private credit overview may 2019 - ncpers docs/pats/2019... · 2019-06-01 · mezzanine funds •...

CONFIDENTIAL – DO NOT DISTRIBUTE

Private Credit OverviewMay 2019

| CONFIDENTIAL – DO NOT DISTRIBUTE

Presenters

Jonathan Marotta, Managing Director, Private Credit

Arthur King, Vice President, Private Credit

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I. Introduction to Crescent Capital Group

II. Private Credit Overview

III. Considerations for Manager / Strategy Selection in Private Credit

IV. Private Credit Investor Outlook

V. Summary and Q&A

Table of Contents

3


I. Introduction to Crescent Capital Group


Private Markets$15.6

Public Markets$9.0

Crescent Capital Group Platform

5 (1) AUM is preliminary as of December 31, 2018Past performance is not a guarantee of future results.

($ in billions)

Strong Growth in AUMBelow Investment Grade Corporate Credit Mix (1) Global Investor Base

($ in billions) ($ in billions)

Crescent seeks to deliver attractive returns with less volatility, lower default rates and higher recovery than the market average

Founded: 1991AUM: $24B+Employees: 165+Offices: 4 Client Base:

• Independent credit firm with complementary strategies

• Primarily focused on below investment grade credit

• Prioritizes capital preservation and high current income

• Depth and breadth of investment professionals

• Long track record of demonstrated performance through multiple cycles

• Crescent Mezzanine and Crescent Direct Lending have experienced a Historical Net Loss Ratio of less than 20 bps and 10 bps, respectively

Facts Highlights

North America $19.3

• ~95% Institutional Investor Base• Over 450 Client Relationships• No Investor >5%

North America$18.2

Asia$3.9

Europe and RoW$2.5

+

$8

$24

2011 2018


Dynamic Organization

6

Information is current as of December 31, 2018

Dedicated Investment Professionals Operations Team / Administration

• 80+ investment team members• 50+ Private Credit and 30+ Public Credit professionals• Strong sourcing, structuring and portfolio management

• 85+ operations and administrative team members• Pursues highest risk management / compliance standards• Provides best-in-class support functions

Management Committee

• Includes Managing Partners and leaders within Investment Management, Investor Relations, Legal, and Operations

Local Market Presence Across Four Offices

London

BostonNew York

Los AngelesHeadquarters


• Strong market presence and relationships

• Robust, proprietary sourcing

• Proven, disciplined investment approach

• Experience across multiple cycles

• Long‐standing, over 25‐year track record with U.S. Private Strategies having deployed over $17 billion(1)

The Crescent Competitive Advantage in Private Credit

1

2

3

4

5

Past performance is not indicative of future results. As used here, Private Credit refers to Crescent’s experience in the asset class generally and not to the proposed partnership structure with its specific investment objectives, which does not have a track record.(1) Inclusive of Crescent Direct Lending and Crescent Mezzanine deployed capital. As of December 31, 2018.

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2019-2020 Crescent Fundraising Timeline

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Strategy 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20 4Q’20

Crescent European Specialty LendingLending CESL II

Crescent BDC, Inc. CBDC

Crescent Private Credit Partners CPCP I

Crescent Direct Lending CDL III(Tentative)

Crescent MezzanineMezz VIII(Tentative)

Currently Fundraising

Projected to Begin Fundraising


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Strong Market Presence and Robust, Proprietary Sourcing

Select Sponsor Relationships Private Credit Deal Flow by Year

Num

ber o

f Dea

ls Re

view

edIncludes investment opportunities from Crescent Mezzanine, Crescent Direct Lending and Crescent European Specialty Lending. As of December 31, 2018.

16(2%)

37(3%)

34 (3%)

37(2%)

30 (2%)

35 (2%)

735

1,165

1,299

1,524

1,399

1,532

‐

200

400

600

800

1,000

1,200

1,400

1,600

2013 2014 2015 2016 2017 2018

Deals Completed

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II. Private Credit Overview


• Strategies where manager sources debt investment opportunities directly from a company (sponsor-less) or through a private equity firm acquiring the company (sponsored)

• Investment instrument typically structured as a loan or a bond; negotiation is led by the credit manager

• Return normally created from structuring fees, contracted cash or capitalized interest, prepayment penalties and, in some cases, equity enhancements

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What is Private Credit?

