There always has been and remains excess spread in private debt opportunities in the middle market – but many institutional investors find it difficult to access the middle market.
“You can’t flip a switch and succeed,” says Andrew Edgell, Senior Managing Director & Global Head of Credit Investments, at CPP Investments, one of the world’s largest pension funds. “You need the proper infrastructure to get it right. That said, we see tremendous opportunity in the mid-market space – where deal sizes are slightly smaller and the business is a lot more human resource intensive.”
CPP Investments taps into the potential of mid-market exposure in private credit through private debt credit manager Antares Capital, a market leader for more than 25 years. CPP Investments invested in Antares in 2015.
“We partner with Antares to access the middle market, and see huge value in originating and underwriting of loans,” Edgell says. “Because the deal sizes are smaller, we see better pricing and terms than we would on the broadly syndicated market. For example, middle market direct loans have offered up to 200 basis point premium versus broadly syndicated loans since 2013.1 We’ve worked with Antares in several scenarios in which they originated the deal, developed the relationships over time, invested in the senior capital, and syndicated parts of the capital structure. We have provided junior capital, been there when the sponsor has sold the business to another sponsor, or even went public. That symbiotic relationship with Antares allows us to play holistically in the capital structure over time. We think there’s a lot more opportunity to come in the mid-market as a result, and in private debt overall.”
A changing middle market
The definition of middle market has expanded as the market has matured and become a more attractive asset class. There was a time when investors would get covenants on every mid-market deal, but cov-lite has become increasingly common, particularly at the upper end of the middle market size range.
“There are ways we strive to mitigate the risk associated with the loss of covenants, but it’s becoming more difficult to harvest yield premium unless you are well positioned as a lending leader,” says Edgell.
The mid-market has upsized over the years, too, with more players – not a lot, but more – willing to write the bigger checks. The U.S. has seen over $50 billion in unitranche loans sized at $1 billion or larger since September 2019, for example.2 Direct lender deal sizes have been growing along with the portfolio companies they’ve been financing for years, but only the biggest players have the hold-size capability to play at the highest end of the middle market.
“Even outside the mid-market, direct lenders are taking a share of the broadly syndicated large deals normally led by banks – and still getting premium spread because direct lending can be easier to execute. There is no [credit] rating or roadshow, and no flex – and there is confidentiality,” Edgell says.
Wider opportunity set
At CPP Investments, the credit investment business is highly diversified, providing debt-financing solutions across the entire capital structure. About 80% of its strategies are private, and a large chunk of that is corporate leveraged buyout [LBO] finance.
“Private debt and private credit include many different sleeves, of course, but the main part of our business is LBO finance,” says Edgell. “Because we’re one of the world’s largest private equity LPs, we’ve been able to create some incumbency in many capital structures and be there for multiple iterations of the company’s lifecycle. This is very attractive for identifying credit opportunities as we look to grow our AUM. Also, from an underwriting and risk management perspective, it puts us in a position to better understand company management teams and see how their strategies play out.”
Edgell and his team tend to be fast followers of sponsor-backed debt because, as he puts it, “sponsors tend to invest in better businesses, so we get behind their diligence. They bring a lot of industry expertise to the table. They tend to organize themselves around industry sectors.”
In his experience, Edgell has found this especially true with partners his team is familiar with through the pension fund’s private equity funds and direct private equity business. That translates into confidence that the business has already been vetted when a deal comes in the door from a private equity sponsor. Sponsors also stepped up in terms of financial and agile management support at the height of the pandemic.
A huge driver of growth in the credit markets is private equity sponsors. There’s over $1.1 trillion of PE dry powder according to recent numbers from Preqin, and similarly cited direct lending numbers are about 20% of that amount. Even with all that dry powder, there’s likely not enough debt capital available to meet demand.
Edgell likes what he sees in that regard, but he’s not overlooking other opportunities.
“At a high level, we see great opportunity in the corporate credit markets,” he says. “Seeing a big opportunity, however, doesn’t stop us from trying to diversify the portfolio and target other pockets of opportunity. And that’s ultimately how we drive long-term value for CPP Investments’ contributors and beneficiaries.”
On Friday, I had a great discussion with Andrew Edgell, Senior Managing Director & Global Head of Credit Investments, at CPP Investments.
