Strategically Speaking: Bain Capital Credit
Bain Capital Credit (BCC), an arm of the eponymous private equity house, has come a long way since it was founded in 1998 as Sankaty Advisors. The firm started off investing in CLOs and mid-market lending, but a global bank loans strategy started in 2001 is now the largest, sitting alongside others including distressed and multi-strategy.
By definition, credit analysis is at the core of what an asset manager like BCC does. Most senior executives started out covering an industry, and research specialists are expected to be “experts up and down the capital structure of all the companies they look at”, as founder and CIO Jonathan Lavine explains. This applies to both Lavine, who was formerly at McKinsey, and Alon Avner, head of Europe. Avner, a telecoms and media specialist, moved across from Bain & Company in 2006.
Industry specialists work across the business on all relevant asset classes, from distressed to private lending, and will get involved in individual portfolio purchases. BCC’s credit process itself focuses strongly on sectors, according to Lavine: “How healthy is the industry? How healthy is the competitive dynamic? And then how healthy is the income statement and cash flow? I think a lot of people look at that in reverse,” he says. Not focusing on industry dynamics risks missing issues like oversupply of cinemas in the US in the early 2000s, or oversupply of energy capacity more recently.
Despite a strong sector focus, Lavine does not describe the philosophy as top down: “I have this debate a lot with people, because everybody either wants you to be top-down, or bottom-up. We actually have a top-down framing of the industry, and then a bottom-up selection of the individual credits.
“And I actually think that is an important distinction in our industry. I think people either say, well I do all the macro stuff. Or they have a bit of a trader or individual security mentality. And we have from day one thought it’s very important to incorporate both. Top-down and bottom-up are not mutually exclusive.”
Of course, supply-and-demand mismatches can lead to opportunities – for instance, for distressed strategies, and nimbleness in combination with manager skill should lead to good returns. “Being disciplined to move to double Bs or safer loans, or safer bonds, and then sell those and rotating into riskier assets is what we’re trying to set up our funds to do right now,” says Lavine.
Given investors’ search for yield in the years since the financial crisis, attention has been focused on underlying credit quality, with some pointing to build-up of leverage and declining covenants. Lavine sees the market in “fragile equilibrium”, with high demand and supply. If one of those elements changes there will be a profound effect, he says.
Lavine continues: “We are concerned about documents. Our liquid funds are generally skewed safer than the market right now. And in our multi-strategy fund we kept our spots where we can use them in special situations to barbell alongside the main core liquid portfolio. I don’t think this is the time for heroics. Therefore, we are very circumspect in the liquid space right now.”
In Europe, BCC is more defensively positioned, with a higher rating and lower leverage, according to Avner. Yet he is not concerned about so-called covenant-light lending: “I wouldn’t say covenant-light is necessarily a bad thing,” he says. “Empirically the recoveries on those loans are not significantly different. And for us, as long as it’s a company that doesn’t really need the covenant-light nature, I’m happy to lend to them. So if a cable operator like Virgin Media wants to have a covenant-light deal, I don’t mind as much as if it’s a chemicals producer where the EBITDA could fall significantly.”
Geographic presence and staff with local knowledge are a prerequisite for a firm like BCC, but Lavine wants to avoid any impression of being a Boston firm with satellite operations. BCC has 14 people working in its Hong Kong and Melbourne offices, for instance, with further offices in London and Dublin and three in the US. “I think a lot of people have made the mistake of showing up in a foreign country, and saying, ‘hi, I’m from New York, you’re happy to meet me’, and they don’t have the sensitivities or the language skills.”
BCC is keen to emphasise the importance of trust between investor and asset manager. The firm’s two largest investors started off with US bank loans but have expanded their investments with BCC since to include areas like distressed. In terms of resources, the firm has a 10-strong client-facing investor relations team, but investors get senior management time on request. Pooled fund investors can dial in to quarterly conference calls.
“I have conversations with billion-dollar investors, and I have conversations with 10-million-dollar investors, because we believe that if you are our partner and we have accepted you as our partner, you are to be treated accordingly,” says Lavine. “Obviously, in large, very complex customised areas there’s going to be much more iterative dialogue.”
Lavine and Avner have seen considerable changes in credit since 2009, when many investors were less familiar and did not have the right asset allocation frameworks. The asset class has certainly moved from the shadows to centre stage right now for many investors.
Avner comments: “We went to institutional investors, the smaller ones especially in 2009, and said they should invest in leveraged loans because they are going to [offer] a massive return.” Yet many investors said they did not have the right asset class bucket for leveraged loans. “Now almost every pension fund will have a bucket for leveraged loans, almost every pension fund would have a bucket for direct lending.”
For many European institutions and those in other regions, credit diversification has meant getting used to a variety of new asset classes and sub-asset classes. BCC started out in CLOs, after all, now managing $9.3bn. Is the market ready for CLOs again? “We are beginning to see a fair amount of investor comfort in that space,” says Lavine. “There are also investors we have seen who have said, look, I’ll do a multi-strat, and 10% of my account can be in CLOs or CLO-related products. And then they see it, track it, experience it for themselves, and then they get more comfortable with it over time.”