European PE Giant Permira Looks to Buy Beaten Up Software Loans

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Hello and welcome to the Credit Edge, Weekly Market's podcast.

My name is James Crombie, I'm a senior editor at Bloomberg.

And I'm Totally Alameda, a senior analyst at Bloomberg Intelligence.

This week, we are very pleased to welcome Ian Jackson, Head of Strategic Opportunities at Permeera.

How are you, Ian?

I'm very well. Thank you.

Thank you very much for having me today.

Great. Good to have you here.

With committed capital of more than 85 billion euros,

Permeera is definitely one of the behemoths in the private markets.

It's global too, with offices in around 15 countries all around the world.

Ian is the Head of Strategic Opportunities and joined Permeera Credit in July 2022,

which incidentally is also when I started at Bloomberg.

Ian brings over a quarter of a century of experience in private credit.

So he's definitely a great person to speak to about the promise and the potential pitfalls of private markets.

That makes me sound very old. Thank you.

Not at all, not at all.

Not as old as me, but Ian, thank you for joining us.

Volatility, as we keep saying, is rising across markets, but credit is actually holding up pretty well.

Corporate bond spreads are only a couple of basis points wider than they were before the Iran war started.

They have a lot further to go though.

If the worst projections on inflation and the economy actually play out,

a lot depends on how long this war actually goes on.

What do you make of this in? It's definitely getting more choppy.

There's more fear than greed at the moment.

But do you see much in the way of strategic opportunity?

Yeah, look, I think there is.

I think that the current situation is obviously serious,

but I wouldn't say today it's a full-blown crisis, at least at not at this stage.

What makes it important is not just the headline event,

the interaction of the several forces that in matter-inormacy for credit,

so geopolitics, energy, inflation expectations,

and the part of obviously interest rates, as you mentioned.

But credit markets, as you've suggested, can often look calm,

right up until the point where they're not.

So refinancing conditions, tights, and spreads start to differentiate more aggressively.

And we've seen a little bit of that.

We haven't gone that far yet.

So to me, the question is not whether this is, we're going down that path.

But when it becomes a credit story, and it transmits into the credit world

through whether it's higher energy prices, margins, lack of confidence,

rates outlook, et cetera, that's when it becomes a bit more real for people like us.

You mentioned that there are still interesting opportunities, I guess,

despite the fact that we may not have seen a full adjustment yet,

and the fact that credit markets might take some time to make those adjustments.

Where would you say you're seeing the most interesting opportunities now?

Would you say it's in the US, or Europe, or elsewhere?

Well, we're very much European focus.

We do invest outside of Europe, but predominantly that AEM you mentioned,

at least in credit, is very much focused in Europe.

Private credit is still very attractive in parts.

It's a little less forgiving today, because the ease of money years have gone.

But areas such as infrastructure, energy resilience, I will also say,

selected credit opportunities, and some parts of digital build out

are where demand is linked to genuine bottlenecks rather than just a fashion cycle.

There's definitely a scarcity of capital there.

What I think is less attractive, though, is the kind of environment where assets

have been bid out to just pure optimism, and we're trying to stay away

for those things where companies have to grow into their capital structure.

We're not huge fans of that.

If the thesis depends mainly on the abundant refinancing cheap capital

and the benign macro-environment, we're very cautious on that.

The world today is all about the word today, I think it's all about resilience.

That's where we're focused our time on the moment.

It sounds like things will get worse, but I'm wondering what the triggers might be

and what you're looking for in terms of signs that we're actually going into

more of a crisis mode in credit.

There's been a lot of noise and a lot of press around what we're seeing

at the moment with private credit funds.

I think the first thing to say about those, there is a lot of pressure on

retail-oriented credit funds, but I don't think it necessarily means

that the underlying asset class is broken in any shape or form.

In many cases, what we're seeing, I think it's just a mismatch

between what investors are wanting, which is, you know,

periodic liquidity and portfolios that invested relatively illiquid private loans.

And so we've seen that mismatch in history a lot.

I think we're just seeing it again today.

These vehicles were designed with gates and courtly repurchase limits

for exactly this reason.

So, you know, when we see, you know,

redemption-recrastic seed those limits is not necessarily a sign of failure

or underlying issues with credit.

You could just argue that the structure's just operating as it was, you know,

it was intended to do.

I think the porting question today for people like me is, you know,

what is the credit quality of the underlying book of these,

of these funds?

How transparent is the manager being?

And investors properly matched to their liquidity profile.

I think just aside, just this whole wealth channel,

I think strategically it's important it's not going away,

but it's likely to remain a, and will like to remain a different source of capital

of the future, but it's coming under significant pressure today.

