The Bridge Ep. 15: Private Credit’s Return to Discipline

The Bridge EP 15, Mathieu Chabran, Tikehau Capital – Transcript

Sonali Basak (00:00:17 -> 00:00:57)
Welcome to the Bridge by iCapital. I’m Sonali Basak, the Chief Investment Strategist at iCapital. And today I am joined by Mathieu Chabran. He is a co-founder of Tikehau Capital, which has about 60 billion in assets under management. And it’s a really great time to talk to you because there is so much going on in the private credit space. This is a place that you really have cut your teeth in many, many ways, but you have unique views on what’s going on. So, let’s unpack it. If you look at private credit, on one hand there’s large institutional fundraising, but there are a lot of questions around the retail flows, given the elevated redemption notices we’ve seen across the industry in the first quarter. Dissect it for us.

Mathieu Chabran (00:00:59 -> 00:02:43)
The, um, I think, you know, the, the private credit, uh, maybe noise struck me as, you know, people forgot that, uh, you know, in credit there was, you know, a risk associated with that, right? So, uh, the underwriting, you know, the fact that, uh, you have to work with managers who’ve been there, you know, a long time. And, um, maybe, you know, the, the, the issue we had maybe with part of the retail, you know, investors is because they came in late, um, around COVID. Remember when, you know, interest rates were at zero spreads were really tight because, you know, the feds, you know, and all those were there. Um, and then, you know, they found a way to do effectively 6,7, 8%, you know, return there. Then fast forward, um, a little bit of the, you know, asset liability mismatch, you know, it’s part of the, uh, part of the market, a little bit of some people, you know, freaking out because they saw that, uh, they were support of the market that were, was being, you know, repriced. And then we had, you know, a, a moment of panic. I don’t know if it was more noise than effectively panic, but it reminded me of the, uh, you know, the, uh, the tech bubble, you know, 25 years ago when we started, you know, and we were working this leftin and we saw some, some, some investors effectively defaulting because that’s what people did not realize. That’s the risk that is associated with credit, that yes, there can be some default. Um, and I think it’s healthy, actually. I really believe that what’s happening right now is healthy, because, as you said, very strong institutional demand. I think that part of the market who came in maybe late, they now might be, you know, reassessing, you know, their, uh, uh, their view about the, uh, the asset class. But fundamentally, you know, fundamentally, you know, that’s the basic of what we do, you know, lending money. And so, if you do it well, I think there will be some great opportunities.

Sonali Basak (00:02:43 -> 00:03:16)
So, very curious about this, because outside of the institutions, the individual investors, the data did show that the redemption notices were still fairly concentrated. It wasn’t that there was widespread heading for the exits, it was a concentrated set of investor bases and concentrated funds. So, what does that say to you in terms of the ability for the sentiment to shake out this year? Do you think that we’ll get to the middle of the year and we’ll look at the first half of 2026, and it was yesterday’s news? Or do you think that the sentiment is going to take a while to flush out now?

Mathieu Chabran (00:03:16 -> 00:03:53)
I think it’s going to take a while, you know, for the very reasons that effectively a lot of people, you know, try to, to, uh, to, uh, rush, you know, through the exit exit door. Now, having said that, the new vintages, you know, what is being put at work, you know, right now, I believe are going to be, you know, much better because people effectively woke up to the fact that maybe they might have been some, uh, um, uh, excesses, you know, in some part, in terms of leverage, in terms of documentation, in terms of, um, maybe complacency, you know, in some part. And when you have a wake-up call like the one, you know, some people had, you know, I would expect the new vintages starting now to be actually much more robust.

Sonali Basak (00:03:53 -> 00:04:16)
So, there’s something countercyclical, it feels like to me, about investor behavior and how the funds are doing, and how do you convince people, okay, well, wait a minute. There, there are some vintages, right? Yeah. The vintages people are worried about are the ones pre-2022.

Mathieu:
Of course, yeah.

Sonali:
And, and so now if, if we believe that 2026 is going to be a good year, how do, how do we explain that story? Why is this year a better year than, than those years past?

