The Exchanges

Q What was the distinction for you between cash flow lending and asset backed lending?

A At American National, I was doing more asset-based lending, so it was underwriting a company-based loan. You advance against AR and inventory and PP&E, and you're looking at it from a liquidation standpoint. So it was this totally new approach of underwriting the business itself and knowing that there's no way I'm going to be repaid from a liquidation of the assets. I'm underwriting the value of the business, so I want to underwrite companies that are Market leaders. Something that they do is proprietary. They're highly diversified. They have a reason to exist. It's a recurring revenue business, that type of thing. So while it was new to me, I actually liked it a lot more than asset based.

AI assessment note: “You advance against AR and inventory and PP&E... totally new approach of underwriting the business”

Q amount of capital you're managing, whether it's on balance sheet or in funds, how did the nature of the market change? You think of a syndicated market as everyone's in it together, right? You're trying to find the capital for the deals. Then there's so much capital that you can imagine there being competition and you probably don't syndicate anything anymore. When did that start to shift in the market?

A So we had created the Unitronch product when I was back at GE and Terry's. I actually led that effort. So we started that in 2010. And honestly, when we started the Unitronch product, we really thought this is going to be an alternative financing vehicle for sponsors to use during periods of market dislocation. Had no idea that it would actually become this primary financing vehicle, which it has. In 2000, let's say, 16, a three or a four hundred million dollar unit tranche was a pretty decent sized deal. By 2019, that was six hundred million dollars, and as you know today, it's multi-billion dollar unit tranches. Lenders can hold north of a billion, but a lot of lenders in the private credit market hold two, three, four, five hundred million dollars on a deal.

AI assessment note: “So we started that in 2010... By 2019, that was six hundred million dollars”

Q As you work through those teams, I'd love to hear a little more about how your process works. So you mentioned originators, long relationships with the sponsors. What does that look like day to day?

A Sure. So the goal of the originator is to gain trusted advisor status with the sponsor. So that means we want to be the first call on the last call. So we want that sponsor to call us, to run the company by us, the structure that they're considering, what they like about the deal. You need to understand too, the market's pretty efficient. If a deal is an auction deal, we may be seeing that from as little as two or three sponsors to as much as 20 sponsors. Maybe contacting us on that one deal. So we have a screening committee, very senior folks on the front end. So when I say the front end, I'm talking about originations and credit professionals that are evaluating the deal. So basically the best way to think about the originations team and the credit team, they're investors. It's our investment team. They're looking at it and determining, is this a company we want to finance? And if so, what do we think the appropriate leverage multiples are and how would we price it? But they also really dig in and say, okay, it's early on. It's an investment banking book. The investment bank is going to sell. It's all positive. From our side, we're lenders. There's downside risk. There's really no upside. So we're looking at it and saying, what are the major issues with that particular company? How do we think we're going to mitigate those? And then if it makes it through screening, We would …

AI assessment note: “if it makes it through screening, We would do a little bit more work”

Q As the economic winds are shifting a little bit these days, I'd love to walk through some of the opportunities and risks you're seeing. Where are the areas that you're excited about?

A In the base direct lending business, just really excited about how much I think that's going to grow. So I think at the very top, you're going to have private equity penetration of middle and upper middle market companies in North America just continue to grow. So McKinsey will say that that's maybe 12% today. Those private equity sponsors are going to be looking for direct lending solutions, probably more than syndicated solutions. So I think the private credit market's going to grow direct lending by, let's say, 15% a year for the next five years. I hope we grow faster than the market. So that's on the base. I think that there's a big opportunity in secondary lending. Secondaries have been around for a long time in private equities, so LPs commit to a fund, and for whatever reason they need to sell, they have liquidity issues, they're over-allocated or whatever. And there's a big secondaries business in private equity. I think that given the huge growth in private debt over the last five years, there's a big opportunity in secondaries. I also believe that there's a pretty decent opportunity in nav lending, which is lending against essentially the equity value in a private equity sponsor's portfolio. That's pretty big today in Europe, and it's just catching on here in the U.S.

