Hello and welcome to the second show.
Brooke podcast, I'm your host, Nicholas Neverland the editor of
Real Deals. And on today's program we will
be discussing how the emergence of unit.
Ranch has transformed acquisition Finance markets over
the last five to ten years and what this means for the future
over less than a decade unit. Ranch has grown from a quirky
debt offering provided by a few New Market entrants into the
financing. True of choice, for the majority
of mid-market deals. You need to transfer lenders.
Ripped up the acquisition Finance rule, book shedding the
need for amortization and certain covenants and
simplifying Capital structures through.
The provision of one piece of debt at a single price point, it
is help direct lenders to Hoover up market share from the once
dominant High Street Banks and open up the market for a new
generation of debt funds and Challenger Banks to help
understand why you need tranches.
Been so disruptive and why sponsors have Takin it up.
So readily. I'm joined by two guests.
Jayne Murray leads, the unit. Raunch offering a chore
brookbank. Jen has worked in the leveraged
and acquisition Finance market for more than a decade and held
senior Financial sponsor facing roles at RBS, and Clydesdale
before, joining Sherbrooke to launch, its unique trans product
earlier, this year, since launching the author Jane has
already closed her first three Deals, providing Finance for
transactions back by alcuin Kangal.
And most recently, Rutland Partners gin we go to the It's
the reasons for launching a bank, LED unit, Ranch products a
bit later, but before we get there, I wanted to ask.
If you could just sketch out, how you neutrons developed in
the first place, and what its impact has been on the wide
acquisition Finance market for both Financial sponsors and
indeed lenders. So I think the emergence of you
know, trying to really started just after the financial crash.
2008 2009 there were obviously big teams sitting in the
clearing Banks doing leveraged Finance.
There was a definitely post-crash Retrenching by those
Banks Banks, that started to become a lot more picky around,
for example, which sectors they were willing to play in which
sponsors they were willing to back.
And at that point you had a number of credit funds in the
market with significant money to spend and to deploy and looking
for you know, decent returns, they looked around the market
and obviously saw the opportunity not just to do
perhaps what, they previously done, Junior debt, or a bit of
mess. But actually to go in and
wholesale start financing, stop financing businesses, it very
much disrupted. The market, they came in and
decided to do the end to end piece.
They obviously funds have very different touch points and
different sensitivities to the banks.
For example, they want to get Lenten stale and so the unit
Ranch product, really suited them and and equally, you know,
the banks for a time, really struggled to compete.
These guys came in and really change, change the game.
I'm Also joined by Katie mcmenamin, who is a lawyer at
Travis Smith, I'm Katie has been with the firm for nine years
where she qualified and she's been working in the finance
team, wish, advisors both lenders and sponsors on
financing packages for mid-market, private Equity
deals. Katie is lovely to have you
here. If you had to look back at the
private Equity deals, you've worked on over the last year.
What percentage would you estimate Heather, unitron
structure. And to what extent would you say
all structures? Now, mimic you need tranching.
Respect. Hi Nic, nice to be here.
The answer to that question, probably depends on which heard
of end of the the mid-market you're looking at.
So, definitely the upper end percentage-wise.
You're looking at sort of 60 70, % unit, Ranch deals, and
probably a higher percentage than that.
Have some feature and that mimics any chance whether that's
a non amortizing, tlb kind of like of loose type terms, which
are more akin to this. Out of uni chance package at the
sort of lower end of the mid-market and there's a much
lower percentage of what you might call unit Ranch deals.
Having said that, all of those sort of borrow a friendly, kind
of lose, count of light. Type terms are starting to
trickle down and even into sort of Club deals populated Steel by
the clearers. And we're seeing sponsors expect
to achieve those types of terms and even on the smaller deals.
So unit, ranches touch. The whole of that sort of,
mid-market space. And there's any chance features
even in deals that aren't styled a sort of straight, uni, chance
packages. So it varies, but it's
definitely, it's definitely changed the space and over the
last five years, okay? Really interesting.
Thank you. Katie.
And I really want to just dig in to where the market is now and
how could evolve in the future gen.
I suppose an obvious place to start is with is with your new
project here at schaberg as a bank lending.
What was the thinking behind launch?
Being a unit Ranch product, which I suppose would normally
be associated with with the fund offer.
One of the challenges we face when we first thought about
launching a product and a leveraged Finance space.
