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Josie Shillito

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

Debt advisors are playing a more important role than ever in the private credit world, particularly as businesses and sponsors battle high interest rates, cost inflation and low growth.

But as the advisory service provision has grown, a cookie-cutter approach to clients has taken root. Industry veteran William Allen, founder of UK-based debt advisory Marlborough Partners and, more recently, Newbrook Capital Solutions, talks to 9fin about debt trends now versus then, and how it’s more important than ever to put some skin in the game.

1. You launched Newbrook Capital Solutions debt advisory to provide something different to the market. What is that?

I’d say debt advisory has lost its charm and lenders have been increasingly viewed as a commodity. Furthermore, many advisors have reached a size where senior resources are spread thin and execution typically sits in the hands of less experienced team members.

Newbrook is about partner-led execution of bespoke capital advisory solutions where only the strongest and most appropriate lenders for any given deal are approached and always treated with the respect that they deserve.

2. And your model is quite special: you not only advise, but you co-invest in the equity of that transaction. Can you tell us more?

Our model sees a meaningful percentage of our fee offered as an investment in the transaction’s equity funding, topped up by further co-investment from us on a deal-by-deal basis where appropriate. 

We are, of course, happy to provide capital structure advisory without co-investment, but our clients appreciate our offer of an equity participation.

3. How does this 'skin in the game' approach help with the alignment of incentives?

In simple terms, we also become a borrower which aligns us with our client and the management teams they are backing. We believe that the eventual lenders will also take significant comfort that we fully buy into the appropriateness of the capital structure negotiated.

It also enables us to incentivise our team differently over the long term which will serve as a great retention tool in a market where junior staff retention in the larger firms has become a major problem.

4. Would you say you're in the minority in aligning yourselves with your client in this way?

Unquestionably, yes. The fee arrangement in debt advisory is a 100% cash fee typically calculated as a basis points charge on total committed debt facilities raised.

The fee encourages the advisor to always look to maximise debt and, as it is paid upon completion of the financing, there is zero linkage to the underlying performance of the transaction and how the financing may affect it — with only the adviser’s reputation on the line.

5. We're living through some extraordinary times. What will be the main challenges for sponsor- backed businesses in managing their debt?

Over 90% of current private equity investing follows a buy-and-build strategy. A platform is acquired for a full enterprise value multiple, and value is created through add-on acquisitions at more modest multiples with the arbitrage upon exit of the enlarged group generating a large chunk of the return.

Such a strategy requires access to ongoing debt capital through committed acquisition facilities — therein lies the problem. There are many over-leveraged and also possibly unhedged lending structures out there that have been caught out by the rise in base rates. 

Absent new equity injections from owners, or the raising of non-cash pay Holdco facilities (either in the form of debt or preferred equity) to deleverage these structures and recharge CAFs to facilitate a return to buy-and-build, these debt structures, if unchecked, will lock down growth. 

Lenders will likely view the unlocking of these structures as firmly the responsibility of the borrower.

6. Stress in the private credit world has been broadly under wraps. Do you expect to see signs of the bolts coming off in 2024?

The unrelenting burden of high interest rates on unhedged (or under-hedged) borrowers with pre-2023 leverage levels, absent rapid rate cuts, is likely to result in many situations coming to a head as we enter H2 2024. Lenders will no doubt seek a borrower-led solution to the requisite deleveraging, comforted by the equity still underpinning the high value platforms they are lent into.

As evidenced by distributed to paid-in capital hitting a historic low in 2023, recent vintage funds in which many of these assets are held will likely be facing these dynamics, resulting in a generally lower level of equity funding having been held back versus demand for it.

Absent third party solutions, I expect a number of assets being transferred to lenders.

7. What debt solutions will become more prevalent?

There are a large number of non-bank lenders that have specific credit strategies to provide non-cash pay Holdco, preferred, convertible or straight equity solutions that can provide the deleveraging. 

No doubt some GPs will also look to take on minority investors as an alternative, with the proceeds used to bring down cash pay debt in conjunction with a recharging of committed acquisition facilities.

The prevalence of GP funding solutions will also increase, specifically NAV financings that can provide liquidity to GPs to address underlying portfolio company liquidity demands. I also expect continuation vehicles to play a role.

8. And what approaches are becoming more outdated?

Amend and extends — there is much less lender appetite for them and they don’t really address the root cause of the problem. Equally, I doubt whether many private debt funds will have the appetite to help a competitor fund out of a problem by providing too many replacement capital structures to refinance them.

9. You've spent 28 years in financial services. What's the oddest macroeconomic period you've worked through (excluding the present moment)?

No doubt the GFC of 2008. It didn’t take long for many portfolio companies to default on their then covenant-heavy borrowing structures as the recession bit.

As a market largely dominated by banks, many businesses were taken by impatient lenders and their myopic workout groups. 

It’s worth remembering, however, that loan documentation was very different back then so there was little a borrower could do to remedy the situation, not least because, unlike now, there was a complete lack of alternative capital to provide the much needed liquidity that businesses so desperately needed.

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9Questions — William Allen, Newbrook Capital Solutions — Taking skin in the game

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