And then if you look at Pacific sectors,

software obviously has been talked about a lot at the moment.

I think in some areas it's overdone.

I think, you know, we've done a lot of work on AI over the last several years.

It's certainly not new to us at Pamirra.

And I think, you know, depending on the type of company,

we're actually quite comfortable with that risk profile.

But you have to do a lot of work and understand the main drivers of that.

You mentioned something I do about retail asking for their money back,

basically, in some of these funds and so on.

Clearly your focus at Pamirra, I guess, has been more on institution investors.

Do you think that in the future, or maybe even now,

retail might have a role to play, or a bigger role to play in private market?

I think they're already playing a very large role,

and I don't think that's going to diminish over time.

I think the channel is getting a lot of bad press, unfortunately, today.

But as I said before, the fact that you can actually take money out means people

in periods of volatility will want to take money out.

They've been designed that way.

But generally speaking, I think the asset class is very strong.

Around the edges, there will certainly be things that maybe shouldn't have been done at the time.

But I wouldn't say that's just a credit phenomenon.

I think that's just an investing phenomenon.

And so, in answer to your question, yes, I think these wealth channels will be around for some time.

And if anything else, they probably will grow.

There is a lot of noise that you say from the BECs.

We are hearing it daily about these redemptions.

And I do take your point that if investors retail investors had read page one of the prospectus,

they would have known that this is what the situation that they face.

And they might not even get 5%, that was discretionary anyway.

But there is a lot of noise, there is a lot of negativity.

At what point or how much of it is bleeding through to everything that you're doing?

So, yes, around the edges, certainly.

Underwriting this hasn't stopped.

People are still obviously very focused on deploying capital.

But it's hard to ignore what's going on around the world to that.

So, I mean, coming into this work, coming into the year,

generally thought it was going to be fairly benign,

but an M&A activity was picking up.

And, you know, a couple of months in,

and chat GBT or Claude launch another version of their AI systems

and suddenly the software market completely falls over.

And then, obviously, the conflict in the Middle East as adding another dimension.

And so, you know, at the moment, it's cascading,

but I think it's fairly controlled today.

I was listening to one of your commentators recently,

and they were talking about two very high profile bankruptcies in the US.

I think it was first brands and a Tricola.

You know, I think it was the consensus was it was isolated.

That's probably right.

I think Ford was cited as the reason for the bankruptcy.

But in history, Ford typically is the canary in the hallway.

Right. So, we've seen this.

We've seen this plow in the past a number of times in the past.

Now, I'm not putting two and two and coming up with five here.

But, you know, I think, you know, a reasonable investor should step back a bit

and just reassess the changing environment today and incorporate what they're hearing

and seeing into their underwriting.

So, you know, we during April of last year with the tariffs,

we, you know, we stopped, we cleaned down our pipeline and reset it,

and just added additional processes to our underwriting.

And I could argue again, we're now doing the same thing again with AI,

you know, what's the haves and the have nots, what we like, what we don't like.

And so, in this ever changing world, you just have to be aware that what may have worked

in a benign environment doesn't work today.

And the reason why the frauds become clear is that just because all the liquidity,

the easy money is just flowing out and now these companies are kind of hitting the wall

in terms of having to refinance their debt and that's the thing.

Correct. Correct. Yes.

Yeah.

So, in terms of processes though, could you say anything more about that?

Like, what, what newer you're doing now that, you know, in response to this?

Well, in response to those two particular issues, not, not, not a lot more.

But I think we've certainly incorporated into our underwriting now,

if we're looking at a manufacturing business, you know, where do they have their,

where do they have manufacturing, where they're in customers?

If they're manufacturing in China and importing into the US, you know,

your question, what could change over time with that specifically?

But, but with AI, you know, it's, it's, it's one of those things today,

where generally I think the market is overreacted, if I'm being honest.

I think we've seen opportunities where we think, you know,

it's, it's, we think they're very interesting.

I think for credit investors, we look at AI slightly differently to equity investors, right?

We're, we're not trying to find the next big winner, right?

We're just trying to avoid losers.

So it's as much about the downside protection and upside capture,

relative to our private equity colleagues.

So when I think about AI, the first question I tend to ask is,

does this technology make this business more resilient?

Or does it make it obsolete?

That's the, that's the first thing we think about.

And the second thing is really around, is this, is this a temple thing or a structural thing?

So if there's a lot of market volatility right now, you know,

spreads of winding software selling off,

but that doesn't always reflect real fundamental risk, right?

And so that just presents opportunities.

So some businesses are undoubtedly being caught in this noise.

So that's great for us if we can identify them.

