Europe’s abortive football super league didn’t collapse from want of loan capital this April. It collapsed, instead, because of a catastrophic lack of cultural fit with the ethos of the sport.
There’s no lack of capital chasing private credit funds and opportunities at the moment, but for Tim Flynn, founder and CEO of the London-based European private credit manager Hayfin, culture is what distinguishes both good niche credit asset managers and good football teams. What goes on behind the scenes directly affects performance track records.
“Team culture makes a real difference in how those humans interact on the pitch and what they do and the effort they put in. A lot of it is dictated by culture and it’s the same in financial services.”
While not downplaying the skill needed in credit, lending is less inherently complex than some other areas of finance, requiring skill and judgement, rather than overly advanced computing power or financial engineering, for instance.
Borrowers may become ever more innovative in their business models, balance sheets more complex, term sheets and loan documents more voluminous, and legal fees ever more egregious. And even if workouts, liquidations and debt-for-equity swaps can add unwanted headaches, at their heart the basic processes of credit underwriting and loan origination – by banks or alternative lenders like Hayfin – change relatively little.
Flynn is candid about the sometimes competing pressures on a private credit manager – and the tensions that a CEO must manage. “To have a successful private credit firm, in my opinion, you have to be a good business person. People miss this,” he says. “These are businesses that have complexities and nuances that have to be very thoughtfully managed as businesses.”
In other words, running distressed, special situations, direct lending and CLO franchises brings complexities that require skilled people. But hiring top-tier professionals – Flynn worked at a New York white-shoe law firm before joining Goldman Sachs – means hiring talented but also competitive people.
A competitive spirit can lead to pressures to grow the franchise too quickly – “it’s hard to hire really good business people and retain them, you know, if what we are tomorrow is exactly as we are today”, as Flynn puts it. These pressures need to be dispassionately managed.
With a track record approaching 12 years in the private-credit fray, Hayfin is no hayseed. British Columbia Investment Management Corporation (BCI) has been a shareholder since 2017, when it acquired a majority stake in the firm from a consortium of OMERS in Canada, Australia’s Future Fund and TowerBrook.
As capital-raising and deployment moved to Zoom in 2020, Hayfin and a handful of other managers benefited from a distinct incumbency bias among investors unwilling to commit capital to unfamiliar managers.
Hayfin’s third European direct-lending fund pulled in €5bn last year, deploying €3.7bn by the end of the year along with about €1.2bn in special situations and distressed debt.
But competition is still tight. A few weeks after Hayfin announced its €5bn capital raising, Los Angeles-based Ares closed a $10bn European mid-market fund.
Growing the business does not necessarily mean growing out fund sizes and Flynn recalls Hayfin’s origins in 2009: “Going back to the beginning we thought a couple things: we need to be diversified in terms of our product footprint and what we cover, and we need to diversify geographically.”
To that end, Hayfin has people working on origination in a handful of offices across continental Europe. Glenn Clarke now heads Asia Pacific and is based in Singapore, where the firm opened an office in 2020 to cover its Asian client base.
Flynn is, in fact, speaking to IPE from San Diego, where he is in the process of setting up an office that will be headed by Rob Kneip, who will move across from New York.
“We continue to chip away and work on trying to make our business more transatlantic,” Flynn says. As much as 30% of Hayfin’s direct lending deployment is in the US.
Hayfin has already had a presence in New York for about seven years but Flynn says the geographic expansion has been slow and deliberate.
The majority of the healthcare team is now in New York, along with structured products, and high-yield and syndicated-loans people. Kingsland, a New York-based specialist CLO manager, was acquired in late 2017 to build out a liquid credit capability.
Hayfin has continued to add people, hiring 35 in 2020, mostly in finance, operations and technology which, according to Flynn, may be “less visible in many ways to clients than our investment side but it’s just incredibly important to the product that we can deliver”.
If 2020 was an extraordinarily attractive year for private-credit managers, Flynn expects deployment to revert to more normal levels: “Q1 has been an outlier and has continued to be attractive but we’re expecting that to taper off during the course of the year.”
And if 2020 was a year of haves and have nots in terms of distinct groups of performing, stressed and distressed borrowers in liquid and illiquid credit, Flynn believes this theme will continue to an extent as conditions normalise.
Still, things looked hairy in the eye of the storm in 2020 – “when you’re in the thick of COVID, we have businesses in the portfolio that are showing up at zero revenue, and we’re all reading the newspaper”, as Flynn puts it.
This forces perspective: “When something goes from 95 to par you think it’s amazing. When something goes from par to 85 cents or 80 cents you think it’s very hard to stop it. So for both defensive and offensive reasons, yes we’re a bottom-up investor but it’s important that we do think about what’s happening around us.
Inflation has been a particular concern in the first months of 2021. While the floating rate structures of private debt provide protection to investors, underlying economic dynamics can certainly work against them.
“What we have been selecting for in our portfolios can be distilled to two words: pricing power. The businesses that have pricing power and that are levered have a much better chance of trading through an inflationary environment than those that don’t have pricing power. It’s kind of simple.”
This article has been amended to clarify that the third European direct lending fund closed in 2020.