CIO: There is a sense—and frankly, I’m slightly skeptical
about its novelty—that we’re in a unique environment for
public markets right now. Is that mirrored in the private
Roelke: Yes, we think so. Broadly speaking, in today’s
environment all markets are seeing more demand than they have
historically. But, particularly given low interest rates, folks are
looking to increase their yields through private debt markets.
TIAA-CREF is, historically, a very big investor in the private credit
markets. We’re attracted to three main things: diversification,
because we can access issuers that you can’t find in public
markets; relative value; and finally—more often than in the public
markets—good structures for your investments that provide
downside protection, in the form of financial covenants and other
CIO : And beyond that?
Kencel: One of the reasons that this is happening now is because
the asset class performed very well through the cycle. It took a
while for that to become evident, but once it did, investors said
that private credit—especially the middle-market asset class—
behaved as everyone said it was going to. Secondly, it became
obvious that it was less correlated to public markets, which have
been very volatile. The great thing about the middle market is that
it’s relatively insulated from those factors.
CIO : Let’s talk about the risk diversification.
Roelke: It is very important in terms of the overall return. This is
because of the differences between a well-structured private debt
investment—which will have a robust financial covenant package
limiting a company’s ability to take on incremental leverage, for
example—and a comparable public debt investment in the same
company without that covenant package.
CIO : So given the demand, and the diversification it brings,
how have the players offering the supply changed?
Like so much of the financial sector, have we seen a sea
Schwimmer: If you think about this global hunt for yield we’ve
been in the midst of, there are definitely some clear themes.
One is a move away from traditional lenders—the large banks—
towards institutional and nontraditional lenders. There are various
reasons for that, such as consolidation, but the fact is that banks,
as it relates to corporate debt, have changed from being in the
“storage” business, to the “moving” business.
CIO: Now to drill down to the middle-market space. Let’s
first define it.
Schwimmer: There are lots of ways to define the middle market,
but for us it’s a matter of EBITDA. We generally consider the
middle market to be companies with $10 million to $100 million,
with the sweet spot being between $10 million and $50 million.
Vichness: And it’s not a small market. If the middle market
were a country on its own, it would be the fourth largest
economy in the world. When you think about the middle
market—that universe of 350,000 companies—you may think
of it as a relatively small niche, but it’s actually a very big
market. They’re companies that are really the growth engine
for the US economy, and are, in many respects, underserved
today by the traditional lenders.
CIO : So the middle market, excuse my pun, is not middling
in size. What makes this a sweet spot in your eyes?
Roelke: The combination of bank consolidation and capital
requirements has made this middle market the province of
nontraditional lenders. Today, more than 75% of lending to
mid-market businesses is actually being done by nonbank
lenders. It’s increased from 25% of the market to over 75%
of the market—and it’s gone that way quickly. The vast, vast
majority of lending to these companies is actually being done
by nontraditional lenders.
Schwimmer: It’s also about the way that the supply of deals
comes to us. The middle market is where companies are
growing; nearly all the employment growth in the US over
the last three to five years has been in small- to medium-sized
enterprises. Private equity sponsors, which always look to help
Middle-market companies demand debt capital. With traditional lenders departing the space, a few
select groups have ramped up their involvement—including the recently combined forces of TIAA-CREF
and Churchill Asset Management. To discuss market dynamics and company culture, CIO Editor-in-Chief
Kip McDaniel recently sat with Ken Kencel (President & CEO, Churchill), Randy Schwimmer (Head of
Origination & Capital Markets, Churchill), Brian Roelke (Head of Corporate Finance Originations, TIAA-CREF), and Shai Vichness (Head of Senior Leveraged Lending, TIAA-CREF).
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