But others are generally have business models that will get disrupted.

Now, they're unlikely to go to zero this year, probably not even next year.

But over the next five years, will they present refinancing risks at the time

when they come up for maturity?

Absolutely, yes.

I also think a lot of people talk about, and I'm not the expert on this,

my private equity colleagues will shoot me if I tend to be an expert in AI,

because they certainly know a lot more than I do.

But, you know, historically software businesses were valued for things like recurring revenue and switching costs,

but AI is challenging that thesis.

So you have to go a lot deeper now.

And so, you know, what does the company actually do?

Is it a source of critical data?

Is it just a layer on top of another layer, on top of another layer?

And, you know, can the product be replicated by AI?

Or is it deeply embedded in workflows?

Things like this, you're going to hear that a lot over the coming years,

and people will start to, or dispersion, I think,

is what already begin to see with certain AI names.

And I think that will filter through to other sectors as well.

And we've talked a little bit about AI,

but I want to just follow up on that if that's okay.

So, some people would have us believe that AI will, for instance,

take all the credit analyst roles quite soon,

and I should probably consider retirement.

But other people will probably think that I should, you know, plow on and keep going.

But, I mean, that's just, obviously, on the personal level.

But just more broadly, like, what's your,

where is Pamera on that scale that, you know,

AI will replace all our jobs,

or it will be more complimentary.

Where would you say you sit on the scale of AI,

sort of positive and negative parties?

So, one of the benefits of being part of Pamera and Pacifica,

Pamera private equity, we've had a lot of insight into the whole development of AI for a number of years.

So, I don't know whether you know,

but Pamera was one of the first European private equity firms to establish a permanent presence in Silicon Valley about 20 years ago.

So, we saw this coming, and we've got very deep networks across the West Coast.

And we've actually got a GNI team and analytics value creation team as well.

So, it's been hammered into us for at least two years now

about AI. And so, we as an institution have been using it

the various tools, whether it's Tragedy BT or Claude and others,

for about 18 months, two years now.

And so, we're quite o-fayers in organization.

So, I think every day we're getting better and we're developing

more ways and be to be more, more productive.

Ultimately, over time, and I can't give you that timeframe,

do you end up employing less people?

Probably, or do you end up managing more money and borrow strategies and do you the same number of people?

I don't know what that long term, that long term you looks like,

but from a credit standpoint, can we do more with the same number of people?

Absolutely can.

Right. So, we probably see 150 to 200 opportunities a year.

We probably invest in less than 5% of them.

And we can do that with a team of less than 8 people.

So, it gives you an idea of how efficient that has been.

And I would say that's only increasing as we become more,

we become better at utilising some of BZI tools.

I mean, as you would, I guess, appreciate even helping,

but we are incorporating more and more and more AI into our workflow

as you'd expect from a technology company.

But just to go back to one of the points that you mentioned earlier

about picking AI winners or avoiding the losers,

how straightforward or easy do you think it is at this stage,

given that there are so many, I think, unknowns about how the entire thing will develop

and also given that a lot of AI that is in use at the moment isn't necessarily paid for.

So, how do you go about picking the winners or losers at this stage?

That's a really good question.

I would say, you know, we have had an AI framework,

how we look at companies through the lens of how it might get disrupt by AI for some time.

So, in my team, whenever we get a new opportunity,

it doesn't have to be tech. We always look through it from that perspective.

So, I think we will increasingly spend a lot of time understanding

a company's moat, right? And as a term, I'm sure you've heard a number of times before.

But from a credit perspective, it's really around just making sure

that we're stressed testing the company under different AI scenarios.

So, going back to basic credit calculations around cash flow resilience,

market positioning, stickiness of customers, mission critical products,

things like that, which, you know, we are as a team in premier credits.

Certainly getting better at it.

But I think we still need that private equity overlay,

because these guys live and breathe it on a daily basis and have for some time now.

The BDCs that we talked about earlier, business development companies,

the pressure is on them because of their software exposure.

You know, they have 20, 25% some of them to pose to the industry.

Those loans, if you look at how they're trading, they're dropping pretty fast.

We're talking to the stress buyers who are offering, you know, 60s and, you know,

before a couple of months ago, they're offering 80 and, you know, these things are dropping.

I'm wondering what kind of levels you're seeing in the market?

I mean, in what sort of default rates are expecting?

We've heard 15% from marathon as a kind of broad US software default rate.

Yeah, look, I, so we obviously don't have the BDC phenomenon over here in Europe.

So it's, you know, the equivalent really is direct lending funds and not obviously they're not public.

And so they're private, they're private capital.

So you're not really seeing that filter into the market as the way you would in the US.

