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9Questions is our Q&A series featuring key decision-makers in leveraged finance — get in touch if you know who we should be talking to!

Kevin Hwang is a managing director within Macquarie Capital’s principal finance group, where he focuses on investing the bank’s balance sheet capital into private credit deals.

Hwang shared with 9fin his experience of joining the bank during the pandemic, in addition to his thoughts on the future of direct lending.

1. You joined Macquarie’s principal finance group in December 2020, right before the M&A and debt issuance frenzy kicked off. What was that like?

Joining a new firm virtually in the middle of a pandemic was certainly a unique experience. There were obvious drawbacks, including the ease of getting to know my colleagues, finding answers to my basic first day questions, and being able to observe the work environment. Fortunately, I knew a few folks on the team already which made the transition easier. Macquarie also has a culture of constantly trying to innovate and improve, so it was no surprise they had fine-tuned processes with healthy virtual norms in place already.

There were certainly benefits as well. For example, virtual meetings made re-connecting with my external network and building new connections for origination highly efficient. These connections proved helpful in hitting the ground running with the acceleration of deal activity heading into 2021.

The ramp-up in dealmaking certainly made it an exciting time to join a growing platform. Macquarie’s capital and flexibility meant that it could make the most of the market opportunity. While it definitely made for a busy start, it was great to be able to quickly contribute and participate in our investment process.

2. The opportunity set for direct lending is growing bigger each year — ranging from smaller sponsor-backed deals, to big-ticket buyouts. What is the sweet spot for Macquarie?

One of the benefits of the Macquarie platform is the flexibility of our capital. With no strictly defined investment mandate, we can invest across the capital structure in primary or secondary opportunities for sponsored and non-sponsored businesses of all sizes, in a wide variety of industries.

This has proven valuable for our clients, as we can support them with traditional financings as well as more creative capital solutions. If you look across our portfolio of investments, you’ll find many examples where Macquarie is leading or playing a significant role in both small and large financings, as well as cases where we are a smaller participant in a larger club.

From a size perspective, we generally target $100m-200m per transaction but we can and have previously committed anywhere from $30 to $500 million per transaction. However, I would say our sweet spot is more defined by business quality than size. We are probably more selective than our peers, but when we find high quality businesses we like, we tend to be aggressive on leverage and terms.

This approach has not only resonated well with our clients and helped us grow quickly with them, but has also resulted in a well-performing loan portfolio with a realized annualized loss ratio of only 0.2% historically, which certainly helps us continue our ability to support our clients with capital.

3. Given market conditions, we’ve seen a lot of deals fall into the direct lending space that might have otherwise been financed in the broadly syndicated market. How long do you expect this to continue?

This feels like the billion dollar question, and unfortunately I don’t have a crystal ball.

As of early August, banks still have a logjam of billions of dollars of loans they need to syndicate off their books. Assuming no macro shocks to the system (more severe Covid strains, war, etc) and predictions around inflation getting under control and slowing rate increases by the Fed prove to be true, the general consensus seems to be that activity in the broadly syndicated market will pick up in the fall, once they clear through their current logjam. But if those assumptions prove false and the economy enters a true recession in the second half of this year, lenders might have to reassess.

With all that said, as everyone is well aware by now, there’s been a long-term secular shift in the market towards direct lending, particularly as direct lenders have proven many times that we can provide multi-billion dollar facilities. While there will undoubtedly be a shift back towards the broadly syndicated market as market conditions improve, we expect the long-term secular shift to direct lending to continue.

4. Direct lenders are now starting to dial back on risk and raise pricing. How is Macquarie responding to this?

Our business has grown quickly over the past 2-3 years, and so I think we’ve certainly taken a more cautious approach in recent months as we see how market conditions and the economy develop.

We’re still very much open for business and supporting our portfolio companies and clients where we can in this environment, but given the macro backdrop and potential looming recession, we’ve been forced to shift our view on risk/return and increase the bar on business quality for deals we do.

As I mentioned, our balance sheet capital and not being tied to a specific investment mandate provides us great flexibility in times like these. We’ve spent more time recently tracking secondary liquid credit opportunities, as well as evaluating broadly syndicated deals that have backed up in the market where we see good risk/return and can add value as an anchor order.

