CJ Doherty: Welcome to the Lending Loan. I'm CJ Doherty, Director of Analysis at LSEG LPC. In today's episode, we're going to discuss higher yielding private credit, an area often referred to as capital solutions. These are opportunities that don't have a home and traditional dedicated parts of the private credit market, and they often merit a higher cost of capital. In order to explore this area of the market, it's great to be joined by Brian Himot, Head of Structured Capital at Strategic Value Partners. Brian, thanks for joining me.
Brian Himot: Thanks for having me. Pleasure to be here.
CJ Doherty: Great. If we can kick it off with one of our usual questions, can you tell us a bit about yourself, your background and your firm, just to set the stage for our listeners?
Brian Himot: Sure. My background is, I was originally an attorney before I entered Wall Street. I've been at Strategic Value Partners for two years. I was at another firm doing something very similar to this for 13 years prior to joining SVP. Our strategy is exactly what you said. We focus on the higher returning part of the private credit universe. Our strategy is a flexible mandate where we're finding opportunities at all points in the cycle. We're offering solutions rather than just pure capital.
CJ Doherty: Great. Within private credit, there is a wide range of strategies from direct lending all the way through senior equity. I know you've touched on it there, can you talk about more where you play in the space and why do you focus on this area as opposed to other areas of private credit?
Brian Himot: We think of ourselves as fitting in the space that is between traditional direct lending and private equity. And there's a lot there. That's a wide space. But, the reason for that broad mandate is, there's a lot of opportunities that present itself at different times through the cycle and when you have an evergreen strategy like ours, you need to have that flexibility to be able to do different things at different times. But the one commonality is, they all involve flexibility, complexity.
CJ Doherty: Great. And touching on that or expanding on it, capital solutions, so what entails a lot of structuring, legal and credit work. Just focusing on the structuring side, can you talk about the type of loan structures you're providing these days?
Brian Himot: We see everything from stretch senior unitranche, all the way through to preferred equity, and everything in between, mezzanine, second lien, junior debt, hold code debt. We don't come into a situation with a preconceived notion as to what the structure is going to be. We let the circumstances, the business, the owner of the business, help inform which way the structure is going to play out. If you look at our book, we have everything, as I said, from senior secured, stretch senior, all the way through to preferred.
CJ Doherty: Okay. And let's talk a little bit about performance. How has the capital solution strategy performed in recent times? And do you think, will it continue across market cycles?
Brian Himot: It's really interesting. If you look at the market and you think back just a couple of years ago. 2022, 2023, at that point in time, the capital markets were shut, and our type of creative financing was in high demand from companies. It was hard for them to find solutions to finance themselves. Then you fast forward today and the market has gotten more competitive, no doubt. I think there's certain pockets of the market that are more competitive than others, for example, in the US, the stretch senior unitranche market has gotten more competitive, but we're still seeing a lot of opportunities in Europe. We're still seeing a lot of opportunities with founders doing, junior financings, hold co financings, pref financings. And so I would say, across the whole, it's gotten more competitive, but we're still seeing a lot of interesting deals in the market.
CJ Doherty: Okay. Great. And you actually mentioned Europe there and a lot of our listeners are located across regions globally. Your firm lends in both the US and Europe. What are the differences you're seeing between the US and European markets in terms of opportunities, challenges, competition, et cetera?
Brian Himot: Yeah. So first, on our firm, we have a major presence in the European market. We've had an office in London for 20 years, and so my team, we have nine people on the team dedicated to structured capital, split basically evenly between the US and Europe. So Europe is a major focus for the firm. It's a major focus for our team. In terms of the market, overall, the European market is obviously a lot smaller than the US market. When you think about private credit as a whole, global private credit is roughly a $2 trillion market. Approximately 10-20% of that is in Europe. And so the European market in absolute dollars is smaller, but it's also more inefficient. And so you have to think about it in terms of individual geographies, the average size of the businesses are smaller. And so we see a lot of interesting flow in Europe and oftentimes it's a lot harder to come across because of that inefficiency. And so we think of it as a major part of our strategy.
CJ Doherty: Okay. And let's talk a little bit about sectors now. Where are you seeing opportunities in terms of sectors? Are there sectors you focus on or others you tend to avoid? And what's your view there?
