Relationship lender for a changed world
With the banks shedding assets, the likes of Park Square Capital are stepping up as long-term debt holders. Robin Doumar tells Andy Thomson how the ﬁrm will put its new €1.2bn fund to work
“Relevance” is a word frequently used in conversation by Robin Doumar, managing partner and co-founder of Park Square Capital, the London-based credit investment firm located immediately opposite Green Park tube station on the outskirts of Mayfair. For Doumar, relevance means occupying a necessary position in the market. “The market doesn’t need just another ‘me-too’ provider,” he says. “You need to be relevant. Often, that means discussing the deal and then offering a tailor-made solution. In the private equity environment, where prices are very high and the competition intense when it comes to acquiring assets, any advantage we can give in terms of structure, flexibility or creativity, is very important.”
Now a manager of approximately $5 billion on behalf of its investors, Park Square was founded in 2004. Doumar had spent 15 years at Goldman Sachs and saw an opportunity to provide direct loans to private equity deals in the junior debt space. He wanted to build a business that would offer chunky capital solutions for private equity deals and develop strong relationships with PE firms, management teams, banks and alternative investors.
While courting those four groups has remained one of the firm’s priorities, it has broadened its strategy to include a senior debt vertical as well as junior debt. Park Square Capital Partners is the subordinated debt arm, operating in the primary and secondary market in both performing credit and stressed and dislocated debt. The other strand of the business is Park Square Credit Opportunities, which is involved in primary senior secured debt and secondary investments in performing credit.
The opportunity set, Doumar insists, has grown enormously. “You’ve had the withdrawal of the banks and the retrenchment of CLOs. It’s a very low growth rate environment with bank rates more or less at zero. Institutional investors needing to generate yield from their fixed-income buckets are a huge force driving growth in our space.”
WHO HOLDS THE ASSETS?
Moreover, he sees a chance for firms such as his to carve out a reputation as ‘relation-ship lenders’ – that now rather quaint-sounding label that was once applied to the banks but not so much these days. “The banks are rapidly shedding assets. Who is left to hold those assets?” he asks, rhetorically.
Doumar paints Park Square as the reliable, long-term holder of debt in a currently highly volatile wider context. “Late last year and early this year there was dramatic volatility in the equity and credit markets,” he reflects. “The sponsors and the banks were stuck with loans they couldn’t syndicate. The banks want to sell down – often to zero – but if there’s market volatility they are vulnerable. Some of the biggest syndications of US buyout deals are hung and may end up requiring the deal to be restructured. We can provide a bespoke solution and be the end holder of the debt.”
He also thinks that the size of loan Park Square can offer is a meaningful differentiator. “We don’t want €2 million exposures. When you’re a €100 million to €150 million lender, the relationship is different – we become important to the private equity firm and management team.” Doumar believes not only that the banking retreat has created more space for firms like Park Square, but also that the returns on offer, particularly in relation to private equity deals, are perhaps better than ever before. “We’re in a unique environment, looking at things through a different lens,” ponders Doumar. “Growth rates are extremely low and central banks have reached the limit of what they can do to help. So you get asset price inflation. Equity markets are fully valued, fixed income is fully valued and private deals are being done at very high multiples. In terms of risk/return, leveraged loans offer very compelling value.” He reflects that, during most of his 28 years of working in the debt markets, the typical return for leveraged buyout loans has been around 250 basis points over LIBOR. Today, he says, it’s around 450 to 500bps.
“INSTITUTIONAL INVESTORS NEEDING TO GENERATE YIELD FROM THEIR FIXED-INCOME BUCKETS ARE A HUGE FORCE DRIVING GROWTH IN OUR SPACE”
“That’s a completely different environment for senior lending,” he notes. “Assets have been mispriced for years as the banks provided the capital and their balance sheets were out of control. There was no rationing of capital. But today you have Basel III and the need to obtain a return commensurate with the risk.”
At a time when the banks’ activities are more constrained, the stars have become perfectly aligned in Doumar’s view. He points to the combination of high multiples and leverage levels with low base rates and a strong ability to service debt. He adds that among limited partners there has been an “awakening to the opportunity”. “There is tremendous interest and it’s growing,” he says, noting the increasing allocations coming from the alternatives and alternatively fixed income buckets.
Park Square was a beneficiary of this when it closed its latest subordinated debt fund, Park Square Capital Partners III, on €1.2 billion (€1.5 billion including leverage) in early April. The fund beat its target of €1 billion and was significantly larger than the €850 million predecessor fund raised in 2010.
Investors in the fund include Orange County Employees Retirement System (with a $50 million commitment) and Pen-sionDanmark, according to PDI Research & Analytics. The firm says its investor base includes global public and private pension funds, sovereign wealth funds, insurance companies and asset managers.
The larger amount raised by Park Square this time around may in part reflect a lack of supply of funds to meet the demand. “There are a very limited number of providers of private debt who have been doing it for a long time and have good team platforms and track records,” Doumar claims. “There is a relatively short list of them in Europe.”
