In Private with Marc Chowrimootoo, Hayfin Capital

In this episode of Termgrid Talks, Anthony Sage talks to Marc Chowrimootoo, co-head of direct lending and portfolio manager at Hayfin Capital.

The discussion includes a look at how private credit maintains a competitive edge over broadly syndicated loans. Marc discusses his views on covenants, clubs and co-invests as well as trading in private credit.

Also on the agenda, Marc discusses growth opportunities for private credit; barriers to entry for new lenders in the European market and how Hayfin is positioned for 2025.

Anthony Sage: Welcome to Termgrid Talks. Today the spotlight will be focused on private credit. I’m Anthony Sage and I’m delighted to introduce a friend of mine, co-head of Direct Lending and portfolio manager of Hayfin Capital, one of Europe’s leading direct lending and private debt platforms. Welcome Marc Chowrimootoo. 

Marc Chowrimootoo: Good to see you.

Anthony Sage: Perhaps we can start by diving into looking at 2024 and the context of what’s happened across the market and what your key observations have been.

Marc Chowrimootoo: Thanks. Actually 2024 has been a really interesting market to be in. Despite the themes around low M&A, low volumes, increased competition from the syndicated markets, we’re on pace to actually deliver the highest level of deployment in direct lending since COVID. So we’ve managed to find a way to deploy in really interesting spots, even though overall volumes are low. 

I’d say one of the themes we’re noticing is a continual increase in M&A activity. It’s starting off at a very low base, but we do experience and have experienced that sort of slow ratcheting up. Actually the teams are probably operating on more lender eds and more processes now than they’ve done at any point in the last 18 months. So that bodes well for 2025 and onwards.

We also saw a real uptick in refinancing activity certainly from Q2, which is added to the volumes of that low M&A base, the syndicated markets and sort of how that’s impacted us. 

It’s had some impact on spreads without any doubt. But what’s noticeable is that even with sort of spread compression and pretty severe spread compression in the below markets, ours are sort of matched in sync. 

And so we’re still delivering sort of 150-200 basis points premium to the B loan market, which is actually what’s happened over the last 15 years. So whilst it seems like a really dramatic move this year, it’s actually pretty normal for our market to move in tandem. 

And look, we’re still finding really interesting spots to deploy both from a sector and as well as regional perspective.

Anthony Sage: I think that success somewhat surprises me just in the context of the, you know, as we said, the compression in the syndicated loan market, there are 150, 200 base points inside of you. 

The M&A activity has improved but still somewhat suppressed. And against that context, I would have expected the sponsors to perhaps veer away from you and towards syndicated loan market. What do you think the differentiating factors are for you guys? 

Marc Chowrimootoo: So before I get to the differentiating factors, I think we need to reset a little bit what the market opportunity is. I always use the analogy of the venn diagram. And so you’ve got the syndicated markets – B-loan and bond markets. 

Over here, you’ve got private credit more broadly and, you know, direct lending in particular, and that overlap in the middle. And we tend to spend a lot of time talking about that overlap and that tension between asset classes and the narrative is about the battle for ascendancy between those classes. 

What it misses is that the really interesting space for us, the white space for private credit, is an area that isn’t covered by the syndicated loan market. And so whilst there has been some compression, there is increased competition for those assets where they overlap, that white space is still growing. 

So notwithstanding that the health of the syndicated markets coming back, we’ve still been able to find really interesting places to deploy. And actually, the real growth driver for private credit in general and direct lending in particular is in that white space. 

It’s not in the areas of competition. I always remind people that actually we want a healthy syndicated market because that drives overall volumes. And that’s good for M&A, which is good for everyone. 

And so we want to be in a system where we co-exist with them, where there will be places where we compete, because quite frankly, it’s not clear whether an asset is natural for the B-loan market versus the private market, or where we coexist and we supplement them. 

There’s been an increase in deals where whether that’s PIKs on top of syndicated deals, whether it’s currency tranches within a B-loan context, where private credit and the syndicated markets can really have a symbiotic relationship. 

I think that’s the healthy place for the market to go. I think that’s what’s really interesting. But that white space is what’s fueling the growth. It’s not that battle. And so coming to the point around what’s different about us, what are the flexibilities and advantages to us. 

I think there’s a growing appreciation within both the borrower and sponsor community of the flexibility that private credit offers. We can look at slightly different sectors. We can certainly take a view on leverage and cash flow outside the constraints of a ratings framework. 

I think the speed of action between you know, starting a process and getting to commitment, I think in this environment we still offer something different. Management teams often prefer dealing with a small group of direct lenders, as opposed to a syndicated offering where they’ve got 50 investors that they need to speak to. 

And I think the reliability point, I mean, if you go back to 2022 and 23, we were the only asset class that could stand that volatility, we were the only reliable asset class out there. And I think that’s not lost on the sponsors and borrowers. 

Anthony Sage: A symbiotic relationship between loans and private credit is quite interesting because I thought that the convergence of terms documentation between those two asset classes would be more difficult than the convergence between bonds and loans. And clearly you’re saying that’s already underway.

