Scale, execution and relationships emerge as key traits
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Analysis
E X P E R T Q & A
After a record-breaking 2021, the managers that performed well through
covid are in good shape to deal with challenges on the horizon for 2022,
say Churchill Asset Management’s Jason Strife and Randy Schwimmer
Scale, execution and
relationships emerge as key traits
Q Who were the covid
winners and losers in
private debt, and how will
SPONSOR
CHURCHILL ASSET
of our origination strategy on both the
junior and senior side. Their attitude
shifted from doubts about the asset
MANAGEMENT
managers have to adapt their class to asking how quickly we could
approach for a post-covid put their money to work.
environment? were in place to get through the most
Randy Schwimmer: Since our incep- acute phase of disruption, which lasted Jason Strife: Covid was a proof point
tion in 2006 we’ve had a consistent about three months. for private capital providers with scale,
underwriting theme. The same sec- By the summer of 2020 the resil- execution capabilities and strong pri-
tors we liked then – business services, ience of our credits was clear and we vate equity relationships. If you didn’t
healthcare, technology, software, dis- were able to pivot to new business. have that combination going into cov-
tribution, logistics and financial ser- Having had the right strategy of stick- id, you are coming out having lost a step
vices – held up well during the great ing to defensive, non-cyclical sectors or two competitively. Most important
recession. going into the crisis, we could put sig- for us was our excellent private equity
The pattern for success through two nificant dry powder to work as market relationships going into this. So, when
years of covid was also established ear- liquidity and confidence returned. we couldn’t travel and get in front of
ly. When the pandemic emerged, we At the same time, investors who had people, our platform still accelerated.
focused on how our portfolio might be been circling around private credit be- You saw sponsors relying on a smaller
impacted. We worked closely with our fore covid witnessed the performance group of lenders with whom they had
private equity sponsors to ensure plans of our portfolio and the differentiation strong, long-term relationships.
50 Private Debt Investor • April 2022
Analysis
Q What are you currently
observing in terms of
origination trends and hot deal
sectors for 2022?
JS: We are coming off arguably the
busiest couple of quarters in the history
of our firm and arguably for the mid-
dle market private credit industry as a
whole. From our platform’s standpoint,
our deployment of senior and junior
loan capital was nearly $9 billion last
year, which was a 100 percent increase
versus the prior year. Our Q4 figures
alone were half of that annual total. We
saw an incredible acceleration in the
second half of last year.
The factors driving that did include
some looming tax changes that pulled
Q How can investors get comfortable with the additional
risks that come with investing in higher yielding junior
capital?
forward some 2022 deals into 2021, JS: It really depends on the type of junior capital structure you are after.
but it was still incredible. It is going There are many different flavours. Our bread and butter has always been
to be hard to sustain that kind of mo- sponsored junior lending working with private equity firms with which we
mentum. The market is taking a bit of have long-lasting relationships. In fact, our position as a significant limited
a breather at the start of this year, after partner to middle market private equity funds allocating close to $1.5
a very frenetic period and other devel- billion annually drives direct dealflow and provides us with an information
opments including the war in Ukraine, advantage. We know which GPs perform best and we align with them.
inflationary pressures and some of the Ultimately, we know the private equity decision makers personally and
supply chain issues impacting prod- their position on risk, business model quality, due diligence and portfolio
uct-based business models. company support. All of that helps the relative value discussion we are
Still, the expectation is that 2022 will having as a junior capital investor. We think that is really attractive relative
be another very active year, driven by to more opportunistic strategies in the junior capital universe.
the sheer amount of private equity cap-
ital raised in the past few years and the
fact that so many of the private equity group of direct lenders that can create
portfolios constructed in 2016, 2017 that kind of one-stop capability. In this
and 2018 are now naturally bringing “We saw an incredible highly competitive M&A environment,
assets to market. We are hearing from private equity sponsors are seeking
investment banks that the pipeline for acceleration in to work with a small lender club they
new investments is building nicely, but know and trust to execute financings
the timing for those deals is in flux due
the second half quickly and effectively.
to geopolitical issues.
of last year”
RS: Our record year was compound-
ed by successful fundraising, as we JASON STRIFE
Q One difference from two
years ago is the number
of larger unitranche financings
brought in $13 billion of new com- taking share from the broadly
mitted capital in 2021. With investors syndicated loan market. How is
leaning in and trusting our platform Churchill participating in that
and underwriting thesis, we were able trend?