1

2

3

(Also Called Private Debt or Direct Lending)

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12

Why Private Credit?

Pros:

• Customized, flexible solutions

• Certainty of execution and terms

• Privacy / no disclosure requirements

• Partnership-based lender approach

• Sometimes the only option

Cons:

• Generally higher coupon

BORROWERS’ PERSPECTIVEINVESTORS’ PERSPECTIVE

Pros:

• Significant yield premium

• Lead due diligence process and legal documentation

• Generally better credit terms

• Enhanced reporting and monitoring tools

• Access to management and Board

• More control in downside case scenarios

Cons:

• Generally lower liquidity

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: Preqin; S&P LCD.

Middle-Market Lending Opportunity

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• Continued growth in global buyout dry powder • Bank share of the leveraged loan market has declined from 30% in 2000 to 12% in 2016 • Smaller banks have curtailed lending meaningfully since 2008• Only 54% of small business lending is addressed by small-to-medium sized banks

Non‐Bank Investors

Banks & Securities Firms

Aggregate Ca

pital R

aised ($ in billions)

ANNUAL PRIVATE CAPITAL RAISED BY ASSET CLASS BANKS WITHDRAWING FROM LOAN MARKET (1994-2018)

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$409 $410

$213 $187 $239 $244$329

$421 $417$522 $565

$459

$74 $100

$24 $42$45 $68

$76

$79 $104

$115$134

$123$142

$147

$53 $58$77

$89

$110

$121$140

$132

$132

$137$44$41

$15 $33

$27$33

$49

$44$61

$67$77

$94

$14$18

$21 $13$11

$26

$36

$32$40

$24

$23

$20

0

100

200

300

400

500

600

700

800

900

1000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Private Equity Private Debt Real Estate Infrastructure Natural Resources

& of Leveraged

Loa

n Market


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Leveraged Buyouts: Purchase Price and Leverage Trends

• Leveraged buyout purchase price multiples are at historical highs

PURCHASE PRICE AND LEVERAGE MULTIPLES

5.2x4.2x 4.0x 3.4x 3.7x 4.2x 4.6x 5.4x 5.3x 6.1x

5.0x3.9x 4.6x 4.9x 5.1x 5.3x 5.7x 5.6x 5.4x 5.7x 5.8x

7.8x7.0x 6.6x

5.9x6.5x

7.0x 7.2x

8.3x 8.3x

9.5x9.0x

7.7x8.4x 8.6x 8.6x 8.7x

9.6x10.1x 9.9x

10.6x 10.3x

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Leverage Equity

Source: S&P LCD.

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Leveraged Buyouts: Equity Contribution Trends

• High level of equity contributions provide a substantial valuation cushion to debt investors

EQUITY CONTRIBUTION

27% 28%32%

34% 35%37%

35%33%

30% 31% 31%

39%

46%41%

38% 38%36% 37%

40% 41% 41% 43%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: S&P LCD.

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16

Type of Private Credit Strategies

Capital Structure Focus

Geography/Industry Focus

Sponsored vs Non‐Sponsored

Target Company Size

Use of Proceeds

16


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Direct Lending Funds• Senior Secured• Stretch Senior (Unitranche)Mezzanine Funds• Junior Lien• Unsecured• SubordinatedOpportunistic• Holdco / Preferred• Structured Equity• Distressed

PRIVATE CREDIT FUNDS SAMPLE CAPITAL STRUCTURES

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0xSenior / Junior Structure Unitranche Structure

Senior SecuredLoans

Junior Lien /Unsecured

Unitranche

Equity Capital

EquityCapital

30‐50%Equity

Cushions

Higher Risk /Return

Lower Risk /Return

EBITDAMultiple

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11Senior Loans Unitranche Loans Junior Loans Preferred Securities

Position in Cap Structure Senior Opco Debt Senior Opco Debt Junior Opco Debt Subordinated/ Holdco

Asset Collateral 1st lien 1st lien Junior Lien / Unsecured Unsecured

Current Income Cash Interest Cash Interest Primarily Cash Interest Primarily in Kind