Marc Chowrimootoo: I think you need to look at subsectors to really understand the movements. And we operate in two distinct markets. We operate in the mid market, classic mid market, which for us is sort of $30-50m EBITDA. 

And what we term the upper mid market is sort of $50-100m. The median asset in our most recent vintage is sort of $60m. If you look at the last 12 months, it’s more like $70m. So it cuts across those two markets. 

There is obviously a number of assets in our portfolio that are above $100m, which look and smell and feel like a large cap deal in the B-loan context. And if you were to look at terms in that part of the market, they would look very similar to what you and I would have been underwriting in our previous jobs. 

But that’s actually a relatively small part of what we do. The bulk of what we do is in those two sectors. And that’s where the docs do diverge.

We do have better protections from a documentary standpoint. We are more rigid on structural protections. There’s a reason why there’s a much lower default and loss rate in direct lending than there is in the B loan market.

But then for the assets where they’re mature, it’s organic growth, they’re large scale resilient businesses, you need part of that as part of your portfolio. There’s a place for some of those assets within a broad name, within a broad portfolio that has 60, 70, 80 names because that tends to be at the higher quality end.

If you’re going to just be rigid about, I want my old school docs and my old school covenants and I want to stick to that part of the market, there’s an element of adverse selection. 

So for the right credits, I think we and our peers have understood the value of having that as a part of your portfolio.

But it is diversity within that. And so for every large cap deal with large cap docs we’ve got sort of upper middle and middle market stocks which smell and feel like the more traditional deals that we’re doing. 

Anthony Sage: Behaviourally do you see clients thinking differently in terms of which route do I go down bank syndicated loan vs private credit?

Marc Chowrimootoo: Yeah there’s a range, there’s a subset of sponsors who used private credit because that was the only game in town during that sort of 22-23 period and have learned a lot about us and we’ve learned a lot about them over that time and become buyers of private credit and the flexibility that it offers and the place within their own portfolio that it occupies. 

Not every asset is fit for purpose but there are certainly some portfolio companies which are more suited to private credit. I think that that journey of experience and understanding of our asset class I think has been really positive for the future growth of the asset class. 

There are those who are going to be more transient and will look for the last basis point in financing costs and that will be the focus and will pivot between them depending what’s more attractive and there are those that just really don’t like using private credit. 

I mean I know one sponsor in particular that said to me that they’ve got one asset in Europe that they’ve used private credit for and they really don’t want to because actually from a structural perspective it doesn’t give them the flexibility that they want but the B loan does and particularly with the ability to have large sort of revolving credit facilities to provide liquidity. 

So there’s a full range within the sponsor community as to what place we we occupy but I think what’s absolutely incontrovertible is that as we come out of this period, private credit is a much better place within their appreciation and and the usage than we were going into it. 

Anthony Sage: One point I want to pick up on is underwriting. I was surprised, I’ve spoken to a few of your peers, and it seems to be a common thread amongst many of them now to underwrite deals, not just to co-invest, sell down, put to third party, and it’s much more prevalent across the market. Clearly, historically, it was the preserve of banks, and they were the ones who disintermediated and made the money on that side. Are you seeing that more and more across your peers? Is that something you’re considering internally? 

Marc Chowrimootoo: We have seen instances of it. I would say from the shop floor, it isn’t widespread. It’s not a commonly used technique. But if you think about it, and if you contrast what’s happened in the US market, and our market tends to follow the themes, trends that are prevalent there, that rubicon has already been crossed, right? 

And so, in our mind, it’s just a matter of time. And then from an origination and sponsor relationship perspective it’s much easier to go look here’s 100% commitment. Don’t worry about the rest we’ll sort it out ourselves. We will sell it to the family. We’ll negotiate docs. You don’t need to pull together a club and we’ll do that for you.

That’s a much stronger proposition than saying you know we’ll do 100% but by the way you want some flexibility so you’ve got to bring other people in. We haven’t done that. We have, as you mentioned, we have pulled co-investors inside alongside us in order to to meet larger and larger ticket demands.

But I don’t rule out at some point in time us developing capability from a capital markets perspective to move in that direction. It’s just probably not not right now.

Anthony Sage: How big do you think that could be in terms of absolute ability of a club of direct lenders to go in and and position themselves on a deal?

Marc Chowrimootoo: Well I mean you’ve seen deals north of $4bn being done by a cabal of of lenders so you know the the capability is definitely there.

I would say the number of transactions in in Europe that are above $2bn even for the syndicated market is actually quite limited. We’ve never had the volume of sort of mega cap deals in in Europe and so is that really going to be the path forward. I doubt it. But the mode where we’re 2 / 3/ 4 lenders in $1-2bn I think that you’ll definitely see more of.

Quite frankly we’ve seen a lot more of it even in the sub $1bn cap stacks and that’s a theme that we’ve seen that’s been sort of across the Atlantic coming into our market.