And mid-market was, you know, how do you possibly
differentiate yourselves there are say 150 debt funds out
there. There's all a clear is that
still very active? How do you do something
different? And I guess, where we saw the
opportunity was this Katie's touched on particularly in the
lower bin Market, things are not quite so quickly.
Shh. And there seems to be a bit of a
gap where perhaps sooner, some of the debt funds don't really
get out of bed for less than, you know, 15, 20 million
tickets. And yet you have some of the
clearers who would have appetite in that space.
But the process of actually lending money hasn't changed
dramatically in terms of delivery in the last 10 years
bluntly. So we saw an opportunity to
really bridge, the gap between what the depth runs are doing
and what the clearing banks are doing both and Terms of what we
offer, offering the unit, orange bullet style, debt that the
funds can do, but equally being able to offer all of the
flexibility that our bank might more typically do.
So, for example, working capital facilities, capex, facilities,
accordions. And, and really, provide a bit
of a One-Stop shop for that end of the market.
And in terms of delivery to, you know, we're relatively small
bank, and I think being able to deliver in a way that's a bit
more. Like a fun do something that not
many people are are doing. So we try to take advantage of
the fact, we have a small lines of communication and experienced
people on deals and, you know, can it can basically deliver a
bit more like a fun Pooja - what are your observations on that?
And was it surprising to see a bank position there?
They're offering this way or do you think this could be, you
know, the beginning of even sort of the bigger High Street Banks
starting to go along the similar.
Something going down a similar path.
Path and and almost reformulating their product to
be more unit, Ranch like that even.
As now as gen touched on earlier, there definitely was a
time when the clearers were starting to question where they
sat in the market and credit funds are able to write big
checks and at high-end average levels, and some High Street
Banks were starting to question whether their role was being
reduced to super senior RC F as a relationship.
Lend, I think we've seen all of the She Bangs do a really good
job of sort of fighting back if you like and and modifying their
offering. So that they take what what the
sponsors might see is the sort of best features of the credit
funds and mold that together with what they need from a from
a day-to-day High Street. And then do, whether that's
ancillary facilities, whether that's relationship, banking
things that for credit funds are perhaps more difficult to
deliver just because of the way they're set up.
So I wasn't surprised to hear Sherbrooke protect an offering
that basically summed up that that change in the market that
we're seeing High Street Banks. Look to give their sponsors, the
best bits of the unit Ranch offering combined with what they
need from their sort of day-to-day relationship lenders.
Really interesting case, you're not, that's wanted to follow
that up with another question to you and your, how far can they
actually go given the sort of various regulatory obligations
that they are? And you know, if we look at the
market, more broadly, how flexible can a bank be when
compared to a fund and at what point do the bank stop bumping
against red lines that maybe the funds don't necessarily have?
I think it's a really interesting point and and I
suppose it depends what you mean by flexibility and want to
sponsor thinks of as as valuable flexibility definitely High
Street Banks and clearing banks are going to have to Consider
their regulatory obligations obligations in a way that is
different for credit funds, maximum.
Leverage levels, focuses on things, like difficulties in
giving portability needing Financial covenants.
Needing maintenance covenants, as opposed to incurrence based
controls. They always going to be things
that for credit teams in banks are and remain important.
And I think leverage team, certainly the mid-market have
done a good job of Challenging that internally where they can
and I'm gaining flexibility for sponsors, where it makes sense.
But I think they are always going to stand apart from credit
funds. Who can write very large checks
and at very high leverage levels.
And probably in the in the upper mid market and large-cap Deals.
Credit funds will continue to dominate because they can they
can do away with those types of controls which for the much
larger deals are going to be really important for sponsors,
what the High Street Banks and providers.
Chewbacca doing a good job of is and focusing.
This once as Minds on do you need those types of
flexibilities on this deal and or on this deal?
And is the package for offering actually giving you the
flexibility you need with the added benefits of some of the
relationship side of the banking relationship, which were some of
your smaller deals, and smaller. And investi companies might be
more important in their growth story, okay?
Really some really interesting points their cage and maybe
Jennifer Just come back to you on that same point your response
to what? What?
