1) How have you navigated last year’s volatile markets?

Largely by being prepared. Very early during the Coronavirus days, the firm set up regular meetings to monitor the health of all our portfolio companies (“PCs"). We remained sensible on leverage levels across our portfolio and worked hard to ensure we had as much liquidity as was practicable to weather a potential storm.

In late 2021, we took the decision to hedge interest rates at very compelling rates for a significant number of our PCs, with the expectation that central banks could be more hawkish than initially anticipated. We also continued to assist the entrepreneurs and managers of our PCs as well as their teams with hands-on support from the entire IK platform (Investment, Operations, Capital Markets and ESG). Notably, this meant that, on some occasions, we provided full equity funding for add-on acquisitions in companies where we believed they made strong strategic sense and financing was difficult to come by.

2) How did the difficult financing environment last year affect deal flow and opportunities?

It has an undeniable impact on deal flow but it has not ground to a halt and it differs significantly depending on the size of the transaction.

In the large cap space, the understandable reluctance of banks to underwrite transactions has had a clear impact on the ability to transact and whilst private debt has enabled some buyouts, it does not have enough dry powder, nor the will in some instances, to substitute for syndicated markets. Conversely, we have seen large corporates, in particular those rated IG, fill the gap left by sub-IG acquirers.

In the small and mid-cap space, it is fair to say that liquidity remained relatively healthy as this particular segment of the buyout industry does not typically rely on syndicated debt, but rather on less volatile direct lending or traditional bank financing. Although of course, no asset class lives in isolation and terms and conditions have evolved substantially.

3) Where do you see the balance between syndicated financing and private debt at the moment?

Capital markets were virtually shut for most of 2022 and so private debt has been gaining significant market share, in particular, on larger transactions albeit within a smaller pie given the subdued activity levels. There are a couple of developments that are interesting to see though.

For example, the clear pivot from large-cap private equity funds to this asset class, the increasing tolerance of direct lenders to facilitate the formation of clubs and finally, a defensive move from banks to either establish standalone revolving credit facilities or participate in both undrawn commitments and unitranches for credit-worthy borrowers. And so, there is a marked convergence between these various categories of buyside investors and sellside players which is likely here to stay — even after markets re-open.

4) How do you expect IK and its peers to cope with the refinancing requirements in 2023?

We do not have a sizeable maturity wall in the next 24 months as our portfolio rotates and hence is fairly young. We have refinanced or extended maturing facilities where it felt appropriate to do so. We see with other companies that there are some refinancings and amendments that are taking place right now, on the back of a more constructive market backdrop. This shows that a few borrowers and issuers were prepared to go to market as soon as the opportunity arose.

Naturally, these are being executed at substantially higher yields and some of them will require shareholders to commit a degree of fresh equity to clear. There are also some that will probably fail in a less benign economic environment and with cash flows coming under strain from underperformance and significantly higher interest charges.

5) Are the banks supportive in terms of RCF / LoC / TLA refinancing?

As mentioned earlier, we have witnessed a significant paradigm shift as it pertains to undrawns and banks have been selectively participating in revolving credit facilities and sometimes even unitranches. It’s a defensive move that allows banks to be close to the borrower and the shareholders whilst capital markets are inaccessible.

6) How do you anticipate valuations will move this year?

Not too dissimilar to what we are seeing in debt, a bifurcation can be expected with a flight to safety, which will ensure that leading companies will continue to attract capital and the rest may struggle to find investors unless the valuations are appealing enough for them to lean in.

7) Do you think it’s worthwhile for sponsors to buy up their own debt cheap?

As often is the answer, it depends.

If the issuer has ample cash on its balance sheet and believes its debt trading levels are unjustifiably low, it could make sense. Otherwise, it’s of little help parting with precious liquidity and having to potentially raise new debt that is significantly more onerous than the one it replaces. As for the sponsor, at current trading levels, but also during the last dip, it is hard to see yields that are in line with expectations limited partners typically have from most of their general partners, but also quite simply enough liquidity and willing sellers. Or if there is, there may be a good reason for that. If we were to see further deterioration though, the maths start to add up.

8) Does IK see value in P2Ps and carve-outs this year? Do you expect activity in that space?

Quite a few companies are under pressure right now to de-gear their balance sheet so carve-out activity can be expected to pick up as borrowers rely on asset disposals to shore up their finances. Stating the obvious, public-to-privates tend to become more attractive when stock markets are suffering, and most investors will indeed be on the lookout for potential opportunities. And we can expect some of them to materialise. In some sectors though, the premium required for a take-private to be successful remains substantial and still involves quite a bit of uncertainty and execution risks. This can sometimes dissuade PE from pursuing this strategy too aggressively.

9) We hear you're a big diver. Where is your favourite spot to do so?

That would have to be off the coast of Amed, in North-Eastern Bali where I did one of my very first dives. There is an imposing shipwreck, the USAT Liberty, a cargo ship that was sunk during World War II by a Japanese submarine and was eventually beached in Tulamben. Not only is it an impressive sight charged with history, but it has also become home to a colourful myriad of small and large fish as well as soft and hard corals. The shallowest part of the wreck starts at around five metres and the current is manageable, so a part of it is actually within reach of beginners. An unforgettable sight!