But having said that, we do have, you know, we do see it in the border syndicate.

The border syndicated loan market, I would say, you know, several names over the last five to six weeks.

Certainly, you know, ones that were, you know, firstly, seeing secure that were trading sub eight, nine percent blew out and were trading low teens.

So maybe four, five, a hundred basis points wider.

So the good ones people have identified are now trading a bit tighter.

And the ones that people for the question mark about are still drifting a little bit lower.

And I think that's really how it's going to play out and you're, I doubt you're going to see material changes in revenue because of the impact of AI in the short term.

So I think it would be interesting to see where, where some of those names trade at the end of this year because, you know, companies will probably still be performing relatively well beyond budget, etc.

And you may not see the impact today, but ultimately when it comes to refinancing in two or three years time,

that's when the robber hits the road and people will be questioning whether the next, the next five years after that, where the impact of AI will have on some of these companies.

And after the default, the bigger concern is obviously the recovery, which estimates are going down all the time in terms of how much you might get back through a restructuring.

So that's concerning not just to BBC's, but also CLO's who are having to get out because these things are being dumped.

I'm just wondering whether you think that there is potential for more of a domino effect from this sector as, you know, we feed on fears of the unknown and we also have actual write downs in the market.

Yeah, look, I think there's always that possibility, but I will say say, you know, AI is not just, I think there's also a misconception having said what I've just said is around AI just being a

software issue, right? I mean, AI is going to disrupt many, many different sectors. And so it will impact and reshape services, healthcare, consumer, and so forth.

So yes, look, we're not going to necessarily see it in 2026, but we will certainly see it in in the coming years where there will certainly be an impact across many, many, many sectors.

We're not seeing that today and it's part of the, you know, the market is that it's just basically saying anything software related, we don't really like, we don't really understand, we're come back once we understand it.

But you could argue some healthcare and consumer names should be under, but should be struggling today as well if you're using this looking through the same lens.

But in terms of sectors that you, you see opportunity, I'm wondering, you know, where they are and, you know, how they're shielded from this also how they're shielded from the potential impacts of what we're seeing in the Middle East, you know, higher oil prices and potential supply chain disruptions.

Yeah, so I think, you know, the first thing to talk about there is probably oil.

Everyone always looks at oil and things filling up my car, but all matters, not just as a commodity price, right?

So it's a transmission mechanism into the into the border into the border economy.

So if any pro energy prices stay elevated, it shows up in things like transport, manufacturing, household budgets, corporate margins, and once that happens, the effect is not just an economic one, it's financial.

So because, you know, inflation expectations become stickier and central banks, we've already seen a put put any further cuts on the hold and maybe the next movement is up.

So for credit, that obviously matters a great deal. So I would say higher for longer rates and not simply just evaluation issue today for some parts of the market, it might become a solvency issue as well.

So, you know, a company might look fine when, you know, refinancing was cheap and plentiful, but if you look today in a more fragile world, you know, more maybe restrictive financing some margin pressures coming through that changes the dynamic completely.

I would not ultimately assume though we're heading into some sort of second inflation wave though, I'm not sure that's that's really the base case.

I do think there is a risk of inflation going up, meaningfully, if energy remains elevated, but I don't think we're there yet.

And from a credit perspective, even a modest change in that sort of probability matters because it affects market access, risk appetite, default expectations, etc.

We're already kind of experiencing a little bit today with volatility coming out of the conflict in the Middle East.

But in terms of, you know, my day today, you know, what, what do I like?

You know, in, in, in opportunistic credit, we're going through a little bit of a, a bifurcation, I would say, I say on the, on the one side, you've got what I would call flow opportunities.

Those are more standard, more intermediate situations where, you know, lots of lenders are effectively looking at the same deals using similar frameworks and coming to broadly the similar conclusions.

And it's really, you know, it tends to get priced fairly tightly and success is really driven by speed and scale, rather than, you know, any sort of specific knowledge.

But then on the other side, which is where we tend to focus more of our time is generally complex opportunities.

And so that, that's really, that's really for me anyway, where I think he gets a lot, a lot more interesting.

And when I mean by complex, these are situations where, you know, the outcome really depends on how well you understand the business underneath.

And that's where, obviously, having a, a private equity overlays so important.

So you're looking at things like operational nuances, sector dynamics, how value accrues over time, et cetera.

And it's much less about just providing a check and much more about how you interpret, how you interpret a business.

So for me, and I'm also should point out more importantly, actually, is that complexity doesn't automatically mean higher risk.

And so that's a lot of people confuse that.

And I just, I think that's wrong. It just often means the situation takes more work to really get comfortable with.