Katie's observations are about how a you as a bank have have
been able to build a unit Ranch offer at the same time as
respecting the you know the red lines that you obviously have to
be cognizant of sure. I mean I think you're never
going to get away from the fact bluntly that banks are probably
always going to need perhaps, you know, two covenants for
example in a transaction, where a fund might need one that looks
and feels more like Maintenance Covenant, but that's quite a
simplistic view of what flexibility means to a
management team in a growing business and ambitious
management team in a business wants to grow and, you know,
needs investment from the sponsor what they're really
looking for. I think is flexibility and
responsiveness from their Landing partner.
So something that may look, you know, a little more flexible on
day. One is that ultimately more
important to them than being able to pick up the phone, Any
day of the week to a bank, to request an increase in, for
example, of working capital facility or a little bit more
money for capex as a business involves, and being able to have
that kind of live conversation. Certainly from our perspective,
rather than focusing on particularly, you know, the
wording sort of having arguments about everything in the document
that's done on day one. What we're trying to do is be a
much more sort of supportive ongoing flexible relationship
that can support business through.
Three to five years. One of the criticisms of
certainty that the bigger Banks is that they have been very
cookie cutter in their approach and you are the tick, the box,
or you don't as that be in an area where you've been able to
perhaps take a different approach as a as a challenger
bank and and look at each deal on its merits, take the sponsor
behind the deal in two accounts. Yeah, I mean just any
observations about how you've looked at those questions as a
way to deliver the flexibility that we've been speaking about.
Certain Out. And about in the market, when
you talk to sponsors and the conversations we've had, I think
we're all in the same boat to an extent and that everyone's
looking to perhaps find the less obvious steel or investment
opportunity. And, you know, with those
opportunities, as sponsors, for example are spending a lot of
time thinking about how they go in a region, eight deals that
aren't cookie cutter auction processes, and inevitably with
those many of them at this end of The market are owned and
managed they may have had a blipping trading.
They may be in a sector that isn't as you rightly say, maybe
a bit of a computer says no for a bank.
But if you know if a sponsor can bring a lot of operational
expertise to bear and they are prepared to invest the time and
really understand the story behind that business.
The think about how they can, if not turn it around and really
sort of turbo boost the growth over the next three to five
years whether that's yeah Acquisitions or organic growth.
And I think there's a bit of an opportunity for us to actually
sit alongside that sponsor and really try and spend some time
getting under the skin of that story and support that.
And I think it's probably fair to say, you know, of the three
Deals we've closed. You know, one of them has some
links to, for example, the oil and gas sector, which may be a
bit computer says, no, you know, the Rutland transaction requires
quite a lot of capital investment over quite a long
period of time and with both of those transactions, you know,
We've really spent time with sponsors and if perhaps, they
are, you know, not transactions. That would be obvious, slam
dunks, but we've managed to get comfortable with them.
That leads us, nicely onto to question.
I had about differentiation and take you.
There are so many providers in the market right now.
It seems that there's a new debt fund launching almost every
week. They're obviously, all fighting
for the same deals. Is it realistic for Linda to
even try and stand out from the crowd and when deals with Stop
being the one that is having to put out the cheapest package on
the weakest terms. So I think it's a really
interesting point there, definitely is a DOT of dry
powder. In terms of credit funds,
ability to deploy cash and in the market.
And they are inevitably putting pressure in terms of pricing and
leverage levels on providers across the market.
And there definitely is as you'd expect from sponsors a focus on
achieving the best terms in terms of.
Comentary terms on all of their deals.
Even when when we're looking at sort of the lower end of the
mid-market, having said that, I think some of the traditional
providers along with some of the newer credit funds have been
quite inventive, in setting themselves apart and on indices
other than pricing, how big it a check, they can write and and
they've identified that to sponsors there are other things
that are important. And so what Hear from a lot of
our sponsors. Our clients even when comparing
debt packages from different providers is that extra turn of
Leverage may actually not be the most important point for them.
And a few basis points may not be the deciding factor when
choosing a provider to go with. Actually it may be the strength
of the relationship with that provider and having a known
quantity in terms of their lender, actually provides a lot
of comfort to sponsors and they do.
Want a diversity of lenders across their investi companies
and they want people who they think they can rely on to be
there for the businesses, not just now, but through the
lifecycle of of the business, but also through the credit
cycle, then when you were formulating, the, the offer here
at Sherbrooke was that sort of front of mind for you.
The fact that this is a very crowded Market, there's a lot of
choice for for sponsors out there.
And did that thought you in any way inform the way you have set
up, Peel your offer to the market.
