Stuart Fiertz, co-founder and president at $10bn London firm Cheyne Capital Management, appeared on episode 9 of the AFI podcast. Here are five takeaways from the interview.
1. Cheyne shifted to private credit after 2008
Fiertz discussed (from 1:47) the development of Cheyne since the financial crisis, moving towards private credit with an initial focus on real estate-backed lending. It then started providing debt to recapitalise (primarily) non-sponsored European SMEs and most recently primary financing.
“In those non-sponsored areas — those parts of the market that are least well capitalised — we can keep our under-writing discipline and achieve good risk/reward and decent yields without having to sacrifice the covenants and credit enhancement that we want,” he says.
The firm now manages $10bn. Slightly over half is in real estate backed lending, a quarter is in the corporate distressed and non-sponsored SME space, and there is continuing activity in investment grade credit and a small amount in long/short equity.
2. The current market environment suits alternatives
(From 5:39) “It feels like the tide is going out and we are going to see who is still wearing swim trunks. There are a lot of strong currents that will effect the ability of companies to refinance. On the real estate side you have the combination of much higher interest rates with higher cap rates.”
Rolling debt will become very difficult for some. You will end up with some players “finding themselves to be over-leveraged” in this environment.
“You can see this in the share prices of some of the listed REITS,” he added, highlighting some of the German multi-family stocks. “That will be a dynamic area where there is no obvious beta to own so you need to move into more of an alternative approach.”
3. Private market should overcome tests to come
Fiertz is optimistic about the outlook for private credit in a rising rate environment and the challenges to come.
(From 11:25) “Private credit got a pretty good test during Covid and was able to work with borrowers and keep defaults at levels much lower than feared,” he says.
“Private credit is going to have more flexibility to be accommodating going forward than banks are. The question over private credit was what would happen when times got difficult. With the implementation of IFRS 9 it is much harder for banks to extend and pretend now.
“I think private credit will get through this cycle well. I think we will discover that covenants in the syndicated loan market and wider distributed loan market are very weak and so the recoveries will be low.”
4. Active/passive may replace alternative/traditional
Fiertz discussed (from 14:44) the development of the hedge fund industry, with many original players now operating in private markets or concentrating on long-only. He said investors now interpreted the sector in different ways, which partly explains why “Alternative fund manager” is preferred to “hedge fund manager” when funds describe themselves.
“Some investors view it as the actively managed part of their portfolio, some have long/only and a separate hedge fund mandate.”
In many ways the active versus passive element is more important. He added: “At some point there may not be alternatives. There might be active and passive, within which you have a range of criteria.”
5. UK faces challenge under Sunak — but exports should help
Speaking on the day Rishi Sunak was appointed prime minister, Fiertz (from 26:00) gave his view on the outlook for the UK. In short, it will be tough.
“The bond market vigilantes are back. They were in hibernation for a long time when the printing presses were whirring away. But they have come out because debt is high. Fiscal spending was profligate. We spent a lot of money during Covid and are now spending a lot on the energy side.”
Sunak will be well aware of this because of his hedge fund background, he added. And the cheap pound could help the country recover relatively quickly.
“I have always viewed the fact sterling is floating rate as one of out country’s greatest strengths. We saw that coming out of the 2008 financial crisis, with the weakness of sterling we were one of the first to start growing.”
He therefore expected to see some positive news coming on the export side, despite Brexit challenges: “We have to overcome stickier borders, more paperwork and maybe a bias against the UK.”
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