Episode 38

John Bowman on direct lending

John Bowman, Managing Director and Co-Head of Crescent Direct Lending, discusses the why the direct lending market is becoming an increasingly popular asset class for institutions investors.

Steve Peacher: Hi everybody it's Steve Peacher, president of SLC Management and thanks for dialing in to this episode of “Three in Five,” and today I’m with John Bowman really excited about that. John is the Co-head of Crescents direct lending business. John thanks for taking a moment.

John Bowman: Hey Steve, great to be here.

Steve Peacher: So John your team focuses on direct lending and anyone who follows alternative credit knows that direct lending is kind of a hot thing, over the last couple years a lot of money's been pouring into it in the U.S., and also in other markets around the world, can you just first spend a moment to talk about what is direct lending, what's it all about, what's driving the amount of interest in money that's flowing into this sector?

John Bowman: Sure Steve, it's kind of been evolving over the last 15 to 20 years but really get the supercharged I think after the Great Recession but it really, it's been an outgrowth of the consolidation of banking, which created a really a void for middle market companies who needed lending. That was sort of the early phase in the early 2000s as the banks got bigger and left the middle market. What really caused direct lending to take off here in the U.S., as well as Europe in other markets, is as interest rate environment close to zero or negative in in markets outside the U.S., the so called search for yield became the big thing for institutional investors, they could no longer get adequate yields on liquid broadly syndicated loans and liquid high yield, and for pension funds, in particular, trying to get that seven to seven and a half percent hurdle rate was just really challenging as the Fed took rates down after the last recession to get us back on our feet. So the market has is really boomed and we've really stepped in the shoes of the banks, and it's been it's been a great asset class and, frankly, I know we'll talk about the pandemic and of itself, certainly, you know very positive impacts on the market as well.

Steve Peacher: So when you know when people use the term direct lending, and that's typically used to describe the market that you described, but they're different segments within that market I think people approach it different ways. So at Crescent, with your team, how do you approach that market and within the segment that you operate in what are you seeing today, what are some trends you see?

John Bowman: Sure, yeah increasingly the players in direct lending or are carving out niches or are taking specific approaches to the market. At Crescent direct lending here in the U.S. we're focused on the lower half of the market in large part because you know we see generally greater value there. It is less competitors, spreads tend to be wider and as a result to careful credit selection you actually could have risk adjusted, much better returns than you think you can in large cap direct lending, but you do have to be careful, these borrowers are smaller so it's not for everyone, and you know the manager really matters. But you know we've carved out a niche in the lower half of the market, today we're one of the largest players in the lower half of the market, manage you know roughly $8 billion of capital today. So we have a very large balance sheet, can deliver very large credit solutions for our clients. And as it has been in many markets, small to mid sized companies tend to have higher growth rates than then larger caps, so these are companies that are rapidly growing, and we try to grow with them.

Steve Peacher: You know, as you mentioned this market has evolved over the last 10 - 15 years it's grown dramatically, especially the last five or so, you know if you look out five years from now, what do you think's going to happen what's this market to look like 3,5,7 years from now?

John Bowman: We're probably somewhere in the middle of the development of the direct lending market here in the U.S. and it differs across other geographies but ultimately, the lifeblood of our market has been the growth in private equity, we are the primary source of capital to private equity buyouts and as you may have all heard you know that's a trillion-dollar market and so there's a tremendous demand for our product. As the market has been maturing, I think they'll continue to be more niches people will play an interesting market in different ways. We you know we focus on the smaller end of the market, we have a sister group in LA that focuses on the larger and the middle market, they focus on more junior capital in nature, to have a niche there and I do think you'll see other verticals as well approach the market, whether it be asset-based lending equipment, finance, and other verticals. So as the market continues to grow and players come in, you'll continue to see niches being developed in hived off, but ultimately the prospects for the future of the market are quite strong and it's also like just that private equity machine which you know we are the primary provider of debt capital for that I think, continues to make this a really attractive place to be.

Steve Peacher: Well, I can certainly say that in whenever I’m out, I mean you talk to clients all the time for your business, and when I talked to clients across the different alternatives market state everybody seems to want the new niche – you know alternatives with alternatives. So I think as the niches you describe develop within the broader direct lending market there's going to be a lot of demand, at least from institutions, you know to put money into those niches.

John Bowman: It really allows the institution when they want to increase their exposure to direct lending do it in a way where they're not going to create overlapping credit issues, so they can really expand their exposure to direct lending, which is getting you that extra yield without ending up owning the same names from two different managers. And that's a question we get a lot, so I agree wholeheartedly Steve, I think you're going to continue to see this segmentation and niche build out as you build a family of products across the space.

Steve Peacher: Let me switch gears as we get to the end and just ask you something on the personal front, as I do on these every time. I know you've got a couple kids in high school they're very active in sports. Covid hasn't been the friend of sports at any level but, given the disruption. So what have you found has been the biggest disruption that you, you are as a spectator your kids as participants and had to deal with all the last couple years as they’ve had to moderate how they approach these things because of Covid?

John Bowman: The kids the kids are pretty resilient, so they actually do okay, I mean they don't love the masks as we know. I actually think the parents have more challenged because depending upon the venue we may not be able to watch, you may have a parent that tries to sneak in the back door and break the rules. I try to tell my kids this is one or two years out of a very long lifetime, it's hard for them to appreciate that today, it's been challenging but we’re learning to move through this all together.

Steve Peacher: Have they had to wear masks while they're playing in a lot of those, during the games during the practices?

John Bowman: Depending upon the geography the mask rules are different. So during soccer season, if you if you have a championship up in New Hampshire you, you might find yourself without masks. If you’re back in Mass, the mask is on. And then those that are not quite totally compliant with the mask above the face, the ref will throw the flag and have the kids sit down for a few minutes. Which I think is fine, it's a good life lesson for them.

Steve Peacher: Well, as you say, these kids are resilient so as more resilient than probably any of us. Well listen John, thanks so much for this short discussion of direct lending it's a it's a big area for Crescent, it's a big area growing here in the markets, and you know you've developed, one of the best teams in the market, which is great for the platform so thanks again for taking the time.

John Bowman: Well, great thanks for having me, Steve.

Steve Peacher: All right, and thanks to everybody for listening to this episode of “Three in Five.”

This podcast is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. This podcast may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.