 million cash flow. Right. Which in our numbers parlance would be kind of credit facility of a hundred to 250 million. Right. So large enough to have scale large enough to be backed by a private equity firm with a track record and resources, but not so large as to graduate into potentially the liquid market and not so small as to really be you know, defined by a fundamentally very different credit risk. Yeah, it’s certainly, is it a just right.
Speaker 2: 39:51
Quick question. Can you speak a little bit about the geographic hedging that you all do as far as not putting all your eggs in one basket or one particular region?
Gregory Robbins – Managing Director, Golub Capital: 40:03
Sure. I mean, as I mentioned, we, we focus on the US but I think the point you’re trying to make is diversification is really important and I’ve learned it. I think we’ve all learned it that no matter how much you love a deal, you’d never want to have too big a portion of your portfolio in any one, one transaction because the unexpected happens. I could talk your ear off about scenarios where we thought X, Y and Z was going to happen, the exact opposite occurred. And now the good news is being at the top part of the capital structure, even when the unexpected happens, you’re still generally getting a meaningful recovery. But diversification is critical. Large position for us in our portfolio would be 5,000 basis points. Max. We like having diversification helps us like Craig sleep well at night.
Craig Packer – Co-founder, Owl Rock Capital Partners: 40:55
I think you’ll find for the most part we’re financing businesses, I think primarily US but diversified across the US these businesses, they’re national businesses. And I think most of us, we’re diversifying by position, size by sector. You know, if you’re investing in a business that is so exposed to a local region, that’s probably going to be a pretty small business to begin with. And we certainly wouldn’t want to have several of those. But I think in and of itself, just being concentrated in one geography is probably a pretty significant risk factor.
Ken Kencel – President/CEO, Churchill Asset Management: 41:34
But, even when you think about the types of we financed, even though they may be in, you know, sensibly the same quote industry group, right? They’re take an example of healthcare, right? So we financed compassion first, which was a chain of animal hospitals. We also finance Dolan S you’re in Greenwich, right? You know, which is obviously completely different business. We think it’s completely so even within a certain SIC code or within a category, our companies tend to be as different among themselves. You know, because of the, you know, the nature of our business.
Laurel Fitzpatrick – Partner, Ropes and Gray: 42:11
Thank you. Thank you all.