Let me first thank Andrew for taking the time to talk to me and also thank Frank Swtitzer, Managing Director, Investor Relations for setting up the call and providing me with material and following up with me.
Andrew and I started talking about the team structure in Credit Investments (CI).
CI provides debt-financing solutions across the entire credit structure, including term loans, high-yield bonds, mezzanine lending, structured products and other solutions for borrowers in all sectors.
Andrew specified that CI delivers both alpha and beta across the capital structure.
On their website, you can read more about Credit Investments and the teams:
1. Americas Leveraged Finance: The Americas Leveraged Finance (ALF) group invests in sub-investment grade corporate credit or credit-like opportunities in both primary and secondary markets in North America and Latin America.
The ALF group focuses on liquid and illiquid debt across the capital structure in the primary and secondary markets, including leveraged loans, high-yield bonds, unitranche loans, bridge financings, convertible bonds, mezzanine debt and preferred equity.
ALF can hold up to $1 billion, with a minimum investment of $100 million for illiquid debt. ALF has the ability to underwrite on a stand-alone basis, and has proven ability to structure complex, custom and creative solutions for borrowers.
The ALF team is comprised of experienced professionals with offices in Toronto and New York.
ALF is headed by by David Colla and you can view other senior members here:
2. Americas Structured Credit and Financials: The Americas Structured Credit and Financials (ASCF) group invests in sub-investment grade structured credit and debt capital solutions for financial institutions.
The ASCF group seeks high-yield investments in portfolios of credit and credit-like assets, as well as corporate credit investments in specialty finance companies and other financials. This includes purchasing or financing whole loan portfolios, residential mortgages, consumer credit, other smaller-scale credit and collateralized loan obligation and other asset-backed securities. The group also invests in intellectual property with royalty-related income streams backed by tangible and intangible assets globally.
The ASCF team is comprised of experienced professionals with offices in Toronto and New York.
ASCF is headed up by Devon Kirk and you can view other senior members here.
3. APAC Credit Group: The APAC Credit group focuses on sub-investment grade corporate, structured and real asset credit solutions in Asia-Pacific.
The APAC Credit group invests at both the asset and corporate level using various instruments, including leveraged loans, high-yield bonds, convertible bonds, senior and mezzanine loans and structured credit products including non-performing loan assets.
APAC Credit invests geographically across Asia-Pacific in any sector and can provide both dollar and local currency solutions. The group invests both in primary and secondary credit markets, with investments made both on an absolute and relative return basis.
The group targets individual holdings of $50 million to $1 billion-plus, and has proven ability to lead complex, custom and creative solutions for borrowers. APAC Credit also selectively engages in strategic partnerships in core local markets to provide scale and local access.
The APAC Credit team is comprised of experienced professionals with office in Hong Kong.
APAC Credit is headed up by Raymond Chan and you can view other senior members here.
4. European Credit: The European Credit (EC) group focuses on sub-investment grade corporate credit solutions in Europe across the capital structure including leveraged loans, high-yield bonds, convertible bonds and structured products.
The European Credit group invests in both public and private credit geographically across Europe in any sector and has the flexibility to fund in multiple European currencies.
The group invests in both liquid and illiquid credit instruments in both primary and secondary markets, including performing and non-performing loan portfolios.
European Credit targets individual holdings of $50 million to $1 billion-plus, with the ability to underwrite on a stand-alone basis. It has proven ability to structure complex, custom and creative solutions for borrowers.
The European Credit team is comprised of experienced professionals with office in London.
European Credit is headed up by Derek Jackson and you can view other senior members here.
5. Public Credit: The Public Credit (PC) group invests in liquid credit products globally, with a focus on higher-rated products.
The Public Credit group invests in investment and sub-investment grade, public, single-name credits and credit indices globally across all sectors.
Products used by Public Credit include corporate bonds, ETFs, Credit Derivatives, ABS, RMBS and CLOs. There is no typical investment size, but investments can range from $25 million to $100 million.
The Public Credit team is comprised of experienced professionals with offices in Toronto, London and Hong Kong.
Public Credit is headed by Chris Pinkney and you can view the rest of the senior members here.
