PR OFILE


Fig.1 AUM by Strategy


Source: Alcentra


28%


Secured Loans High Yield


59%


Credit Alternatives Special Situations Structured Credit Direct Lending Multi-Strategy


13%


is pleased to report. The simplest switch could be from fixed to floating rate debt, and Alcentra targets senior loans to return 6% net of fees, mainly from income. Reaching further out the liquidity curve, direct lending targets 8-10% net according to Alcentra, which has raised assets for direct lending strategies that will help plug “the middle market funding gap to European corporates that Standard & Poors estimate at between €2.7 to €3.1 trillion over the next five years. (Source: S&P Banking Disintermediation in Europe, 15 October 2015.)” states Forbes-Nixon. Investors that are seeking double digit returns, of 10-15% or more, will in Alcentra’s view, need to look at structured, stressed, distressed and special situations credit. Alcentra’s stressed, distressed and special situations strategy has returned 24.4% net in the first ten months of 2015, exceeding its 15% net1


IRR target and making


Comprehensive coverage Alcentra’s asset breakdown appears above. It offers traditional and alternative strategies working across the whole continuum of sub-investment grade credit, which cultivates a culture that enables analysts, who average 15 years’ experience, to choose the optimal instrument to express their views and deliver the best risk-adjusted returns.


“We have merged our High Yield and Loan analysts to create a team of industry-focused analysts who are product-neutral and who the portfolio managers can leverage off” explains Forbes-Nixon. He sees the firm’s comprehensive coverage as a source of competitive edge. For instance, “we are deeply embedded in the primary and secondary markets in Loans and High Yield in Europe and US and have committed capital to one in three deals in Europe. The library of proprietary data we have on individual credits is vast and how we leverage off that information that is key” he mentioned.


Alcentra has been adept at preserving capital and avoiding defaults. For instance “our default rate of 1.5% is a fraction of the market and our loss rate of 0.59% is a third of the market in European loans (source: Alcentra)” Forbes-Nixon claims. He reckons that some competitors, including US ones, would need to buy information positions from dealers or syndicate members, in order to get up to speed on some companies; but even then Alcentra has seen US rivals get burnt by insufficient intimacy with, and knowledge of, European corporates. Forbes- Nixon thinks that Alcentra’s 15 years of experience in European leveraged finance is one of the longest track records in the space - and the firm also has huge experience in actively driving restructurings and turnarounds that can drag on for years.


10


This omnipresent footprint has forged strong relationships, and “there is no substitute for experience; you simply cannot buy the relationships we have with corporate CEOs, CFOs, and treasury management, who view Alcentra as a tier one lender” asserts Forbes-Nixon. Relationships are crucial in Europe because some 95% of leveraged loans come from sponsor-driven LBOs. “Access to management is essential and you have to be non-hostile to open doors” says Forbes-Nixon, who adds “we get exceptional treatment from the street”. Alcentra is seen as being firm but fair in negotiations. In theory Alcentra could pursue hostile tactics, but in practice has very rarely done so. Working with companies, as opposed to against them, throughout the cycle, is the Alcentra philosophy; however, sometimes as a consequence of a restructuring where senior management have failed to execute strategies and service their debt appropriately, “we may upgrade the senior team running the company” explains Forbes-Nixon.


Why Alternative Credit? Alternative credit globally has a vital function for institutional investors, as Alcentra sees sophisticated investors radically re-assessing their asset allocation in order to meet return targets. “The past 40 years of declining rates provided a free lunch from holding government bonds but now the classic 60% equities, 40% bonds, split will not come close to hitting the 7-8% return target of many pensions and endowments” opines Forbes-Nixon, adding that some strategists are forecasting returns of only 2-3% net from that asset mix. “Sovereign wealth funds, pension funds, insurance companies, endowments, foundations, private banks and family offices are increasing their alternatives bucket in general and alternative credit in particular” Forbes-Nixon


it a top performer among stressed, distressed and special situations funds globally. Both Alcentra as a firm, and the investment team on a personal level, have invested in the distressed and special situations credit strategy.


Why Europe? Though Alcentra runs the gamut of corporate credit markets globally, stressed, distressed, and special situations credits in Europe are currently where the manager sees the most compelling opportunities. This is, perhaps, contrarian if many global investors remain underweight of Europe. Though Alcentra has as many investment professionals, assets under management, and strong performance in the US as in Europe, Alcentra presently feels most confident about harnessing its acumen in Europe: “Europe is our back-yard; we are one of the most experienced investors in Europe” reiterates Forbes-Nixon. He adds “Europe is a less mature market where risk is priced much less efficiently because of the complexity of investing in this market – different jurisdictions, accounting regimes, corporate cultures – are all far more clandestine and opaque than the US which makes it more difficult to understand situations as well. That is an environment where we have a huge competitive advantage and will thrive.”


If capital markets are less developed in Europe – partly because the continent’s corporate bond markets were only created in the early 1990s – the post-2008 economic cycle is also at an earlier stage. So, Alcentra expects QE in Europe to be extended to last 3-4 years, does not expect interest rate rises in the Eurozone in the short-term, and would not rule out negative interest rates, but the big macro picture is much less important than individual investment opportunities. “The marginal effectiveness of QE is falling all the time” says Forbes-Nixon, and ultimately he thinks more QE could result in asset bubbles that, when they burst, will provide another distressed cycle.


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