Mathieu Chabran (00:04:18 -> 00:05:32)
Discipline. I think that it always come down here to discipline, discipline in the, in the underwriting discipline, in the distribution discipline, in the skin, in the game. You know, something that is very important, because when I said, you know, there were maybe a bit of complacency, I really mean it because we were coming out of this, you know, mega cycle of 15 years of very accommodating in an environment that was, uh, uh, you know, that that was actually beefed up by the, uh, post COVID. I, uh, um, um, uh, liquidity, you know, that got into the system. And so effectively at some point, you know, this extra marginal liquidity that may, may not have been here in the first place, you know, it needs to be reassessed and repriced. And I get that’s what we’re going through. Now, there might be some structural, uh, changes, you know, I’m sure you will, you know, we want to discuss the software and, and other stuff like that. But when it comes down to credit and lending and direct lending and private credit, uh, the way it’s been operating for a long time in the us less so, you know, in Europe and in other part of the world, uh, I think it’s a maturity, it’s a maturity phase. And yes, it will certainly be yesterday’s news, but the market should get back to a more healthy, I think, you know, a more healthy environment, which will be great for investors, which will be great for managers and fundamentally, which will be great for the economy.

Sonali Basak (00:05:32 -> 00:05:59)
Yeah, you make a great point, because people forget 2020 in the wake of what had happened with COVID, it wasn’t just that there were low interest rates that rose very, very precipitously in 2022. It was also life support. There was a fed that had a bloated balance sheet propping so much liquidity into the market. So, when you think about the current opportunity, there’s a lot of people who are saying that this might be the year that we might actually see dispersion among credit managers. Do you believe that that’s going to be the case?

Mathieu Chabran (00:06:00 -> 00:07:40)
Yeah, I mean, it will. I mean, for sure. I mean, to start with, I mean, you are right. There was a very visible end of the market, you know, that was the Fed. You know that what I like to call it the very visible end of the market because that was, they were the, the buyer of a last resort and so, you knew that part of the spreads, you know, had been, um, artificially maybe, uh, uh, uh, there, there’s been this distortion. But when you look at the, uh, uh, at the situation, you know, where we are, you know, right now, um, this reset, you know, in the market with now a more mature industry, the fact that, as you remember, I remember this, this, this number where, you know, 95% of, uh, credit manager were born after the GFC. You know, I’m old enough now to know I was born before that. We started, you know, in 2007, and effectively in this situation where people thought that it was easy because it was called credit, which would be, you know, easier than doing, you know, large, big private equity deals. But all that, you know, ties together. And, um, you’ve got the managers, you know, very well established to been there, you know, decades. And as the market developed, they, they, they, they started to, you know, marketing this new strategies to a new investor base. Uh, this investor base is learning too. But, um, if this situation, this moment in the market, uh, has some benefit, it will be to make the market, as I say, you know, more healthy, but I would expect the real proper, uh, uh, discipline managers, you know, to, to, to take advantage of that. And you started seeing that actually in the numbers, as you said, a lot of, uh, institutional demand support and the large flood platforms are still operating very well.

Sonali Basak (00:07:40 -> 00:07:50)
So, let’s be super specific about the lessons learned then, to the extent that’s some behaviors that might get washed out of the industry because of what we’ve seen this year. What are those behaviors?

Mathieu Chabran (00:07:51 -> 00:08:38)
Yeah, well, I mean, firstly, the asset liability mismatch, you know, here again, we’ve been discussing that, you know, at length, you know, this, uh, the evergreen format, you know, is a great way to access the, uh, uh, it’s a great way to access the product, but it has to be understood by the investors, you know, getting there. It has to be properly managed by the by, by the GP itself, you know, because you’ve got some constraints on this, uh, on this, uh, vehicle. But it has to be, you know, uh, uh, uh, you know, properly managed and not trying to maximize everything, you know, both the size of the fund that you’re raising, both the return, the leverage, you know, it, it comes down to, to, to, to good sense. You know, I think, uh, uh, when, when you, when you start, you know, with this, uh, with this structural fund, which fundamentally is not designed to receive, you know, private assets.

