The GlobalCapital newsroom was not expecting many deals to be announced on Monday morning, following Credit Suisse’s rescue deal late on Sunday.
In the more liquid markets this proved to be correct, as the corporate bond market remained closed until Thursday, FIG was closed all week and scant activity was picked up elsewhere. However, one deal was signed over the weekend: global asset manager First Sentier Investors took a majority stake in AlbaCore, one of the last independent European private credit managers.
Of course, the deal had been in negotiations for months, and was by its nature less vulnerable to the kinds of short-term pricing concerns that led to a freeze in other asset classes. However, the fact that the auction was so competitive does demonstrate that despite the challenges that alternatives and private debt in particular are facing, there is still extremely strong investor appetite for this kind of exposure.
“Returns today are historically very high and so I would say it’s about as good a time as any to make a loan to a corporate in Europe,” AlbaCore founder and CIO David Allen (pictured above) told GlobalCapital, expressing a view at odds with most of the banking world.
Private credit firms such as his hope to capitalise on further bank retrenchment from corporate lending. “Credit Suisse is being consolidated, and in 2006 players such as Lehman, RBS, Merrill were on league tables. More regulation should be expected in the banking market, which could lead to more difficult conditions for banks to lend money,” Allen said.
Consolidation
Fundraising has been challenging in the past year for all private markets firms and some see this as part of a natural consolidation as limited partners look to invest more — or the same amount of capital, but with fewer managers. “The trend with large allocators of capital now is for larger asset management groups to offer more bespoke solutions for clients — and for FSI, alternative credit was a strategic area for them to grow,” Allen said.
This has driven stiff competition as large asset managers look to buy into a market with just a handful of players of scale. GlobalCapital wrote in February about the lack of independently owned European private debt firms that would be realistic targets for the growing number of would-be buyers — identifying AlbaCore as one of a small handful, following the sale of Arcmont to Nuveen.
First Sentier Investors’ CEO, Mark Steinberg (pictured below), described the search from his perspective: “Mitsubishi UFJ Trust and Banking Corporation (MUTB) acquired us with the intention of helping us to continue to grow and we have looked to do that through both organic and inorganic means.”
He explained that inorganically it made sense to look outside where their current capabilities lay — and that, in conjunction with the direction of client demand, led to looking more closely at Europe and private debt.
“We started to look more closely at the market last year, looking to identify opportunities that would be a good strategic fit. We identified AlbaCore as a firm that could be a good fit — so when the opportunity came up to engage with them, we did so and uncovered a lot of initial mutual interest in what we were both seeking to achieve as organisations and at that stage entered the process in earnest.”
Supply and demand
This dynamic allowed AlbaCore to be picky about its strategic partner. After all, it had already entertained several approaches over the years. “It’s a bit like getting married — unless you have an arranged marriage, it’s hard to predict in advance to whom and when, and there is magic when you find a great fit,” Allen said.
Almost all the other acquisitions of private debt firms have been 100% deals. However, one of the key stipulations from the AlbaCore team — and Allen, in particular — was that they wanted to maintain a stake in the business. This materialised in a 25% perpetual equity position for the AlbaCore management. One rival direct lender remarked that “David has managed to have his cake and eat it too.”
However, Steinberg explained that although the structure was novel for them, it did fit with their values: “The partnership has an innovative and interesting structure that aligns the interests of both the corporate shareholders and the management team. We envisage management maintaining a perpetual minority interest and we don’t intend to own 100% at a later date. In terms of our own model, even though our other affiliates don’t own real equity they do have investment and some operational autonomy as we think that’s how those teams operate best.”
Allen also stressed that the reason for this structure was a philosophical one: “It was my strong view around alignment of interest that staff should be allowed to continue to participate in the success of the business. It was also important for us to operate independently and autonomously. Many other deals we have seen in this space have been 100% deals, so it’s pretty unusual to have a large employee equity stake. Remaining large shareholders in our business for the long term drives better behaviour and alignment of interest.”
Cultural fit
Another area of philosophical overlap was in the long-term thinking endemic to both firms. “We were delighted with the strong cultural alignment and there is a lot about the way AlbaCore thinks and operates that is very consistent with our approach and outlook; they are a team that takes a long-term view around looking to build out a successful sustainable fund management business,” Steinberg said.
Allen also highlighted this as a key deal driver: “The cultural fit and ethos was very strong. FSI operates with key values of honesty and integrity and is very long term in its focus. They plan in quarter centuries not quarters. And we wanted to find a home for AlbaCore for the next hundred years. FSI’s ultimate parent company has a rich history; it was founded in 1880 by a former samurai, Iwasaki Yataro.”
In the context of a hundred years, the events of a week — even this week — seem less significant. But in the short term, private credit firms are confident they can take advantage of what they are viewing just as further bank retrenchment. However, if there is wider contagion or a liquidity crunch, this could create problems across the board. Having access to long-term capital in this kind of situation will be even more important.
“The combination of the two firms is quite powerful beyond what we have been able to do individually,” Steinberg said. “We have very good ideas about where we can go from here with a mixture of GP capital that we can provide, access to our distribution capability and introductions to our client and consultant base that will provide AlbaCore access to areas of the market that would have potentially taken them longer to reach without us.”