Brian Himot: So as a firm and as a strategy, We have a history of doing a lot in old economy, asset intensive sectors. Think about things like packaging, industrials, building materials to give you a few. That said, we've also been very active recently in sectors like consumer, healthcare. Overall, we're generalists, but I like to think about the world in majors and minors. And these are all areas where we have majors. Another area where we spend a lot of time is, again, as a firm, we have real competitive advantages and knowledge in asset intensive industries, things like transportation, infrastructure, real estate, aviation. And the way that we work is we work very closely with all parts of SVP, and so all of that knowledge across those industry verticals translates over into our business as well.
CJ Doherty: Yeah. And from a company size perspective, where do you see the best opportunities these days? Where's your focus?
Brian Himot: So our focus is, in the classic middle market, lower middle market. It tends to be in businesses with $25-30 million of EBITDA on the low end and up to $200-250 million of EBITDA on the high end, so sub -$2 billion EVs. What we found for us is, you know, when you get much below that $30 million of EBITDA, the companies aren't of a size necessarily to be as resilient to stress and to shocks. Then similarly, when you get much above that $200-250 million of EBITDA, then they have access to other forms of capital solutions that have a lower cost of capital than ours. You start thinking about the syndicated market, the large cap direct lenders, the bank markets as being able to finance those types of businesses often at much lower cost of capital than we can provide.
CJ Doherty: Now I want to talk about sourcing deals. Where do you source deals and how difficult is it in today's environment?
Brian Himot: Yeah. If you look at our portfolio right now, well over half of what we're working on, looking at or have done in recent past is in the non-sponsored world. These are family-owned, founder-owned businesses. The reality is, is that we're finding those opportunities from everywhere. To answer your question, they're hard to find. It's a real labor. We source them from all the various parts of SVP. It's not just my team, it's our sourcing team, it's our corporate team, it's all members of our advisory council. It's really all parts of our ecosystem. Then it's out there talking to all of the banks, advisors, intermediaries who have access to that type of deal flow that's coming from the founders and family-owned businesses that are controlling businesses that have $30, $50, $100 million of EBITDA.
CJ Doherty: Great. And just a related question on that then, how does it compare to say last year in terms of sourcing deals? Is it just as difficult? Have things loosened up a bit, what's the feel there in terms of deal flow?
Brian Himot: It's different. So again, I think if you look at the cycle, back in 2022 and 2023, when the capital markets were shut, there we were seeing a lot of opportunity in the stretch senior financing space where we were dollar one attached. So the first dollars in the capital structure through 50%, 55%, 60% LTV, getting paid mid-teens returns. And that was in sponsor-backed and non-sponsor-backed businesses. If you start from the premise of, we're providing capital to people who lack access to traditional forms of financing, in '22 and '23, there was a huge swath of the universe that lacked access to traditional forms of financing. Whereas you fast forward to today, and a lot of those sponsor-backed businesses have gone back to financing themselves with the traditional direct lenders who are offering lower cost of capital, who are offering looser doc terms than we do. And that part of the market has gotten significantly more competitive. If you look at our pipeline going forward, we're spending a lot more of our time in that non-sponsored space, where it's more solution-oriented type of capital.
CJ Doherty: Yeah it makes a lot of sense. Final question for you then is, as we look ahead, what is your outlook for capital solutions lending in the broader credit markets as we head into 2025?
Brian Himot: It's really interesting. If you look at the markets overall, everything seems serene from the macro indicators. Definitely in the US, maybe a little bit less so in Europe. If you look at Germany, I think there's more stress that's apparent on the surface in a market like that. That said when you dig beneath, there's still quite a bit of stress and dislocation in the market. And so what that means for us is it provides opportunity to provide complicated financings to companies that are in transition in their business model, as well as the classic non-sponsored capital solutions as well.
CJ Doherty: Okay. Great. And with that, we will wrap up for today. Brian, thanks very much for sharing your insights and your expertise.
Brian Himot: Thanks for having me.
CJ Doherty: And thank you all for tuning in. I invite you to check at our private credit news, data and analysis at loanconnector.com. Follow us on X at LPC Loans. I'm CJ Doherty, subscribe to the Lending Lowdown on your favorite podcast platform.
