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SIMON BROWN: I’m chatting now with Harris Gorre from Grovepoint Investment Management [GIM]. Harris, appreciate the early morning. We are talking this morning around your actively managed certificate, AMC, listed on the JSE for private credit; the GIM Liquid Private Credit code, GIMLPC. As I understand it’s investing into a – and I quote you here – ‘diversified portfolio of US-listed private credit’. This really is debt, but it’s not the traditional bonds, it’s not the traditional sort of bank debt. This is probably smaller loans for US corporates that one invests in.
HARRIS GORRE: Good morning Simon, and thanks for having me on the show this morning – and good, good morning to all the listeners. It’s cold and dark, but at least a dry London on this side.
At our business at Grovepoint we’ve been investing in private markets since 2006, pre the global financial crisis [GFC]. [Grovepoint has] around $2.2 billion invested across private credit, private equity, in the US and Europe.
And yes, when you describe middle-market lending in the US it is indeed, let’s say, smaller and mid-sized companies. We tend to focus on the mid-size companies. These are companies that are generating Ebitdas of between $25 million and, say, $250 million of Ebitda or earnings. I suppose in rand terms these are companies with an average Ebitda of around R2 billion; so in a South African context probably listed companies. But in the US context, the size of the market, the depth of the market, the liquidity and scale of the market in the US means that these are mid-market companies over there.
Maybe just a quick fact on the US market – that middle market in the US is in itself today probably two to three times the size of the UK economy. So you’re talking about a middle market, a kind of corporate middle market in the US which is a between a $6 trillion and a $9 trillion economy. So, taken on its own it’s the third-largest economy on earth.
We love this market, not only because it’s dynamic. You can get great diversification, great yield; a good selection of managers are lending to it, but also because in the US that market is dominated by non-bank lenders. So when we talk about private credit, traditionally you’re thinking about non-bank lenders. These are loans that are made by the likes of Apollo, Aries, KKR, Carlyle, New Mountain, Golo, Blackstone – the titans of alternative asset management today.
Back in 2009/10, when we started investing in private credit, they were a lot smaller. That asset class has grown a lot, but today those non-bank lenders do 85% of this middle-market lending, which is very different to Europe.
SIMON BROWN: And the key point here is you’re not sort of managing those loans. You are investing into funds which are managing; and those funds, as you mentioned [are] Apollo, Blackstone, Bain and others. That gives you flexibility in terms of where you want to be at this point.
I imagine you are also finding mispricing from time to time.
HARRIS GORRE: Absolutely. This has been an evolution in our business. When we started investing in private credit it was really the traditional ‘lockup’ funds; that was the only option, the only game in town. That’s still a game in town mainly for institutional investors. Those lockup funds require kind of millions of dollars [as a] minimum investment size. They have obviously limited liquidity. They generally lack diversification. There may be 50 to 100 loans in a lockup fund. It takes a lot of time to deploy capital, etc.
What we saw post 2008 in the GFC was that a number of these private credit managers went to raise additional capital on the stock exchange. They listed private credit vehicles that had access to exactly the same loans, but these were permanent capital vehicles, listed stocks on the Nasdaq, on the New York Stock Exchange.
In that market we started seeing an opportunity to really create highly diversified portfolios. So where we stand – I suppose where any investor stands when investing in credit – diversification is much more important than say, equity, generally because in credit you have limited upside, but full downside. So in equity you have full downside; you buy a stock, it can go to zero. In credit you buy a bond or a loan, it can go to zero. But in credit your upside’s capped by the coupon, whereas in equity in theory you can buy these stocks that head to the moon if they lock onto AI or some kind of new technology, or some kind of new fad.
But in credit what we want is diversification – and that was our problem in the lockup funds. You didn’t have enough diversification.
The way we invest now via the listed market means that our portfolio contains over 3 000 underlying borrowers, and that’s across the entire US market. We avoid cyclical sectors like airlines, retail, hospitality. We focus on resilience sectors and we really want to focus on locking in that nice juicy kind of 10%, 11% floating rate yield, with limited downside as a result of the diversification. We do that by investing in the top managers across that market – so as I said, Blackstone, Aries, Carlyle, New Mountain, Golo.
And to speak to your last point, because these vehicles are listed, yes, at times we can invest at, let’s say, a discount to book value. We don’t have a lot of time this morning, but for the listeners who aren’t familiar with these closed-ended vehicles, they raise capital, they trade on the stock market, and they’ll trade at a premium or discount to book value.
What we find in the listed private credit market in the US is generally they trade around just over 1/1.01 of book value. That makes sense because they are a portfolio of high-quality loans. But because they’re on the equity market, often you get this irrational dislocation – movements that affect equity that shouldn’t in reality affect credit, but do because these stocks are listed on the market and the investor base kind of trades in and out of them with the equity markets. We like that volatility. We kind of take advantage of it.
SIMON BROWN: Actually [there’s] a benefit to it. And, as you say, around a 10% yield. Of course, that’s in dollars; we are buying it on the JSE in zar.
A quick last question. In preparing for the interview I was looking through defaults. I expected to see higher defaults. I saw lower defaults. I don’t know – my sense is that if a bank gets a bad loan, they write it off. If these guys get a bad loan, they roll up their sleeves, go knock on the door and say, ‘Let’s fix it’.
HARRIS GORRE: Hundred percent, Simon. So where we think there’s a really good fit in this market is that generally these non-bank lenders are from a private equity background. So you have sector specialists in these teams. Now we favour lenders that have big teams, deep benches……7:20 of talent and, importantly, large workout specialists. So they’ve got the guys there. If you own a software business, or a software as a service [SaaS] business, they’ve got technology experts in there so that, if that business is running into trouble, you’ve got experts that are getting involved in the business, they’re working out the asset. Yes, you may have the default, but even when you have the default you’re having higher recovery rates.
So there really is this kind of asymmetric return profile – what we consider better risk-adjusted returns – whereby in a bank, if you have a problem loan you sell it. I came from a banking background. Banks want to get out of the loan as quickly as possible, take whatever price, write it down, move on to the next year or the next quarter.
These guys are really getting into those businesses, rolling up their sleeves, working out problem loans. And therefore what you see in the market, especially with the high-quality managers, is recovery rates of over 80%, default rates of less than 1%.
SIMON BROWN: Wow. Those are staggering numbers. We’ll leave it there.
That was Harris Gorre, Grovepoint Investment Management. The code – GIMLPC, Liquid Private Credit. Harris, I appreciate the very early morning.