AI assessment note: “In the base direct lending business, just really excited about how much I think”

Q So your business historically has gone through a few transactions. How do you think about, call it buy versus build, as you set out the opportunities in front of you?

A It's a really good question, and I think about that regularly. So if it's a build, it's a natural adjacency to something that we're already doing. So when I think about NAV lending, I don't really need to go buy a team. Our originators are already calling on the sponsors. We know how to underwrite credit. We're underwriting portfolios. When I'm going to do something, it's a new product. So let's say we were going into real estate. I would do that via acquisition or pulling a team out of another institution. I don't necessarily need to buy the company or the portfolio. Maybe I pull a team out. We've looked quite a bit at Europe. I wouldn't start a European lending business from scratch and grow it organically because I just think there's so many different countries. Each country's different. It's not like doing business in the U S so you need to have critical mass. And to me, you enter Europe via acquisition.

AI assessment note: “if it's a build, it's a natural adjacency to something that we're already doing.”

Q How do you think about where you see risks both broadly and then specifically in your portfolios today?

A Well, obviously, there's certainly financial risk that is more acute today in our portfolio companies than a couple years ago, just given the significant increase in rates. The good thing is for companies that we're underwriting today and that we've been underwriting while rates have been increasing, we've taken that into account. So we're underwriting really good companies with an interest rate scenario that is the latest curve. So our leverage is lower. The more challenging situations are the deals that we underwrote a couple years ago. Still really, really good companies, but they're just over levered. They were done at seven plus times EBITDA, and by the way, a highly adjusted EBITDA. So the risk there is companies are struggling with meeting their interest or fixed charges, and what we do there is we have those conversations with the sponsor. We're way ahead of it. We do a deep dive. We've done a liquidity analysis on all the 480 companies in the portfolio. How much cash do they have on hand? What's their revolver availability? How much cash is coming in, going out? And the liquidity risk is actually quite small, but we're having those conversations with the sponsors way in advance of them running out of money, them defaulting on a covenant with the idea they own the business. So they should be right sizing the capital structure. That means they inject additional equity. M…

AI assessment note: “there's certainly financial risk that is more acute today in our portfolio companies”

Q What was the path from being a loan officer at a bank like Heller to what became an asset management business based on private credit?

A I'll give you the story of how we ended up at Antares. So we were at this very large finance company, and Heller, we were part of this small group that was doing sponsor cash flow lending. They were a big asset-based lender. They were a factoring business, and one of the individuals in our shop, a guy named Barry Shearer, had the idea that why don't we take our business and go do this on our own? And that's all we'll do is sponsor cashflow lending. It will own a piece of the business, and I think sponsors will love it. We'll make the credit decisions. So it's an interesting story. Barry ran it by a number of us, and we were all very interested, but obviously to get started in our business, he needed a lot of capital. So he ran the idea by a close friend of his, a guy named Shel Lubar out of Milwaukee, And Shell was a very wealthy individual. He was talking to Shell about potentially investing in the firm. Unbeknownst to Barry, Shell said, hey, I'm on the board of MassMutual, and this is something that they may find really appealing. Let me set up a meeting. He set up a meeting, and within a month, we started Antares Capital. So it was a very, very quick process with MassMutual in terms of getting it approved, and they initially backed us with a billion dollars, and we owned the company with them.

AI assessment note: “within a month, we started Antares Capital... backed us with a billion dollars”

Q So over those, call it close to 20 years since you started, you go from one billion to 12, two transactions, syndicated market. What did the market for what you were doing look like seven or eight years ago when you did that sale to CPP?

A You were hearing some people call it private credit, but still, it was nothing like it is today, and as you know, the market's been growing at double-digit rates. It's expected to grow at double-digit rates for the next five years. You still had some banks around, and what I would say, some of the smaller middle market players had more of a presence back then, so Madison, BMO, it's now known as Apigem, Aries and Gala were around at that time when we started. All Rock slash Blue All really was not even around at that time. So the market has grown exponentially over that eight year period. So I'll give you an example. So CPP bought, let's say, 12, thirteen billion dollar balance sheet. Today we manage sixty four billion. So just to give you a sense of the growth over that time period, And the balance sheet doubled in size. The asset management business that was essentially nothing at the time of the purchase, that was basically a startup, is now significantly larger than the balance sheet.