Floating or Fixed Rate Floating Floating Fixed or Floating Fixed

Indicative Coupon LIBOR + 4-6% LIBOR + 5-7% LIBOR + 7.5-9.5% 10-15%

Upfront Fee 1-3% 2-3% 2-4% 2-4%

Call Protection None Yes Yes Yes

Maturity 4 – 7 years 4 – 7 years 7 – 10 years 10+ years

Equity Upside None Potential Potential Potential

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Capital Structure Focus (cont’d)

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Geography / Industry Focus

Industry/Sector FocusGeographic Focus

Developed World Emerging Markets

Country- or Region- Specific:North America

Western EuropeMiddle EastAsia Pacific

Corporate Credit Energy & Power

Real Estate Technology

Infrastructure Structured Products

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Sponsored vs Non-Sponsored

Private Equity Sponsored Investment Strategy

Non-Sponsored Investment Strategy

• Defined and consistent sourcing channels

• Incremental resources for credit due diligence

• Enhanced governance and controls

• Aligned investment horizons and realization incentives

• Broader access to capital and managerial resources

• Requires a larger sourcing platform with local presence and

more office locations

• More direct communication with management/founders

• Potentially higher upside with more equity exposure

• Generally higher risk

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21

Target Company Size

Smaller(<$25mm EBITDA)

• Growth-oriented companies

• Less sophisticated managerial controls

• Fewer available sources of capital

• Better pricing / covenant packages

Middle-Market($25-$200mm EBITDA)

• Greater scale and stronger market positions

• More revenue diversification

• Greater balance sheet flexibility

• Deeper management teams

Larger(>$200mm EBITDA)

• Economies of scale and revenue diversification

• Longer operating history

• Broad access to capital

• Stronger managerial controls

• Lower pricing / looser terms

PORTFOLIO COMPANY SIZE CONSIDERATIONS

Higher Risk Lower Risk

Higher Return Lower Return

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Use of Proceeds

Leveraged Buyouts

Mergers & Acquisitions

Refinancings

Dividend Recaps

Rescue Capital / Takeover

Growth Capital

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III. Considerations for Manager / Strategy Selection in Private Credit


• Investors should first determine the level of risk they are willing to take

• Investors should be careful about over-relying on presented track record data

– The success is not based on investment pace, but rather on capacity to recover capital and generate

returns

– No reliable benchmark data available as investment strategies / styles vary considerably

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Manager Selection ConsiderationsGreatest Challenge: Fully Gauge the Level of Risk Taken by Each Manager Being Considered

1

2

23

Source: Preqin


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Manager Selection Considerations

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Average Current and Target Allocations by Private Debt by Type

Source: Preqin

Institutional investors’ plans for allocations in the near term


Experienced investment team

Strong market presence and relationships

Robust, proprietary sourcing

Proven, disciplined investment approach

Quality of due diligence

Stable strategy over long term

Prudent portfolio construction

Strong track record across multiple cycles

Co‐investment opportunities

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Manager Selection Criteria

| CONFIDENTIAL – DO NOT DISTRIBUTE27

• Size of the overall market opportunity• Strategic focus by investment type, geography, industry, etc.

Opportunity Set

• Extent of due diligence process• Committee approval processes• Percentage of transactions approved for investment

Decision Process

• Reporting rights / Board representation• Access to management and owners• Frequency and quality of internal discussions

Monitoring

• Investment Returns• Default Rates• Recovery Rates

Key Performance Metrics • Direct vs agented sourcing model• Sponsored vs non‐sponsored focus• Breadth and depth of relationships

Origination

• Position in capital structure / cash vs PIK coupon

• Transaction role and credit terms negotiation

Structuring

Credit Investment Process – What to watch for?


SponsorTrack Record

• Due diligence is a critical component of the investment process • Includes assessment of management, business model, industry trends and financial performance• Focus on cash flow stability and downside case scenarios

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Diligence, Diligence, Diligence