If you can do the work properly, really understand what's driving that risk, you can often get paid much more than I think than the underlying risk actually justifies.

How much more do you get paid? And can you give us more of a tangible example of that?

Yeah, of course. I mean, so I, you know, if I, if I think about, you know, most opportunistic credit funds look for mid teens.

Let's just say, I would say flow flow opportunistic credit, you're probably talking about 200 300 basis points tighter than that.

And I would say complexity is to a 300 points wider than that.

So you can be talking about as much as six to 700 basis points difference between what I would say flow versus complex situations.

One of the issues I guess we faced, even if the start of the year before the golf situation and so on, was that spread retight.

And people were worried that we wouldn't be able to replicate the returns that we saw in 23 24 25 to some extent in credit markets.

So how are you thinking about returns to see what sort of returns could we see from Pamirra and how does that level compared to what you've seen in the previous two or three years.

I think it depends on on what strategy you're looking at.

So spreads today haven't, apart, you know, obviously in some of the secondary own spreads have widened a little bit, but there's not a lot of new activity.

Not a lot of primary new issue going on at the moment. So it's a tough question to answer whether underwriting expectations of trains maturity today.

Maybe they're 50 to 75 basis points wider than they were at the very beginning of the year or the types of last year.

Until we see an M&A pipeline, I think is a really tough one to answer today.

But I would say in places like opportunistic credit, it's really down to a scarcity of capital, especially around complex names.

And so even though there's a lot of volatility today, whether it's software impacted by AI or Middle East conflict, these are very new odds situations.

And so although, you know, a lot of that noise is out there, generally speaking, it's really around the Pacific risk and how many people show up to price it.

And that's where, you know, you can you can gain an extra five to 600 basis points.

Well, isn't as an average deal there for you in, we stay pretty close to the four key verticals that we have at Pamirra because we've obviously got, you know, these, these very knowledgeable sector team.

So we focus on technology, we focus on healthcare, we focus on consumer and we focus on business services.

And that's really where I think we have a significant edge, generally across the credit platform being able to rely on our private equity colleagues.

And that flow information, you know, obviously subject to my legal compliance, obviously, flows incredibly incredibly well between between the between the groups.

I think in a ever increasingly complex world that we find ourselves in.

I think it's very difficult to do it to do credit without having that sort of sector insight, to be honest, because especially around technology where you can look at something.

And, and can just disregard it because it's, you know, in may not be generating an EBITDA, but then if you understand the fundamentals that's driving that.

And the fact that they're reinvesting in technology and their customer base, et cetera, and you look at customer attention, you can have a very different view on it if you know what you're looking for.

And that's where having sector teams that day in day out, that's all they do.

It's, it's, it basically means we have a much larger opportunity set in which we can, which we can play in.

But how's all of this uncertainty using, affecting one of the key verticals that you mentioned is the consumer sector.

On one hand, I would think yes, you know, people are paying more for gas at the pump and so on.

Not the only thing, but inflation is potentially rising and so on.

But then there's all the government intervention that is coming or has already come to sort of offset that.

Do you think that government intervention is going to be enough to sort of prop up the consumer sector and people will still keep spending or do you see risks in some parts of the sector.

I think it depends what they're propping up.

I think, you know, we obviously had the energy shocks and didn't know the government looking to cap energy prices and so forth.

And so that obviously keeps people with obviously doesn't reduce people's purse as a result of that.

So that's obviously generally a positive, but the consumer is definitely where we sit in the cycle today is definitely a sector which we're a lot more cautious of than we probably were just two years ago.

You know, we're not seeing it come through yet in credit card defaults and so forth, but you don't need a lot of noise like this for people to suddenly tighten their belts, not go out as much.

You know, the whole restaurant sector is struggling today.

People just don't go out as much as they used to and so, you know, that's a space where you have to be a lot more cautious of.

So I think anything that's direct to consumer changes very rapidly to the noise that you hear that gets amplified by the media and so forth around the conflict and so forth.

So you just you have to be a lot more conscious of that and you know that that comes through in a number of ways, whether it's pricing or the amount of leverage that you're your you you you you commit on an opportunity and sometimes that just doesn't work for the owner of the business.

So you just don't have a meeting of binds.

We have one consumer deal in our entire portfolio today, so it gives you an idea of how, how little we are focused on that today.

Where do you focus by country in Europe?

So we're, you know, we're probably over indexed in the UK generally, but to be honest, some of the businesses that we've invested in have global revenues.

And so, you know, I'd say they're based in the UK, but, you know, it's hard to say that they're a UK business.

We've got several opportunities that we've we've transacted in in southern Spain and then just broadly across across across Europe.

