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Unquote
  • GPs

Q&A: Intermediate on high ground

  • Deborah Sterescu
  • 11 February 2010
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Deborah Sterescu speaks to Christophe Evain, managing director of ICG, on expectations for recovery and why high-yield is not a long-term threat for mezzanine.

Fresh from the £440m MBO of CPA Global, it seems like ICG is in a more solid position to invest this year. Do you expect to see more defaults on loans or do you believe that ICG's bad debts have peaked?

Firstly, yes we are definitely in a better position to invest, as we now have close to £2bn to invest from our balance sheet and third-party funds. We have a mid-market focus and are accustomed to taking a non-controlling position in the capital structure, which means it is quite natural for us to take a large minority stake in transactions like CPA Global.

We have never been that present in the large buyout segment, as it was always very competitive and mezzanine was broadly syndicated and commoditised, meaning there was less control. That said,while I believe the mid-market will take a while to recover, it is definitely the part of the market that I expect to recover first. I also expect ICG to engage more in the recovery space, as an increasing number of companies will need their balance sheet fixed this year.

With regards to bad debts, we made heavy provisions for this for the year to March 2009, but these provisions went down significantly to the half year in September, placing us in a much better position than last year. This, however, assumes that the economy doesn't spiral downwards again. Still though, we have had a resilient portfolio, and over half of the companies have performed in profit terms in line or ahead of figures compared to the previous year.

It is also worth noting that we created a dedicated 10-strong restructuring team in November 2008 to deal with the issues of our own portfolio companies. They have worked on nothing else since, helping to restructure and strengthen our existing portfolio, which should allow us in time to recover some of the provisions we've taken against these assets.

Do you see the exit market gaining momentum this year, seeing as ICG just secured its largest-ever capital gain from the Marken deal?

I definitely expect exits to gain momentum this year, as recently several of our portfolio companies were exited, including Marken, Springer and Medica. There is still a lot of dry powder in the private equity market.. It will be easier to sell those companies that have had a strong track record through the recession like the recent Pets at Home and Marken deals. Secondary buyouts like these are reasonably easier to complete, as CDOs are simply recycling the cash they receive into the new capital structure and vendors can make a clean break. We will see more of these transactions, but I wouldn't expect a wave of them.

The ICG Recovery Fund seems to be an area of activity that would prove quite lucrative in this economic climate. What sort of strategy does ICG aim to implement in these investments (longer-term, etc) and do you expect this fund to generate more activity for the firm in the coming year?

The ICG Recovery Fund is meant to provide new money (equity and mezzanine) to support private equity-backed companies, outside of ICG's existing portfolio, that may benefit from de-leveraging and an increase in the funds available for growth. The first part of the strategy for the Fund is to take advantage of the market dislocation and purchase good quality loans at low prices. Obviously, this is not currently applicable, as the price for debt has gone back up again. However, our long-term strategy for this fund is to fix the balance sheets of quality companies that have poor capital structures. In Europe, around €240bn of buyout loans are due to mature in the next few years, which means many businesses are going to have to restructure. If senior debt gearing is too high, they will need an equity or mezzanine injection.

We started raising the Recovery Fund in 2008, to take advantage of the dislocation in the market.. While the vehicle has required an unusually long fundraising period reflecting the current fundraising environment (expected to hold a final close by the end of March), it has allowed us to tap into new resources in terms of investor appetite. We have attracted more investors from overseas, including the US, the Middle East and the Asia Pacific, with many US investors realising that the recovery period will last longer in Europe than at home. The fundraising environment is difficult right now, which is why track record and having an established strategy is more important now than ever before.

The mezzanine market has been all the talk in the last 18 months as many predicted investors would shift their focus to the area in the absence of traditional debt. However, these opportunities never really presented themselves in 2009 as a result of the restricted deal flow. What's the outlook for the mezz market this year given the competition from the high-yield markets?

The mezzanine market has slowed down in the last year because you can't finance a deal entirely with mezzanine - the returns will just not work. There has been a lot of uncertainty in the market as well. As a mezzanine investor, we have had to originate our own deals and tread very carefully when making decisions on where to invest. Like most, we have taken some losses over the last year on those companies in cyclical sectors which have been most exposed.

Over the last 20 years, there has always been something that has threatened to bury the mezzanine market whether it was Japanese or Spanish banks or the high-yield markets. This, however, has never happened - mezzanine has never disappeared as there is a clear need for it. The high-yield market is open right now, but will there be such activity when governments sell their bonds on the market?

High-yield is really just a short-term threat, if at all, as a high-yield bond issue is not that simple. You may have to restructure a company the day after you close a deal and you're never going to have someone to talk to about changing the structure of a high yield bond. There are also many constraints on the high yield market - close to those of a listed company with increased reporting requirements. Mezzanine is more flexible and more suited to our mid-market focus.

 

 

 

 

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