Tom Newberry, partner and head of private funds at CVC Credit Partners, discussed why CVC is teaming up with Coller Capital and looking to expand its direct lending business into North America. Financial terms of the deal were not disclosed.
Private Equity News: Why has CVC looked to move its direct lending business into North America?
Tom Newberry: We have a global credit management platform. CVC as a credit manager today has about $ 14.5 billion in AUM managed across vehicles in North America and Europe. It has always been the goal in any business that we go into to have the ability to transact both in the US and Europe and that is consistent with our CLO platform. It is consistent with our credit opportunities and special situations business and in private debt, where we had already established a European direct lending business [in 2014 which has done 17 deals], it has been our intent for some time to develop a US mid-market platform as well.
Why have you decided to buy Northport as opposed to setting up your own office there?
We’ve been familiar with the Northport team for some time. Resource America, which is where the Northport team has been employed previously, is a partner with CVC Credit. Resource America sold a credit manager back in 2012 to CVC and we have been partners ever since that time.
The team at Northport was established back in 2013 to start lending into the US mid-market and I’ve been working with them via their investment committee since that time. So I’ve been familiar with their team, I’ve been familiar with the portfolio investments over that time. It was a very logical extension of our business: we wanted to be in the US, this was a team we knew and they had a good track record, so it made a lot of sense to pull them on to our platform.
Why have you teamed up with Coller Capital? What will they bring to the table?
Coller brings the money to the table. Coller brings the capital to the table, to say it in a more accurate manner. There was a portfolio of investments here that needed to be purchased from the Resource balance sheet. Coller Capital has a history in pursuing asset purchases like this, not necessarily in the credit markets but in private equity. There was some logic there. Coller knows CVC well and has done for many years. They were providing the capital and we are providing a portion of the capital in the form of our GP [general partner] commitment and we will manage the capital.
To be clear, Coller is not taking an economic interest in the management company, it is merely putting up capital and investing on behalf of its investors. They are investing in the portfolios, not in the business we are developing.
CVC has got lots of money, could you not have bought those assets yourself?
The investments that CVC makes in credit funds that we manage are invested out of partner capital, not out of our private equity funds or our credit funds. So, yes we do have partner capital to deploy but for the most part we raise third-party capital and manage that.
What types of deals are you targeting?
It will be North American middle-market companies, mostly private. Generally speaking, these companies will have $ 10 million of Ebitda to $ 75 million of Ebitda. It will be a mix of first and second lien exposure. We can do both but mainly secured loans to North American middle-market companies.
Are there lots of opportunities in the American market at the moment?
The North American market is very well developed. We found there is very steady dealflow over time but it does ebb and flow, in terms of whether there is M&A activity or what capital markets look like. Broadly speaking, there has been a very steady opportunity in North America and we are seeing that spread into Europe. We’re taking a step into a well-developed market. I also think this broader theme of direct lending will continue to expand in the US and Europe. One of the things we are finding is that banks are having a more challenging time underwriting risk, either because regulators are stopping them doing so or they don’t want to. When the markets get dislocated, banks often step away from the underwriting. This creates an opportunity for direct lenders to get involved.
Do you think the upcoming US presidential election might provide you with opportunities if banks get worried about Trump getting in?
I haven’t been able to draw any potential connection between a Clinton or Trump presidency and underlying business activity in the leveraged finance markets. Listen, I think any moment of market volatility creates opportunities for direct lenders, so I think in some respects Brexit did that in terms of banks pulling back in terms of what we’ve seen in the market. I think if, perhaps, there was a fear of a Trump presidency and it began to look like it was more likely, then that is a possible outcome, but it is hard to bet on that right now.