to build significant scale to commit up RS: That trend has been developing for
to $500 million per deal on the sen- a while. Unitranche is one of the most
ior side. That puts us among a select efficient financing vehicles because
April 2022 • Mid-Market Lending 51
Analysis
“Loan prices will be
there’s one lender and one credit agree- hopefully without negatively impacting
ment. Our scale and depth of sponsor
insulated from public the economy in a meaningful way.
relationships, not to mention the back- market volatility” Private credit tends to be insulated
ing of our parent company Nuveen and from exogenous shocks and episodic
its $1.3 trillion balance sheet as of 31 headline issues. Our portfolio com-
RANDY SCHWIMMER
December 2021, allows us to be a lead- panies continue to perform well, with
er in the one-stop market. higher revenues and the ability to pass
While the unitranche is increasingly along higher costs to their customers.
popular in the traditional middle mar- Sponsors anticipated these challeng-
ket, the largest direct lenders are em- es and accounted for them in their in-
ploying them to take share from the vestment theses. Enormous effort here
broadly syndicated market. This year goes into understanding these credit
has already seen a $5 billion financing dynamics, with keen attention paid to
and we expect that trend to continue. worker shortages and wage inflation.
It’s not clear if the Fed will stick to
JS: The market continues to expand the frequency of rate increases the mar-
and our junior loan programme hit its ket expected earlier this year, but as a
high-water mark in 2021 in terms of floating rate asset class, senior secured
investment activity. While we certainly loans are positioned well regardless.
see growth in the prevalence of one-
stop financing solutions, traditional across the capital structure. We have JS: We do a mixture of floating rate
capital structure solutions aren’t going expertise in the bottom half of the bal- second lien and fixed rate mezzanine
anywhere. ance sheet through our co-investment investing. Depending on the pace of
Many private equity firms are still programme. those interest rate rises, we could see
looking for bifurcated senior-junior An independent credit shop that sponsors trying to do more fixed rate
structures, or structured equity-PIK dabbles in equity co-investments is a junior capital to lock in a natural hedge.
solutions. Private equity firms have less attractive partner than a platform Generally speaking, the sponsors we
varying appetites for third party lev- like Churchill that has in-house exper- work with assemble capital structures
erage and if they can partner with a tise on underwriting equity. We are that are appropriately cushioned. Even
strong lending relationship in the mid- not just taking an allocation because with interest rate hikes looming, we
dle of the balance sheet, often that cre- a sponsor offers it. We have an indus- don’t see that as a big deterrent or cata-
ates a junior loan opportunity. try-leading co-investment platform lyst for change in the market.
and we bring a different lens to how we
Q How can equity co-
investments complement
evaluate those opportunities. RS: We expect private credit to con-
tinue to perform well. Loan prices will
private debt strategies?
JS: When you’re talking about equity
co-investment, our view is that is an at-
Q Finally, do rising interest
rates and an inflationary
environment create threats or
be insulated from public market vola-
tility, top-tier direct lenders with scale
and relationships will continue to fi-
tractive feature in a private credit deal opportunities for private debt? nance strong businesses for experienced
but you need to make the most of it. RS: So far in 2021 we are seeing a con- sponsors, and M&A will be active in
Our platform is already a robust co-in- tinuation of last year’s rise in prices for sectors proven to be the most resilient.
vestment partner to private equity firms both products and services. But now Leading fund managers should end up
irrespective of our loan programmes; there’s a clear sense that this will not on the other side of the current crisis
we are a large equity co-investor along- reverse anytime soon, particularly giv- – whenever that happens – in as strong
side GPs and only a fraction of that is en the war in Ukraine. a position as they did on the other side
on the credit side. Indeed, energy and food prices are of covid. n
If we did not have expertise in un- spiking higher as a result of shortages
derwriting equity, that could be seen and sanctions. The US Federal Re-
Jason Strife is head of private equity and junior
as non-core. But it is extremely core to serve seems committed to hike rates to capital and Randy Schwimmer is co-head of
what we do because our platform invests combat this new level of inflation, but senior lending at Churchill Asset Management
52 Private Debt Investor • April 2022 GAR-2089955PG-E0422PYou can also read
