Bloomberg Audio Studios, podcasts, radio news. The perfect person say to talk to us about it choice on set this morning, Ken can Sell.
Lovely to see you in London.
By the way, welcome President's CEO of Churchill Asset Management. Look, we're obsessed in terms of trying to find a narrative here and there's a million things going on. So I'm going to go big picture with you first when we're talking about the volatility in this market and this consumer resilience that just doesn't quit coming out of the States. Is the Nvidia story, Is the FED story? Ultimately at its core just a question of liquidity and when does that snap?
Well, look, you know, I think you know, as we look at the markets, we're seeing a long term trend of rates ultimately normalizing. It's taking longer, right, So we're definitely in a in a higher for longer environment. But as rates normalize, the opportunity for companies to go to the capital markets and raise financing is opening up. I mean, we had the broadly syndicated loan market that the liquid markets essentially closed for the last eighteen to twenty four months,
so you know they've opened up. The Empire strikes back. You know, we're seeing the large liquid markets open for companies. So I think that all bodes well for liquidity, the ability of companies to raise capital, the ability to start investing in businesses, and frankly, the return of M and A activity.
Is that just a function though, of money sitting on the sidelines that has been for years now, it's kind of dipping their toe back in the water, getting a little bit more comfortable here to actively participate in this market as opposed to sitting say on front and heelds or in private equity. And we'll circle back to the alternative story in a moment, But is that what this story is as opposed to real confidence in the fundamentals?
Well, I think you are seeing some confidence returned. You know, we had a reasonably long period there of price discovery in the M and A markets. G Our company's really worth eighteen twenty times cash flow? You know, are we overpaying for businesses? And was the financing markets were they in aberration in terms of funding deals that were made be over levered or or or under capitalized. I think
that things are moving in the right direction. You know, we saw a significant return to normalcy in the financing markets in the world that we live in, which is private credit and private equity. Deal activity was actually quite good in the core middal market, you know, which is the third largest global economy. If you kind of look at the overall US market, we saw a significant resurgence and am an activity, deal activity, private equity coming off
the sideline. So you know, we are for example, our our m and A activity, our deal investing activity was up eighty percent core of a quarter from twenty three to twenty four, and was up sixty percent in the fourth quarter. So we're seeing a gradual return to normalcy against a backdrop obviously of political uncertainty. Well here and in the US.
Yes, I want to come to that in just a moment. But you were just talking there about the deveolp of private equity, and I wonder what the move's like in that sector, because if you can't exit, you can't buy it seems and that we were there for We were there for quite a while, weren't we And now things are changing. I mean, is it just in time for the private equity space?
What's the mood there?
Well, you know, look, I think you've had private equity firms unable to deliver distributions for you know, a reasonable time here, distributions on our private equity fund commitments and our and our co investments. You know, we're down significantly last year, so I think private equity is beginning to come off the sidelines. I think we were coming through a period of price discovery and I think we're you know, we're certain to see buyers and sellers match up in
a better way. So I'm pretty optimistic about the you know, the economic environment, deal environment and emine activity. And as we move through the course of twenty four I think rates you know, will come down obviously slower higher for longer, they will come down slowly, and I think that'll drive better, better investment activity.
You mentioned the link with politics and political uncertainty, so you know, I don't need you to comment specifically on National Grid and its plans. But we've got this bit, this big UK business with a big each you today issuing shares who invest in the National Grid, all about the electroification story here in the UK, and this comes just a day after we had an election called does politics not get in the way of some of this capital markets activity? Is it much more about the rates story.
Now, I think it's more about the rates story, although the backdrop of the political dynamics will increasingly come to bear. I think you'll see the FED back away a bit from interjecting themselves into the election. So at some point in July or August, you'll see the Fed, you know, try to stay out of it and allow hopefully the people to make that decision. But I do think that the underlying backdrop is a move toward normalcy and rates.
I think the new normal will be higher the where it's been historically, but I think, you know, I think businesses and companies are getting used to that, and hopefully post election will start to see some certainty around of our own business conditions and improvement of continuing proven of activity.
One A.