About half of what we do today is in a club of two to five lenders. Half of it is sole. If I were to predict what we were doing in sort of 2-3 years time it would be more skewed to that of 2-5 lenders

Again it comes down to the direct lender preference and what are the principles and frameworks around them deployment. We have made it very clear to our clients, in the LPs, but also the users of our capital, sponsors, that we love control.

Anthony Sage. Is that your preference?

Marc Chowrimootoo: That’s our preference. We understand the realities of today’s market and so we also play nicely in the sandbox with our peers. But we’ll do that where we’re equal in weight and there’s a balanced syndicate. What we won’t do is where we’re the tail of the dog so we’re a 5-10% position and others are much larger. That’s not what we want to do. We want to have influence in our deals and that’s just our model.

So even if the market does migrate to something more of a US style, arranger-led, 10 plus people in those deals, that’s not really our model. We still think there’s a much more interesting part of the market where we can have an influence on the structures.

Anthony Sage: Clearly, private credit is attractive as an asset class. There’s more money coming into private credit. Some of your peers have raised incredible sums this year. With that, I thought it’d be more intensity of competition just within private credit in terms of chasing the deals.

In Europe, the top 25 direct lenders have raised over 75% of capital since 2007 in that market, which is incredible. Whereas in the US, I think top 25 have raised around 50%, so it’s a much longer tail. Do you monitor competition in Europe?

Marc Chowrimootoo: That concentration that I mentioned and you highlighted, that’s actually accelerating. And so what it feels like is that there are a group of larger managers who are breaking away from the rest of the pack. 

And so that dispersion between the leading group and the rest is becoming wider and wider. That’s from a capital raising perspective. That’s from a relationship with a sponsors perspective. So that’s from a deployment perspective. And that feeds into performance and therefore back to capital.

Why is that more prevalent in Europe than it is in the US? It’s just harder to run a direct lending business in Europe than it is in the US. 

To operate an origination sourcing and execution business that can cope with deals in Italy versus deals in France versus deals in Germany is very much more intensive, both from a people and time management than it is in the US. 

And so those that have an existing footprint, those that have relationships, they’ve been here for a long time, they have a competitive motor running. We have nine people in Paris, we have six people in Madrid, we have six people in Frankfurt. 

It takes a lot of time and effort to replicate that. And so it becomes very hard as a new entrant to compete with platforms like ourselves and our peers. 

Anthony Sage: Quickly, just looking at the themes that I’m reading in the market around trading and perhaps building some liquidity in the private credit market, maybe it allows the illiquid premium of private credit to be compressed and therefore become slightly more competitive with syndicated loans. 

Do you see that marketplace evolving? Do you care from a Hayfin perspective whether that happens or not, or are you happy to be illiquid and take the positions you’re in? 

Marc Chowrimootoo: So I think the first thing to say is that we haven’t really seen it. There’s been a lot of talk. So it’s pretty nascent in its evolution.

Second thing is, it’s always dangerous to be too negative on these developments. So we have to sort of be open-minded and there are, I can see some benefits, certainly for the users of our capital.

I would though, just go back a little, is that what our clients want? If that’s really where the direction of travel is, that product starts to look and feel a lot like the liquid credit product, which obviously has a very different price point. 

We offer a much lower default rate, a much lower loss rate for a reason. Is that really going to be maintained if we start to move and migrate towards a market where maybe credit underwriting standards slip. But, guess what, we can sell the assets into the market so does it really matter. I’m pretty sure that’s not what our clients want. 

Then you think about it, the borrowers, one of the great things that private credit offers to borrowers is a direct relationship with their lender. 

We can address volatility in earnings, problems with their sector, issues with the capital structure in a much more constructive way because there is a direct dialogue, there’s a relationship there, particularly companies that have migrated from bank lending up to private credit. 

That’s really important, so if you’re in a facility that actually enables lenders to trade out, who are you going to have around the table when there’s a problem, when there’s a covenant reset? 

Anthony Sage: Do you think we’re entering the golden age of private credit? How do you see it progressing over the next 2-3 years? 

Marc Chowrimootoo: I think it’s been an incredible ride the last 2-3 years. We were certainly at the peak of 2022, where we were for really high-quality credits issuing moderately-levered deals at 650bps over at 97, for senior secured risk.

That is unprecedented and triggered these views as though, well, that is a golden age. We like to remind people that actually that’s the anomaly, not what we’re in today.

And so actually this is much more akin to what the market was before, but also what we think the market’s going to be going forward. We’ve certainly opened up the range of companies that we can transact with and we can build the relationship with. 

The size of companies that we deal with has got bigger and I think that’s not going backwards. I think the appreciation of the value of private credit has increased exponentially during those 2 years. 

So I see this as a springboard for the next phase of growth for private credit. I don’t see this as this is it, this is as good as it’s going to get, like this is, to use your term, golden age. That sort of implies that it’s coming to an end at some point in time to be replaced by the next iteration.

When we talk about the asset class this is just the starting point for us right. There are structural tailwinds to asset class, there are structural tailwinds to answer our growth. We are going to be talking in 3 years time a much bigger market in 3 years time, a more sophisticated user universe and hopefully a much more successful Hayfin to come.