We generally speaking, we haven't done a lot in France today.

We're looking recently at Germany, Northern Italy and and Spain, but you know, a lot of the opportunities we see today come through come to the UK.

In terms of complexity that you mentioned earlier, I mean, that's a word that's used here a lot to apply to even CLOs.

And I know you're, you know, you mentioned CLOs earlier, it's a big focus.

Collateralized loan obligations, just those three words disturbs a lot of people and makes them think of CDOs, obviously they're not.

How does how is that business going at a time when when loans are under a lot of pressure?

How is the arbitrage? I mean, we know a lot of people actually like the product, particularly the higher quality tiers of it, but they're a bit more scheduled of the equity.

I'm wondering what your view of the business is right now. Where do we go for the rest of the year?

Look, I mean, it's been a phenomenally performing asset class over the last few years, you know, post GFC and you're honest during GFC.

A lot of good managers continue to pay distributions on the equity.

So, you know, it's actually proven to be a very resilient, resilient structure.

You know, there's been some technical reasons why some of the the tranches have traded out recently.

We're keeping an eye on some of those. We think they might become more interesting.

But generally speaking, the, the, the, the silo space and the equity as well as, as, as performed exceptionally well, I don't, I don't necessarily see that change.

Look, there are periods, certainly where, as you, as you're right, you said, James, the ARB doesn't work.

And I don't think we're, I don't think we're there today.

We may have been there, you know, a few weeks back today. It's probably a bit better, but it's a changing feast.

And I think a lot of these CLO managers come to market just the right time, get things done.

And then, you know, they, they have a, a period of time where they reassess, maybe add a little bit to existing CLOs.

But the structures themselves have held up well.

And I would say a lot more resilient post the GFC with the, the equity alignment, the regulatory equity alignment that was required.

So, generally speaking, I think it's a, it's a decent asset class.

Just to throw another three letter acronym, LME, liability management, access LME, that's been big in the US.

We have talks of lawyers who are keen to make it much bigger in Europe.

But I'm looking at the CLO impact.

You know, we, we, we talked to investors and CLOs and various other parts of the market.

They, you know, if they're not big enough and they get with a, an LME, even if the loan is at 90, they might want to just get out, you know,

much bigger discount because they, they just don't have the firepower to go through such a thing.

How, how is it affecting your business?

That's, to be honest, that's spot on right.

I think, you know, although LME really hasn't made its way materially to Europe, it is definitely something that is in the back of people's mind both as, you know,

CLO managers and, you know, opportunistic credit, special sits or even distress guys.

You know, 20 odd years ago, if you were an investor, buying a 20 million piece in a, see, a super senior cat structure in a boardy syndicated loan

and a restructuring occurred, you would get your pro auto share of whatever was offer.

And that's how it worked.

That is not the case anymore.

You can be top of the cap structure.

If the company that goes through a restructuring needs the liquidity, the big guy who can write the bigger check can typically dictate how that restructuring will go.

So I think, you know, one of the things that we commit a credit are very conscious of across the platform is, you know, if we're never going to be a massive player in any one particular cap structure.

So we look at the secondary market to a slightly different lens than now.

And that's why the software, the broad sell off in software names has been such an interesting place for us because a lot of these names, we just don't believe we'll go through a restructuring.

So it's more of a pull to part raise.

And so if you don't believe it's going through a restructuring, you don't believe there will be a liquidity rent.

Then you're buying something 85, but in the next six or 12 months, probably trades at 95 and then you sell into that market.

And that's fine. You know, no LMEs triggered nothing good.

But if you're looking at things on the basis that, you know, I'm buying something at five times the trades at 10 times.

If it goes through a bankruptcy process, I'll come out the other end and own the equity and you're a small guy.

That's probably not how it plays out anymore.

I guess one risk of this current uncertainty and what you mentioned about for being the Canadian core mine and so on is that we could see more.

Let me exercise this country in Europe. Do you think that's a risk or do you think that they're just singular opportunities that could come up like the one that you just sort of walked us through?

Well, I think everyone always talks about Europe being one single entity.

And I always think that's a little bit of a misnomer because Europe has a myriad of bankruptcy regimes.

And so although LME absolutely is something that potentially could happen increasingly across Europe, I think you also have to counter the fact that the equity in certain jurisdictions is a lot stronger than it is in a chapter 11 process in the US.

And so I think that's a counterweight to someone just coming in and musting their way in.

The large guy that comes in and throws his weight around still has to contend with the fact that local laws may mean that they don't get as much as the equity or they have to give a bigger tip to the existing holders.