Can you talk about the fact that companies are getting used to the high for longer environment. What's happening inside
portfolio companies right now? Are they really getting used to higher for longer Private equity is very good at financial engineering, and it's figuring out various ways to make the debt loads that some of the companies it has within its portfolio can be managed, and the duration effectively being pushed out to allow these companies to continue to operate if rates stay higher for much longer, are we at some point going to see the end of the road in
the ability of private equity to kind of push that process forward.
So there's good and bad there. So I would say from a portfolio perspective, there are companies that were aggressively financed over the last several years that are going to continue to have issues, and you are starting to see
cracks in portfolios of certain lenders and certain managers. I would say from our perspective, we have a portfolio of four hundred and fifty US mid size companies that we are watching very care We're not seeing it, but I can tell you that other lenders that it may have been a bit more aggressive than us, are starting to see it. So I think the longer the higher rate environment goes, the more you're going to see companies that simply can't sustain themselves at the higher leverage and at
the higher price of financing. If your interest coverage rasos are less than one, you know you have an issue. So in that sense, I think you're starting to see it. On the other hand, I would say the opening of the large liquid loan markets has given them a bit of a reprieve in the sense that companies that couldn't finance themselves didn't have an alternative in the liquid markets are now coming to market, frankly at record numbers in
the first quarter. So what you're seeing is refinancing activity, deals being done to kind of deal with maturity walls in companies that have to refinance or otherwise have issues. So I think it's a mixed bag. But overall, the opening at the larger markets, you know, has been been a positive for availability of financing and company's ability to kind of re do their balance sheet or redo their capital structure.
How much of a difference therefore, is there between the United States and what's happening in Europe. And we're still not giving about a capital markets union here in Europe. We still don't have the capacity to finance in the same way. We still don't have the number of options the US companies have in terms of their ability to
seek financing. And I'm wondering, therefore, when you being here in London, how you see the different story in Europe versus the United States, and how companies are therefore going to navigate how portfolio companies are going to navigate this process given that difference in the financing options that they have.
Sure, well, I think as a direct lender, as a private credit investor, I would say both markets are actually quite appealing, but for different reasons.
Right.
So, if you're a direct lender in Europe, for example, you have less large scale competitors, and you've got significant barriers to entry given all the local currencies and local laws. Right, so you've got different bankruptcy laws, You've got different dynamic. You really need to be local in Europe and that really creates barriers to entry. And so there are a limited number of larger players in the market. So as
a lender, that's a good thing. I'd say As a borrower, it tends to raise costs, so you're generally paying more. The capital markets are less efficient, there's more, you know, the the liquid markets are smaller. Overall in the US market larger, more competition, uh, capital markets more efficient, and so I would say from an investment perspective, different dynamics. But but overall, the US I would say, is running ahead of Europe in terms of the economy and overall,
you know, economic dynamics. I would say, if you look at the various industries. Software technology UH in the US doing extremely well. Pockets of challenges in healthcare, particularly dealing with reimbursement pressures. Certain healthcare businesses are having having a difficult time, but but overall, business services, you know, faring quite well through this.
Ken, I'm going to put you on the spot here twenty thirty seconds if you can sure are the public market in the private market. Are the valuations you're seeing in both justified?
I think that, you know, we deal mostly in the private markets, right, although obviously there's a knock on effect, you know, In terms of public valuations, I would say that they are increasingly finding their level. They're down roughly three to four turns from where they were eighteen to twenty four months ago. So at a very very high quality company, mid market private markets company could easily trade
for fifteen, sixteen, seventeen times cash flow. In today's environment, that same company is probably trading at eleven to twelve times cash flow, so still good by historical standards, but the edge has been taken off a bit. So I think they are justified today. I think I think they found their level. Obviously, the financing markets have come in dramatically just with the cost of les average, you simply can't put six or seven times leverage on a business today.
So as a result of that, leverage and pricing have come in. But I would say they are finding their levels and as they find their levels, deal activity has picked up a fair amount.
Can go to see. It's interesting that the FED noticed noted yesterday in the minutes several members commented on the rapid growth of private credit market. So the Fed serney sitting up and paying attention to what you guys are up, so you can't can still nice to see you in London, thank you very much. They've still being by President CEO of Churchill Asset Management,