Absolutely, I think the big challenge for us was, how do you
take the Best of Both Worlds? How do you take the best of what
it means to be a fund in the best of what it means to be a
clearing bank and try and bring something a little bit different
to Market? How do you think about it
differently at the end of the day?
I guess you know the challenge for us is we've launched
something that feels a little bit different, feels a bit
unusual in terms of this One, Stop Shop offer but actually
anybody can come along and in 24 hours copy that Product, they
can copy the W and then it really comes down to, okay, how
do you deliver it in such a way that you have something that's
sustainable that you can build on and that really delivers to,
you know, not only the sponsors but management teams what they
actually need and want. And I think you know, some of
that obviously comes down to things we've already touched on
speed of delivery, quick decision-making.
Just frankly, you know, doing what the funds do really well
being on the end of the phone 24 hours a day.
If you need to be, I'm giving quick answers.
It, giving Clarity into Ability quickly.
But equally, you know, once the transactions done having local
presence, boots on the ground, you know, having that ongoing
flexible close relationship and that responsiveness and that,
and that's where it feels like. Hopefully there is a chance to
do something different to get away.
From the classic stereotypes of, you know, you're very formal
Bankers in bowler, hats who move very slowly.
And and I've been one and equally, you know, funds who are
very good. Good at what they do tend to be
on the end of a phone, but perhaps, when ideals don't, you
know, as involved. So really trying to create
something a little bit different is is the challenge.
But you know it feels like there's a gap.
And if you look at the fact that I guess we started in January
and we've closed three Deals already and have a pretty busy
pipeline, it feels like there is appetite in the market for
something a bit different. Okay.
One last question to you both and it's a more general question
about the wider state of the market.
Katie. Maybe, I'll maybe I'll come to
you first on this one. We've just discussed how how the
market has become very competitive at cetera.
D think that lenders are pricing risk appropriately when the
market is, is indeed. So saying to mediate and so
competitive, I guess it can be a race to the bottom.
In some respects. Is there anything anything we
should be worried about? I think, as I say, I think
lenders have actually taking a step back and thought quite
carefully about the direction of the market and what all the
competition means and what we're seeing in terms of new entrants
and particularly on the, on the credit side is rather than
focusing on on being able to necessarily write the biggest
checks or provide the most competitive terms in terms of
pricing and actually, they've sought to set themselves apart
by having a particular strategy. So whether it's sector focused,
whether Part of the market size of deals, we've seen credit
funds, not dissimilar to Sherbrooke strategy, focusing on
that sort of lower end of the market.
And I think that is all a response to people being
conscious of the fact, particularly of where we are in
the credit cycle and particularly in the UK with all
the uncertainty that we're facing that purely a race to the
bottom in, in terms of price and terms is, is potentially, not
the best way to return value to anybody's investors, I think.
Us have been thinking carefully about the deals they're doing.
I think whilst there is a lot of competition for a lot of deals.
I don't think we're quite seeing the heady days of perhaps
pre-2008, where you might question.
Whether credit decisions and pricing points wearing exactly
the right place. And I think people are still a
little bit more reticent and thoughtful when picking their
deals. Jen, what are your thoughts?
Well, it's interesting. It's an interesting challenge
when you're setting something up from Scratch particularly in
something as binary is leveraged Finance, because let's be
honest, if something goes wrong, you're probably going to lose
some money and that you could, you know, employ a lot of time
messing around with pricing models and perfecting them.
But at the end of the day you just need one or two to, you
need to get it wrong once or twice and if it's one of your
you know, first six deals you have a big problem.
So I think it's you know, again sort of coming back to some of
what Katie said for us it's Much more about actually really
understanding if it is something a little more complex or a
little more quirky, how do you align your interests with those
their sponsors? Because, you know, their minds
are going to be very much focused on their own returns.
How do we make sure we're we're really in it together.
We understand you know, if something goes wrong how will
they work with us to correct it or to get over that bump all of
these things or four more important to us frankly than a
than a headline? Ice.
Because at the end of the day, you can put an extra sort of 25
Pips on a margin. But you know, what's the, what's
the weight of equity behind you? What's the desire to see this
business grow and succeed? You know how incentivized and
management, how incentivizes a sponsor, how significant and
investment is it for that sponsor.
These questions are exponentially more important to
us than a headline price. Jennifer, Katie.
Thank you very much. It's been a real pleasure
speaking to you both, and to all the listeners, thank you very
much for your time. Think we'll wrap it up there.