They still may cram down existing senior holders, but they may not get the best deal that they were hoping for that they potentially would get in a chapter 11 process in the US.

After the liberation day, so called one year ago, there was this kind of knee jerk push from global funds into other parts of the world and the most immediate attractive opportunity was Europe.

Obviously that's a big thing that it included and everyone realized that they needed to be more geographically diversified.

But now we've got the war impact and potentially much stronger negatives in terms of European economies that flow seems to have been reversed a bit.

I'm wondering where you see that now in terms of when you go out and talk to people that aren't European or aren't based there or aren't even exposed to the continent, how they see it right now and certainly against the US.

Yeah, look, so I think, you know, if I come into this year, I would have said that Europe was looking, probably the best is looked in several years primarily because you always looked at Europe at generating one, one and a half percent of GDP.

The US was two and a half three and so the difference was a size which basically meant what you overweight US versus Europe.

I think coming into this year, I think there was a general consensus that US probably wasn't going to grow as much and Europe was probably grow a little better.

Don't underestimate Germany's ability to, you know, to relinquish its fiscal responsibilities and start to spend a lot more money now and there's a result that could drive a lot of positivity across Europe.

I think depending on what happens in the Middle East over the next three to six weeks, that backdrop still may be intact and so we have to wait and see.

I think today there's still a lot of uncertainty until the conflict dies down or some sort of agreement is reached.

I think it's very difficult to make take a long term view over Europe versus the US today because I think there are, there's competing reasons why one looks better than the other.

And I think investors are taking a bit of a pause just to see how things work out.

But generally, having done this for 30 odd years now, I do think Europe is fairly attractive place to be.

Yeah, I think people have seen the value relative relative value, but I think they're a bit more concerned on the macro, as you say, but the one big thing that a lot of investors are looking at much more closely as defense across the board big up tick and spending.

I was wondering, you know, how you view that as per Mirro, is there an opportunity for you? Is there any particular parts of defense that you might get involved with?

Yes, we have a very strong ESG overlay with a lot of stuff that we do.

So I guess the pointy end we probably stay away from, but the maintenance thereof we probably would look at.

We were actually looking at a port business just recently actually across Europe that would serve as not just, I think they called them grey ships, but you know, military, military hardware and so forth.

Look, I think that's still to play out. There's definitely a lot of money being raised in that space.

I think we're going to choose our situations very carefully.

But you know, although potentially a growth there, I think there's just a lot of capital.

So a lot of capital will chase that down.

And so I don't think maybe the opportunity in terms of pricing will be as good as people think it ultimately will be, but I do think they'll be equally good opportunities in other sectors, which we will probably focus more time on.

One of the issues that's come up in some of our conversations has been how this elevated uncertainty across the Gulf might affect fundraising broadly.

Like we know that there's been quite a bit of issuance activity from the sovereign related entities in the region, but it's really still seen as a source of capital, I think.

And I'm not just talking about them buying Harrods and so on.

Like, how would you say the situation in the Gulf is affecting fundraising if at all?

Look, it's, I think in this short term, it, I mean, you've obviously got to be very sensitive to the situation.

So, you know, it's, it's, it's obviously a human, a human cost to this as well.

I would say we haven't necessarily seen a slow down, but to promise it's only been two or three weeks.

So if you ask me that question six weeks from now, maybe it's a very different answer, but technology allows people to still communicate very easily.

And so we, you know, we're in contact with a lot of our largest investors in the region.

We have got very deep relationships with them.

We haven't seen anything significant change there.

But as I said, the longer this goes on, maybe that changes, but they still have capital deploy.

They want to give it to managers that they trust both in equity and credit.

Private equity generally is, you know, always getting a bit of a tough press in certain places.

And there is, you know, you mentioned ESG that there are social impacts.

But I'm wondering in terms of the industry more broadly, is it going through a bit of a test phase at this point?

Is there going to be consolidation? Are there firms sitting on mountains to dry powder that could convince, you know, LPs to backtake over the smaller firms?

You know, so they don't have to go through another fundraising cycle?

Yeah, look, I think not just equity, I think credits as well.

I think there's a lot of smaller funds out there who are maybe sitting on one or two assets and once they sold those assets, I think.

It may be tough to raise to raise another vintage, whether it's either equity or credit.

I think one of the funds we're seeing a little bit more of in credit is when we're lending to businesses that are owned by private equity sponsors that are raising money on a deal-by-deal basis.

So they've, you know, for whatever reason, decided to spin out, haven't been able to raise the capital or they need to build that track record and so they're going out.

So we've seen that a couple of times, I'm very happy to look at those businesses. It always depends on the managers and if we know them.