He says he has been “pleasantly surprised” by the strong interest in firms such as his coming from North America, much of which comes from pension funds and insurance companies. Following a “core group of early movers” into the space, he says that gatekeepers have become increasingly aware of the opportunity.
There is also something of a change in focus taking place at the current time. While allocations from alternatives buckets have traditionally targeted high-return distressed debt, there is now a shift into senior debt which the gatekeepers are supporting.
However, it’s not all plain sailing when it comes to extracting limited partner commitments. “Any time LPs are dealing with credit, they ask about default rates and how we will handle restructurings. But it reflects a misunderstanding,” insists Doumar. “Our strategy is to stick to high-quality, stable businesses and minimise the risk of default. We stay on the fairway and out of the rough. Others are focused on the very small end where there is a lot of volumes and chasing those is a fool’s errand. The key is to keep the bar high.”
Doumar speculates that some private equity firms may have found it difficult to adapt to the private debt arena because they are more familiar with risk-taking rather than risk aversion. But the most important thing in any transaction, he adds, is whether the business in question is fundamentally sound. “A conservative structure won’t help you if it’s a bad business,” he insists.
Doumar is asked about current areas of priority and possible growth areas. Among the topics, he alights upon is the secondary market, where Park Square is active on both the senior and junior sides.
“Because of market volatility, that’s a very attractive area for us,” he says. Part of the key to being successful in making secondary trades is to know the business well, he adds.
In many cases, because it has been in the market since 2004, Park Square has relationships with management teams that have been through secondary or even tertiary buyouts – thereby enabling the firm to build up a big base of knowledge when it comes to potential transactions.
Increasingly, the firm is exporting this knowledge to the US market, where it has followed in the footsteps of European private equity clients that have expanded their operations to the other side of the Atlantic.
Park Square also works with US firms on European deals, and has found a US presence to be useful in terms of staying close to these firms’ debt sourcing and arranging activities. The firm currently has around seven people in the US and sees it as an important growth area.
DOUMAR: THE ‘BOAT NUT’ FROM CHESAPEAKE
The ﬁshing industry around Chesapeake Bay, the 200-mile long estuary located in Maryland and Virginia, once employed around 9,000 workers. Today – thanks to runoff from urban areas, over-harvesting and the invasion of foreign species – the Bay is sadly less productive than it once was.
Having grown up on the Bay, Park Square’s Robin Doumar is a self-confessed “boat nut”, saying it’s in his DNA. But his interest does not lie exclusively, or even primarily, in bobbing around lazily on the water. Instead, he likes to roll up his sleeves and work on boats – building and ﬁxing them. For the young Doumar, this was more than just a hobby. During his high school years, working as a mechanic at the Norfolk naval base in his spare time offered the highest union-scale wage available. These days, Doumar says, he still can’t help ﬁxing things – even things that don’t necessarily need ﬁxing. “I’m always tinkering, and always having to be told at home not to do the re-wiring,” he confesses.
That said, Park Square is not keen to open new offices beyond the two it already has. “We don’t want lots of offices because we want open, transparent communication. We [the London team] can all be here together in this room and have the New York team up on the screen.” In the UK, Doumar notes that the referendum on European Union membership has “injected a lot of risks”. At the time of the interview, the vote was looming on the near horizon.
Doumar felt that an exit would be “a bad economic result” although he pointed out that Park Square could benefit from the acquisition of distressed assets, with the banks finding themselves under even more stress. He also noted that the firm had been using hedging strategies to reassure its investors that it was managing risk appropriately. Whatever the UK vote outcome turned out to be, Doumar sees enormous growth potential for leading credit providers with global footprints. Not surprisingly, he would place Park Square within that category. “We are not interested in more assets under management for the sake of it, but to be more relevant [that word again],” he says. “As the alternative lending space grows, we’ll grow with it.”
THUMBS UP FOR RULE-MAKERS
He is a fan of the regulators, believing that they have got things right because “you don’t want banks taking imprudent risk with money”. He also thinks the trimming of the banks’ previously huge balance sheets is a positive development that will force them to be more nimble. Doumar also sees a socially beneficial role for organisations like his, given the need for defined benefit pension schemes to make decent returns at a time when the equity markets are especially volatile and fixed income simply can’t offer the yield long-term institutional investors need. He sees alternative lenders (that know what they are doing) as the pensioner’s friend.
Asked what constitutes an average day, Doumar says “some are relaxed, some are intense”. He seems to be at ease, so today would likely fall more into the former category. However, on the whole, his schedule sounds demanding.
“I get in at a reasonable hour and I work a full day – not a very dissimilar day to what I worked at Goldman Sachs. It’s pretty full on.” Not too surprising perhaps: in the world of credit provision, there’s a lot to be done – and juicy rewards for those that can get ahead.
“OUR STRATEGY IS TO STICK TO HIGH QUALITY, STABLE BUSINESSES AND MINIMISE THE RISK OF DEFAULT. WE STAY ON THE FAIRWAY AND OUT OF THE ROUGH”