AI assessment note: “You were hearing some people call it private credit, but still, it was nothing like it is today”

Q Why don't you take me back to how you got started in the credit world?

A I was the son of two educators, so When I chose a college, I chose University of Illinois. My parents were both big fans of smaller liberal arts colleges, so they weren't a big fan of me going to Illinois, but they said, hey, if you're going to go to a big public university, you're not going to go straight into business. I had been fascinated with business since I was a little kid, was focused on the stock market in second and third grade, a little unusual, but they said, hey, if you go to University of Illinois, you're going to get that liberal arts background, so I majored in In economics. So I took a lot of the liberal arts classes, but I also took finance and accounting, was really, really interested in finance and economics in particular. And I spoke to one of my father's friends who is a very successful business person who said, you should really go work for one of the banks in Chicago. They spend a lot of money on their training programs. You're going to learn about a lot of different companies, and importantly, you're going to learn about credit. So I interviewed and ended up getting a job with a bank in Chicago called American National Bank. It was part of First Chicago, and it was the fifth largest bank in Chicago. Great training program, and that was the starting credit.

AI assessment note: “ended up getting a job with a bank in Chicago called American National Bank”

Q When you have that broad of a mix of businesses, how do you integrate what's happening in the economy through what you're seeing in the businesses with some of the decisions that you're making?

A So it's a combination of investment committee that's making the real time decisions on deals and our executive committee. Our business today is a 24 seven business. Originators and the investor front end folks are constantly providing us feedback on deals that are happening in the market. Particularly, let's say we lose a deal. So we're learning of the terms of that deal Were you acting real time? Hey, was that an anomaly? Is that maybe some new lender in the market just trying to gain share? Or has the market really moved that much? That's on the investor side. We have a portfolio of 480 companies, so we're able to see what's going on in a bunch of different industry sectors. That makes us much better investors on the front end because so many of these companies that are coming in, One of the first things the team does is look at comparable companies in our portfolio to see, okay, what is revenue been growing? What are margins? What's CapEx? So that helps us make informed decisions. And then at our executive committee level, it's a combination of talking about just competitive dynamics, fundraising, what's changing in the environment. So investment committee meets three official days a week. They typically meet five because there's deals that pop up. Our executive committee meets once a week, but we're talking to each other every day, because we have to, to provide each other …

AI assessment note: “look at comparable companies in our portfolio to see, okay, what is revenue been growing”

Q Which two people have had the biggest impact on your professional life?

A So I mentioned at the beginning that my parents were educators, so I really needed to learn the business side from someone else. My aunt was a very successful businesswoman. She was a CEO of a very large hospital in Chicago. So she was around us quite a bit growing up, constantly talking to me about the stock market, talking to me about what the census was at her hospital that day. What is the challenge on the insurance side? Challenges with her management team. So she really helped me in terms of classes to take in college, jobs out of college. When I told her about Antares, she's like, do it. Jump on it. Opportunity like this may never come along again. So it would be her. Her name was Sheila Line. And then secondly, it would be my partners, the original group from Antares. Because once again, We never could have done what we've done without having the whole group together, challenging each other, bringing different strengths to the table, so I wouldn't be in this position today without that team.

AI assessment note: “So it would be her. Her name was Sheila Line. And then secondly”

Q Up until the last, call it, year and a half, there was just an abundance of capital and deals getting done, and obviously the boom in private credit. As you're going through that period of time, how do you think about where you're a price taker and where you're a price maker?

A There certainly were periods of time, Ted, where from a relative value standpoint, you look at it and you just say, wow, the competition out there, we knew about a number of lenders that had pulled back. They were short on capital. You're very aware of what's going on in the market. You begin to hear those types of things. You're surprised to see that, hey, someone else isn't showing up on this call. They're not competing for the deal. So in those cases, you look at it and you say, wow, I think that our pricing on this deal can be 50 basis points higher than it may have been, 75, a hundred basis points higher than it may have been in a very hot market. And I hate the term price taker, to be honest, because if we don't feel or believe that the pricing on a deal, the risk rewards in line, we're just not going to do it. So I look at it and say, we're going to make that decision on each deal that we're doing, and on some deals, yes, the market's moved up, there's less competition, we're going to receive some enhanced pricing, so is everyone else that's doing that deal.