Past Performance

Demo‐graphic trends

Barriers to Entry

Revenue Cyclicality

Fixed vs Variable Costs

Capex Requirements

Switching Costs

RegulatoryCompliance

Competitive Advantages

Product Concentration

SupplierConcentration

Financial Analysis

Competitive Landscape

Management Team

Go‐to‐MarketStrategy

Labor Relations

ESG Issues

Exit Strategy

Product Liability

Seasonality

Working Capital DynamicsInput Cost

ManagementPricing Strategy

IndustryTrends

ForexExposure

Customer Retention

Employee Turnover

InventoryManagement

DistributionChannels

ReceivablesAging

SponsorFundCycle

GeographicFootprint

SegmentProfitability

Capacity Utilization

SAMPLE FOCUS AREAS OF CREDIT DUE DILIGENCE

EBITDAAdjustments

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• Interest rate

– Cash vs PIK

– Floating vs fixed

• Upfront transaction fee

• Redemption premiums

• Equity component (strategy-specific)

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Portfolio Construction

• Diversification by issuer, industry, geography

• Foreign exchange exposure and hedging

• Attachment point, leverage, equity cushions

• Interest and fixed charge coverage ratios

• Transaction role (sole vs lead vs non-lead)

• Covenant and reporting packages

• Asset-based leverage (strategy-specific)

Typical Return Components Portfolio Characteristics

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Important to understand regional regulatory environment and credit protection laws

30

Credit Terms and Legal Documentation

KEY COVENANTS TO WATCH FOR

Debt Incurrence Asset Liens Acquisitions

Dividends / Restricted Payments Asset Sales Change of Control

Protectiv

eCo

vena

nts

Mainten

ance

Cove

nants

Covenant‐Lite Covenant‐Loose Springing

Change of Jurisdiction

Definition of EBITDA

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• Lack of representative or reliable benchmarks

• Confusion on definition of terms (e.g., unitranche fund)

• Benchmarks should ideally be adjusted for multiple key factors

31

Benchmarking

Private Fund Benchmarks Public Index-Based Benchmarks


Geographic/ Industry Focus

Target Company

Size

Levered vs Unlevered

Sponsored vs

Non‐Sponsored

Vintage Year and Pace of Investment

Strategy Shift

VolatilityConsiderations

Periodic vs Inception‐To‐Date Returns

Public Market Equivalent

Methodology

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Pitfalls to Avoid

High Team Turnover

No Investment Experience During a Full Cycle

Cherry‐Picked Track Records

Off‐Market Claims on Covenants, Pricing, Leverage, etc.

Unrealistic Co‐Investment Promotion

Manager More Focused on AUM Growth Than Constructing Quality Portfolios

Sourcing Reliant on Agent / Syndication

Aggressive Use of Fund Leverage

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IV. Private Credit Investor Outlook


Private Credit Investor Outlook

Source: Preqin

Proportion of institutional investors allocating to each alternative asset class

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Private debt investors by source of allocation



Investors in private debt by type

Source: Preqin

Investors in private debt by location

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Fund types that investors view as presenting the best opportunities for the next 12 months

Regions that investors view as presenting the best opportunities for the next 12 months

1 Includes commercial real estate senior loans, receivables finance, and multi-strategy credit Source: Preqin

1

36



Recommended allocations to private debt from consultants (2018)

Source: Preqin

Private debt recommendations for 2018 from consultants by strategy

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V. Summary and Q&A


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Summary• Private credit is an attractive asset class given its significant yield premiums, better credit terms and enhanced controls

relative to the traditional fixed income markets

• Demand for private credit from borrowers should continue to have strong tailwinds given the growth in global buyout dry powder and declining participation in the loan market by traditional banks

• Successful private credit managers

– Have the capacity to source broadly and stay selective

– Stay focused on company’s underlying credit fundamentals

– Disciplined in deploying capital during various macro and investment environments

• Investors across the globe are increasingly allocating assets to private credit from various “buckets” (private equity, fixed income, alternatives, etc.), with many creating from a separate private debt allocation.

• Crescent is an experienced private credit manager with multiple private credit strategies, a large dedicated team of investment professionals and a 25+ year track record of delivering attractive, risk-adjusted returns

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Certain Risk FactorsNature of Debt Securities. Debt and structured equity investments in highly leveraged companies involve a high degree of riskwith no certainty of any return of capital. The debt securities in which Crescent Funds and strategies (“Crescent Funds”) investmay be unsecured and subordinated to substantial amounts of senior debt, all or a portion which may be secured, may not beprotected by financial covenants or limitations on additional debt, may have limited liquidity and may not be rated by a creditrating agency.