5. Your previous experience includes stints working at funds, in addition to management consulting. How does that compare to the banking environment?

I certainly had some preconceived notions before I decided to join, but I have to say I’ve been very pleasantly surprised.

I think a lot of that has to do with the culture at Macquarie and within the principal finance team. Macquarie has 18,000+ employees operating in 33 markets across the globe, and yet still it moves with much of the nimbleness of smaller organizations. We make decisions quickly, with broad input to get to the right outcome. Our culture is highly entrepreneurial and values continually identifying ways we can improve and innovate to avoid stagnation.

In addition, we benefit from the broader resources of Macquarie Group, which is a real competitive advantage from both an origination and underwriting perspective. Our link to Macquarie Capital’s advisory business provides access to over 150 senior executives covering both industry verticals and financials sponsors in North America, Europe and Asia Pacific.

6. A growing number of big banks have either launched or are in talks to launch direct lending divisions. Do you think there is room for everyone to compete?

As someone who has watched and participated in the growth of the private credit industry for a while, I’ve seen many new entrants into the space.

There was a time when the ability to write a $200m check was a differentiator. I previously thought there wasn’t enough room, but the private credit market has been a growing one, with secular tailwinds. This has created room for many new firms to participate. It has also coincided with growth in private equity dry powder that needs to be deployed.

Furthermore, not all direct lending platforms are the same, as many private credit firms have specific investment criteria and preferences which reduces head-to-head competition. There’s no question though that additional entrants will have some impact on leverage and terms, which is a positive for borrowers, although Macquarie has been successfully navigating this dynamic for well over a decade now.

7. What do you think is the biggest risk for private credit in a recession?

Private credit has a lot of downside protection. Our loans are more insulated from broader public market volatility, there is typically significant cash equity cushion beneath us, and borrowers are often sponsor-backed which provides them access to long-term committed capital that is accessible in a downturn.

One reason that borrowers choose private credit is that they have a single lending partner (or small club of partners) in the capital structure who can work with them through tough times, who are often incentivized to do so, and who have the capacity to really dig into diligence to understand the issues. It’s not always without friction, but we’ve seen this value proposition during the early months of Covid and throughout the past decade. In return, direct lenders often have much better access to management and sponsors, earlier awareness of any issues to create more time to react, and an ability to influence outcomes.

The biggest risks for private credit are probably more individualized. For private credit firms that have been prudent on leverage and selective on business quality with a defensive portfolio in mind, market dislocation can present an opportunity to deploy capital and earn outsized returns. The principal finance team is a good example of that, having invested over $33bn of private credit capital since 2009. However, private credit firms who have significant credit risk in the portfolio may not weather the storm as well.

8. Macquarie Group’s CEO Shemara Wikramanayake mentioned private credit as an area of growth during the firm’s FY 2022 presentation in May. With that in mind, what is on the cards for your team in 2022 and beyond?

Our team’s credit portfolio has grown significantly to $15 billion in just the past few years, and it has been incredibly positive to see our traction in the private credit market. Our message appears to be resonating well with both new and existing clients, and we’re becoming an increasingly valuable financing partner as we scale.

What’s exciting about the future is we still have room to grow and we’re finding more areas to work together with our advisory business. This is especially true as the value proposition for Macquarie Capital as an advisor in the technology, infrastructure and energy transition sectors continues to expand.

As we unlock those synergies and assuming we continue to make sound investment decisions, we should be able to capitalize on continuing tailwinds in the direct lending sector and drive continued growth and value for our clients.

9. A lot of us had to abandon travel plans over the last two years due to COVID — with domestic and global travel starting to amp up, what is the one place you can’t wait to visit and why?

I would say Australia, given I joined a global company headquartered in Sydney. It’s one of the few parts of the world I have not been to yet.

Fortunately, I have plans to go there in September with the rest of our global team for our annual principal finance conference, which I’m excited about. Since I joined during the pandemic, there are many folks in Europe and Asia Pacific who I would love to meet in person. It’ll be great to connect as a global team.

9Questions — Kevin Hwang, Macquarie Capital

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9Questions — Kevin Hwang, Macquarie Capital

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