6. Real Assets Credit: The Real Assets Credit (RAC) group is a global credit investor in public and private markets in real estate, energy and resources, infrastructure and renewables.
he RAC group is a global credit investor in public and private markets in the following asset classes: real estate (first mortgages, b-notes, mezzanine debt, preferred equity and single-asset CMBS), energy and resources (senior debt, subordinated debt, preferred equity and mineral royalties), and infrastructure and renewables (project finance, loan finance and bond finance).
The group focuses on complex transactions requiring customized solutions, with target positions of $100 million to $500 million and flexible hold periods with maturities generally less than 15 years.
The RAC team is comprised of experienced professionals with offices in Toronto, London, and New York. Here is a listing of all our senior team members, categorized and searchable by city.
RAC is headed up by Geoffrey Souter and you can view other team leaders here.
Because I want you to really dig deep and look at the breadth and depth of CPP Investments' Credit Investments teams.
They're all very experienced professionals with top-notch credentials and lots of private sector experience.
The same goes for their leader, Andrew Edgell, who joined the organization in 2008 in the midst of the Great Financial Crisis:
Like most credit professionals, Andrew is really sharp and he really knows his stuff.
Most people understand the stock market but credit markets are much bigger and they range from public to private and everything in between.
Credit people are obsessed with structuring trades offering the best risk-adjusted returns, it's in their DNA.
Anyway, Andrew and Frank told me the plan is for the Special Situations team within Americas Leveraged Finance to join Americas Structured Credit and Financials to create a new group called Capital Solutions, which would be uniquely positioned to provide capital at scale for complex corporate financings and asset-based opportunities. Devon Kirk, currently Head of Americas Structured Credit and Financials, will lead Capital Solutions.
"Capital Solutions is agnostic to industries and geographies, it looks at the needs of the issuers and brings a holistic solution to the table," Andrew told me.
He said that Credit Investments helps the Private Equity and Real Assets teams by investing in multiple places across the capital structure.
Whether it's direct lending or other lending, they also do their own deal origination and look favorably upon sponsored backed deals.
The problem with syndicated deals is by the time everyone gets their cut, there's little spread left for investors.
This is why it helps to have a very experienced credit team spread throughout the world, it gives CPP Investments' an edge other pension funds simply don't have.
Don't get me wrong, CPP Investments also has strong partnerships with all the big players like:
They like doing "club deals" with these big players.
But CPP Investments doesn't only invest in and with credit funds, it does direct lending, origination, structured credit, real estate lending, and of course, traditional corporate credit.
In other words, the Credit Investments team at CPP Investments does a lot of of the same things Apollo's Global Credit and other top firms do but exclusively for the CPP Fund:
Andrew and Frank gave me examples of things the Credit Investments team worked on.
For example, on the $14 billion McAffee deal, taking the company private, addition to its PE investment, the Credit team is involved in the financing package:
The Investor Group has obtained a commitment from JPMorgan Chase Bank, N.A., Bank of America, N.A., Credit Suisse AG, Cayman Islands Branch, Barclays Bank PLC, Citibank, N.A. (and/or its affiliates), HSBC Bank USA, National Association, Royal Bank of Canada, CPPIB Credit Investments III Inc., UBS AG, Stamford Branch and PSP Investments Credit II USA LLC to provide debt financing consisting of a $6.66 billion first lien term loan facility, a $1 billion first lien cash flow revolving facility and a $2.32 billion senior unsecured bridge facility (which may be replaced with senior notes issued through a Rule 144A or other private placement), subject, in each case, to customary conditions. PSP Investments Credit USA LLC and investment funds managed by Neuberger Berman have agreed to provide the Investor Group with preferred equity financing with an aggregate liquidation preference of up to $800 million, subject to customary conditions.
You'll notice PSP Investments Credit was also involved financing that deal and I would say David Scudellari and his team at PSP are also excellent in their own right.
But the deal shows you how different departments at CPP Investments work together on deals.
Another example is Fairfax's US$1.0 billion substantial issuer bid and sale of 9.99% minority stake in Odyssey Group.
Here are some other recent Credit Investment transactions that may be of interest:
- Committed US$300 million to Blackstone Life Sciences Yield, which will invest in royalty streams on FDA-approved products and structured credit opportunities with biotechnology, pharmaceutical and MedTech partners.
- Committed to acquire US$1 billion of home improvement focused consumer loans from Service Finance Company, LLC, a sales finance business owned by ECN Capital Corp. Under the agreement, the purchases will be made through 2020 and 2021.