Financial Markets. Instability in the securities markets may increase the risk inherent in Crescent Funds’ investments in that theability of portfolio companies to refinance or redeem debt and structured equity securities held by Crescent Funds may dependon their ability to sell new securities in the market.

Conflicts of Interest. Crescent and its affiliates manage multiple funds and accounts. Key personnel will devote somebusiness time to managing those other funds and accounts. Obligations to certain funds and accounts could in certaincircumstances adversely affect the price paid or received for investments by Crescent Funds or the size or the portion ofinvestments purchased by other Crescent Funds.

Interest Rate Fluctuations. Interest rate fluctuations may negatively impact Crescent Funds’ investment opportunities and therate of return on invested capital. An increase in interest rates would make it more expensive for portfolio companies tofinance operations and indirectly affect the credit quality of Crescent Funds’ investments.

Lack of Diversification and Reliance on Portfolio Company Management. Crescent Funds may invest in a limited number ofinvestments and may be concentrated in only a few industries. Therefore, the aggregate return of Crescent Funds may beadversely affected by the negative performance of a relatively few investments. The manager monitors portfolio companyperformance; however, it is primarily the responsibility of portfolio company management to operate a portfolio company on aday to day basis and there is no assurance that such management will perform in accordance with Crescent Funds’expectations.

No Market for Interests in Crescent Funds and Restrictions on Transfer. Crescent Funds’ interests (“Interests”) have not beenregistered under the United States Securities Act of 1933, as amended (the “1933 Act”), the securities laws of any state orthe securities laws of any other jurisdiction, and, therefore, cannot be resold unless they are subsequently registered underthe 1933 Act and other applicable securities laws or an exemption from registration is available. It is not contemplated thatregistration of Interests under the 1933 Act or other securities laws will ever be effected. There is no public market for theInterests, and none is expected to develop. An investor in a Crescent Fund is generally not permitted to assign its Interestswithout the prior written consent of Crescent, and any such assignment is subject to the terms and conditions of the operativedocuments of the relevant Crescent Funds . Investors must be prepared to bear the risks of owning their Interests for anextended period of time and the risk of loss of the entire investment.

Competitive Debt Environment. Crescent Funds compete with the public debt and equity markets and with other investors forsuitable investment opportunities. There can be no assurance that Crescent Funds will be able to locate and completeinvestments, fully invest its committed capital or satisfy its rate of return objectives.

Foreign Investments. Investments in non-U.S. companies involve risks not typically associated with the more developed U.S.capital markets, including risks relating to currency exchange, differences between the U.S. and foreign securities markets,differences in corporate and creditors’ rights laws and economic, and political risks.

Dependence Upon Key Personnel. Decisions with respect to the investments and management of Crescent Funds will bemade exclusively by the Crescent management team. Investors generally have no right to take part in the management ofCrescent Funds and do not have an opportunity to evaluate the specific investments made by mezzanine funds or theirterms. The success of Crescent Funds depends significantly upon the skill and expertise of the principal members of theCrescent management team. The departure of any of those principal members could have a material adverse effect onmezzanine funds.

No Assurance of Investment Return. There can be no assurance that Crescent Funds will be able to generate returns for itsinvestors or that the returns will be commensurate with the risks of investing in the type of companies and transactions describedherein. Accordingly, an investment in Crescent Funds should only be considered by persons who can afford a loss of their entireinvestment. Past activities or investment return results of investment entities associated with the Crescent management team orits principal members, including their prior funds, provide no assurance of future success or return results. The fees andexpenses charged in connection with an investment in Crescent Funds may be higher than the fees and expenses of otherinvestment alternatives and may offset profits.

Use of Leverage. Certain Crescent Funds may leverage the cost of its investments. To the extent Crescent Funds purchasessecurities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are notused. If the interest expense on borrowings were to exceed the net return on the portfolio of securities purchased with borrowedfunds, Crescent Funds’ use of leverage would result in a lower rate of return than if Crescent Funds were not leveraged.Overall, the use of leverage, while providing the opportunity for higher returns, also increases volatility and the risk of loss.

No Regulatory Approval. The Crescent Funds have not been approved or disapproved by any securities regulatory authority ofany state, by the Securities and Exchange Commission, or any similar authority in another jurisdiction.

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private credit overview may 2019 - ncpers docs/pats/2019... · 2019-06-01 · mezzanine funds •...

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