AI assessment note: “I hate the term price taker, to be honest, because if we don't feel”

Q So as you start to see at least some of these subsectors that have some issues, what's the state of your conversations with the sponsors today in terms of shoring up those businesses?

A They're not fun conversations, but we've been doing this with them for over 20 years, so probably 90% of the cases that we're dealing with today, we've done this with the sponsor in the past, so it's, hey, We're looking at it. Looks like you're going to have a liquidity problem in two quarters, or it looks like you may trip a covenant. Let's get in front of it. What are you thinking about doing? Does it make sense to bring an advisor in to review the cashflow forecast that the company's producing? So it's a lot of back and forth. And most of the time we get to the right place, but we don't get to the right place on the first one or two calls. So it takes a while.

AI assessment note: “They're not fun conversations, but we've been doing this with them for over 20 years”

Q So in this marketplace that's changed so dramatically, when you're talking to a company, how do you differentiate yourself from your peers?

A I talked first, Ted, about the sponsor, because more of the sell for the financing is with the sponsor than it is the borrower, unless the borrower's already in our portfolio. So with the sponsor, in many cases, we've known these private equity sponsors since the sponsor started the company. We're now 27 years in business, so many of these sponsors, we were around when the firm was founded. We've worked with them for many years, We've worked through difficult situations with them because not every deal goes the way it was originally intended. So they've spent time in our credit advisory group, AKA a workout group. We've had very difficult conversations with the sponsors, but that's actually further enhanced our relationship with them. So that's one thing. These sponsors know that we see the vast majority of deals in the marketplace. We're really responsive. They know that we're going to be competitive when it comes to the multiples and the basically the leverage we're willing to provide and the pricing. And then also how much can we hold? So a lot of it is the consistency. We've been doing it forever. Our reliability, it's a huge thing. And it sounds so simple, Ted, but if we say we're going to get there, unless there's something crazy that pops up in diligence, we're going to get there and we're going to get there on the same terms. That we had originally outlined. So I think …

AI assessment note: “a lot of it is the consistency. We've been doing it forever. Our reliability”

Q What are the attractive use cases for a sponsor to take a NAV loan?

A A sponsor may just want to inject capital into one of their businesses. Maybe they don't want to do a capital call. I think that is what is going to be used for most of the time. I guess some of them are used as a dividend, but I think most of the time you're going to see that as a use at one of their portfolio companies. People are like, oh, but isn't it leverage on leverage? The way we would underwrite a deal like that is we want a diversified portfolio. So let's say the sponsor has eight to 12 companies in their portfolio. They have a valuation ascribed to each of those portfolios, but part of the underwriting process on our side is getting comfortable with what we really think the equity value is. So you're valuing each company, subtracting the data. Here's the equity value So you have a diversified, a number of companies, and then you're, let's say, loaning 25, 30% of the equity value, and importantly, you have triggers to get paid back. Once a company's sold, pays back the loan, or you can opt not to get paid back. So I don't think it's high risk. I think it's actually a very good business, and I think there's a pretty significant opportunity there.

AI assessment note: “A sponsor may just want to inject capital into one of their businesses.”

Q What happened with that business in terms of its size and scale over that first decade?

A So I'd start by saying sponsors loved the idea that their coverage person was in many cases sitting on the investment committee and owned a piece of the firm. I started covering the West Coast, and it was a time when there were a lot of middle market private equity sponsors that started On the west coast, particularly in San Francisco in the mid to late nineties. So Antares resonated with a lot of the sponsors. Now we were still competing with our prior firm Heller Financial, and I would argue Heller was number one in the market. GE was probably number two, and we were number three. What happened along the way, which was hugely beneficial to Antares is that we started the company in 96. In 2001, GE acquired Heller.

AI assessment note: “Heller was number one in the market. GE was probably number two, and we were number three.”