But a lot, I think there's going to be consolidation, at least at the smaller end in both equity and credit funds in the coming years.

If you have to pick one thing though in terms of where you're really excited for the next 12 months, is there one thing that we're always asking about relative value?

Is there one thing you think is particularly attractive right now?

Well, I think with the increased volatility that we're starting to see now, the secondary market is certainly going to be a lot more interesting this year than it was last year and it has been for some time.

If you think about periods of volatility, whether it's the GFC, European sovereign crisis, the commodities crisis in 15, 16, COVID, a couple of days during, you know, liberation week and now, you can really count on one hand.

The number of periods of volatility, right? And so, and they were all very, all very different and those windows of opportunities got smaller and smaller.

The fact that the opportunity software is still present six weeks later probably tells you something that there is a bit more volatility and noise out there today than there has been for some time.

And so, if I had to put my finger on one thing, I think some of the risk adjusted returns being able to buy firstly and see secured in some of these very large captures, it's probably a good place to put some money to that.

You were talking about software specifically.

Software, but also, you know, it's, it really depends over the next six weeks whether, you know, if the conflict in the Middle East doesn't, doesn't slow down, are we going to see that impact other businesses?

That is potentially, and I think there will be a knock on effect. And so, there will be second, third order events, which basically means sectors that you thought were probably more resilient start to trade down.

And in terms of how you would get an edge on that, that's your depth of team, your history and in the sector, you're able to see these, see the value and actually, you know, get a better read on it than others, you think?

Yeah, yeah, absolutely. I mean, being able to, we use the term, you know, information velocity, right, the speed of which you can get to the, the crux of an issue.

And I'm still even surprised today how, how, how, how quick when we, when we look at a company, one of our private equity colleagues in, you know, in healthcare, may know the company may know a customer may know a supplier may know a management team.

Just having that, you know, just being able to pick up the phones, speak to a senior advisor, I always say, we're always two phone calls away from someone that knows a lot more about a situation that we do.

And so, we always as part of our underwriting process will pick up the phone. And in most instances, we will bring one of our private equity colleagues on to the deal team and help us get through our own investment committee, because having that ability to synthesize.

Or demystify the equity story for someone is, is invaluable. And so if you can do that under one roof, I think that's a pretty powerful proposition today.

Is now the time to buy the software debt as it's dropping or do you wait for it to drop even more?

Well, I'm not going to sit here and say I couldn't always buy the low. It was like, I can't, I don't think anyone else can. But, you know, your average in overtime, right? And so I think we, we, we think it's interesting today.

Could it be more interesting tomorrow? Absolutely. I think the fun that we've gone a long term view on this thing on this stuff. So, fundamentally, we like some of these names and we think they're going to be around for some time. So, we will buy as and when your opportunity presents itself.

We talked a lot about the golf and obviously also about the software potential opportunity. What would you say is the one key worry from your end investor? What question are they asking you most frequently?

Well, I think I think you kind of touched on or James touched on it just a few minutes ago around around Europe and, you know, if you saw it, if you got an in an in Liberty partner or investor.

If they've got a global portfolio, typically 60, 70% of that will be North America. And then the rest will be a mixture of Europe and and Asia.

Maybe, maybe the way to slightly different, but broadly speaking, they'll probably be overweight the US because Europe has under perform related to the US for, you know, for several years.

I think, as I said, coming into this year, I think, you know, that was being dispelled a little bit. But now with everything that's going on, the energy, the energy issue that we presenting ourselves today, I think people will start to question again.

But I think it's too early to have a really firm view on that. I think we could quite quickly go back to where we were at the beginning of this year with Europe positioning itself for much more higher sustained growth than we had in the subsequent years.

And so I think just be patient and just to see how this how this plays out. But I would say that's the biggest issue because people have still got the mindset that Europe is, you know, it's a collection of countries that don't necessarily always working coordination relative to the US. And I think, I think that's always the case to be honest.

And when you flag software, it is a potential opportunity in terms of software debt. Are you talking about private loans, direct loans, or are you talking about broadly syndicated loans? And is it mostly Europe that you're looking at in that context?

Broadly syndicated loans, predominantly Europe, but we are looking at US as well.

Great stuff, Ian Jackson, head of Strategic Opportunities at Permera. Many thanks for joining us on the credit edge.

Thank you, Jones.

Tolloo.

And of course, very grateful to Tolloo, Alamo too, from Bloomberg Intelligence. Thank you for joining us today.

Thank you, James, and thanks Ian.

For more credit market analysis and insight, read all of Tolloo's great work on the Bloomberg terminal, Bloomberg Intelligence is part of our research department with 500 analysts and stretchers working across all markets.

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