How has the higher cost of borrowing affected your business?
Since March, the debt-LBO syndication market has been pretty much closed. There’s been some sporadic deals; some have put money to work, but not a lot. The pipeline and appetite for mid-cap deals hasn’t stopped, but what we see is that [collateralised loan obligations] and debt fund providers don’t know what the rate is going to be and don’t know what the cost of lending is going to be.
“A lot of people are standing on the sidelines waiting for the market to settle down, get fixed on the interest rate, and sell”
Whenever we have a financial crisis, it always turns out to be a crisis in the real world, and it takes a bit more time [for the impact to be seen in portfolio companies]. Today, when you look at the portfolio of the funds, are there any portfolio companies that are hurting? The answer is no, not really… but [they’re] bound to show up.
When the cost of goods [goes] up and the cost of energy [goes] up, margins are going to come down, as well as turnover. Some of these companies are going to be underperforming. Nobody in the debt market wants to second guess what’s going to happen in those deals – that’s why the debt market is difficult to read. A lot of people are standing on the sidelines waiting for the market to settle down, get fixed on the interest rate, and sell.
What’s the timeline for financing LBO deals?
We think the market will come back, like it always does. We just have to be patient. That’s number one.
Number two, the book has to get cleaned up: everybody has an underwriting book that is higher than it should be. That has to be cleared up for the banks to be able to be enthusiastic… The market has to find a price for all these products.
There has been a lot of capital raised in 2021 and early 2022, and most funds are ahead of schedule in deployment, so actually putting it on pause for six months or for most of 2022 is not going to be a problem. What they’re going to do is wait for valuations and leverage to come down, and then they’ll get back to work when they think it’s a more liquid market.
Are you looking at financing distressed opportunities?
We do not look at distressed [situations] and we stay away from workouts. Doing a restructuring is very difficult. Most of the time, the target doesn’t need more cash. What they need is a new management, a new shareholder that is taking a hard view of the business. In these situations, the companies are going to spew out cash pretty quickly. So you don’t really need bank financing for that.
Do you expect some firms to be under duress?
Yes, there will be some debt-to-equity swaps. Whenever there’s volatility, there’s always going to be a fund that can play in that space. Whether it’s a hard turnaround, like putting in a debt-to-equity swap, or whether it’s putting in a preferred share at the holding company level, that’s what some funds today are made to do: they come up with more creative structures in this difficult environment.
What other parts of Crédit Agricole CIB do you plan to build out in the near term?
First, we want to do a lot more in GP financings, because fundraising is going to get tougher. If you have a fund, there’s no way you’re going to burn through it – you’re going to make the investments over a longer period. At some point in time, some GPs will find it difficult to raise a fund. So we expect consolidation in the market – the stronger will buy the weaker. Second, I want to do more equity bridge lines for co-investments. I think it’s a promising segment. If you know your client, you can be a real support to them.