- Committed to provide up to US$500 million in financing to Prodigy Finance, a provider of postgraduate student loans for international students attending top schools.
- Committed additional capital to an investment vehicle managed by Carlyle Aviation Partners to fund the acquisition of AMCK Aviation’s portfolio of aircraft, consisting of 125 primarily narrowbody aircraft and an order book of 20 A320/321 neo aircraft.
- Completed a US$100 million investment in the debt financing for OTG Management, an airport concessions operator with locations across 10 airports in North America.
As you can read, CPP Investments' Credit Investments is busy financing many deals, enhancing yield.
In all, there are 135 investment professionals managing $50 billion in Credit Investments across the capital structure.
Obviously, Antares Capital remains one of the most important investments in the credit portfolio:
Antares was founded in 1996 with a vision to be a pre-eminent player in middle market private debt. Today with more than 45.4 billion of capital under management and administration1, Antares is a private debt credit manager and a leading provider of innovative financing and investment solutions for our PE-backed borrowers and investors. We’re proud to have built one of the industry’s largest and longest-tenured portfolios of mid-market companies.
A lot has changed over twenty-five years. What started as 12 has grown to a team of more than 370+ dedicated professionals2. Together we are committed to consistently and reliably championing middle market growth. In good times and bad. All while maintaining integrity and a focus on social responsibility. Doing so allows our people, partners and communities to achieve their full potential.
Antares focuses on mid market LBOs and is growing nicely.
But Andrew told me they want AUM at Credit Investments to grow to $82 billion in 2026 and the target is achievable given how fast they're growing (they were at $42 billion in May 2021 and are already at $54 billion).
"Whether it's direct lending in private equity, real assets, renewables, we are proactively sourcing deals and have the right skill set and diverse mandate to grow nicely."
Andrew also emphasized the "One Fund" approach and how teams work collaboratively together at CPP Investments.
As far as risks, he told me they're focusing a lot on cost inflation and stress testing their portfolios for higher rates.
And even though spreads have widened a little recently, "deflaults have not jumped as debt servicing costs remain low."
He also gave examples of how Special Situations sprung into action during the pandemic, providing important financing solutions to investee companies CPP Investments' owns.
He said the energy transition and move to net zero is huge and wil provide many opportunities to invest in the medium to long run.
He said while mid-market debt financing is increasingly provided by non-bank entities, banks still play an important role for larger companies providing working capital lines, advisory and other services.
He also told me they can engage with companies in credit, structuring financing deals where they can influence their adoption of ESG standards.
Anyway, I am not doing justice to Andrew Edgell and our conversation but I tried to convey the important points here.
Suffice to say that CPP Investments' Credit Investments' is extremely sophisticated and unparalleled in the pension investment landscape. They literally operate like premiere credit funds.
Recall, John Graham, Andrew's predecessor, led the team before being nominated CEO.
Again, credit professionals are always looking to manage downside risks in the deals they structure.
Andrew left off with some advice to young finance professionals to look at CPP Investments' Credit Investments team as a place to learn a lot about credit and capital structure.
"We focus on relative value all the time, it's a great place to work and I'm asking young talented professionals to come work here if they really want to learn a lot about finance."
Alright, let me wrap it up there.
Below, in a wide-ranging Invest Talks interview, Apollo Global Management co-founder and CEO Marc Rowan spoke with Bloomberg QuickTake Chief Correspondent Jason Kelly about what the past year has been like for the firm and what he sees around the corner for global markets (July 2021).
Around minute 7, he talks about how while private equity is an important asset class, "yield and hybrid" are their growth engines as they are in the "fixed income replacement business."
And Mark Jenkins, Head of Global Credit at Carlyle discusses their Global Credit portfolio and how they collaborate across their platforms.
Listen carefully to Mark, they're growing in line with CPP Investments' Credit Investments (their AUM and targets are in line) and their platforms and approaches are very similar (but not identical).
Lastly, I hope to see Andrew Edgell interviewed on Bloomberg or somewhere else one day but he is still fairly new in this leadership role so he has time to do these interviews.
For now, he's focused on running one of the biggest and best credit portfolios on the institutional world.
I thank him for taking the time to talk to me and look forward to our next conversation