Sonali Basak (00:08:38 -> 00:09:00)
So, I’m, I’m really interested in diving into those because I don’t think people are talking about it enough. On one hand, there’s that 5% liquidity cap.

Mathieu:
Yes. Yeah.

Sonali:
That I think now is better understood after we’ve seen this cycle. But you bring up two other points that are very important and lesser talked about. One is, within these evergreen vehicles, a close watch on leverage is one of them. And two, also not growing too fast.

Mathieu Chabran (00:09:01 -> 00:09:56)
But we are, because when you grow too fast, I mean, Chanel, you have to put the capital at work, and it’s complicated to invest, you know, so raising money is, is, is, is one thing. And if you’re successful at that, then you have to, to, to deploy, because remember that when you’ve got this cash coming in every week, you know, every month, if you don’t put it at work, that will dilute the existing portfolio, right? So, there is some kind of, um, uh, um, there is a, a bias forcing you to deploy and maybe being less discipline. So that, that’s also the, the other part. And that’s why, you know, I can’t come back all the time to the alignment of interest. You want to see more skin in the game from your managers. And that for an investor who is now, you know, reading about this and think, well, was it noise or is there an opportunity that the first thing you should be doing? Are you investing with someone who’s got an, an incentive to be patient and to asset select? Or are you investing with someone who’s got an incentive to deploy? And that makes, you know, a huge difference.

Sonali Basak (00:09:56 -> 00:10:11)
Yeah, this is an interesting point here because I think conventional knowledge in the money management world was raise a lot of money, get much bigger. But realistically speaking, you’re saying that there’s a real benefit here to being disciplined in how you raise money actually, for, for,

Mathieu Chabran (00:10:11 -> 00:10:45)
Of course, because, you know, you’ve got, you’ve got this part of cash coming in, diluting the existing, the existing performance, and you get this, um, constant and consistent, you know, uh, um, incentive to, uh, uh, to deploy and maybe being less, again, discipline in your, uh, in, in your underwriting. And so effectively when you say about, you know, it’s not about being as big as possible, and that’s why you also have to be careful about asset aggregators, if I may say, um, you want to, you want to remain with investors, um, and if you do do that, there’ll be great opportunities, uh, this time of the cycle.

Sonali Basak (00:10:45 -> 00:10:55)
So, the fun part of this conversation is now what are you doing about it? How are you using this moment to find opportunities if we think that 2026 is going to be such a great vintage?

Mathieu Chabran (00:10:55 -> 00:12:17)
Well, to start with, you know, we’re very active in, uh, uh, uh, private debt secondaries, right? We started that five, six years ago, you know, at the time of, uh, COVID. And it was not really tested beyond the institutional LPs, effectively arbitraging, you know, the portfolio and, you know, selling at times and us providing liquidity, as you can imagine, that’s going to grow. It’s going to balloon because some people are panicking, some people are rebalancing, some people are arbitraging and pro being able to private the, the liquidity to these people who are looking for, uh, effectively a, uh, uh, uh, part of the liquidity. It’s a massive, I mean, it’s a massive opportunity right now because if you look at what happened to secondary private equity over the past 20 years, that has become such a big established, uh, strategy. Private create secondary will follow the same trend, but at a multiple, because there is, you know, twice or three times more debt in any given deal than equity. So, the volumes are going to be bigger. The investors who pulled a, uh, who put a lot of money into the primary market of the past, you know, 10 years, they’re looking at rebalancing. They’re not selling because it’s distressed. They’re not selling because themself for distressed, they’re selling because, you know, they want to rebalance. And this is, in my view, one of the biggest opportunity we’ve seen of the past, you know, two decades of a new asset class into something that is very basic, you know, which is this credit market.

Sonali Basak (00:12:17 -> 00:12:23)
So, this tells me that if you’re comfortable buying the private credit secondaries, and are these mostly LP led or GP led?

Mathieu Chabran (00:12:24 -> 00:12:27)
LP led is what we are focusing on. We do both, but LP led is what we favor.

Sonali Basak (00:12:28 -> 00:12:33)
So, if you’re buying the assets, it, it tells me at least that you have confidence in the credit underwriting.

Mathieu Chabran (00:12:33 -> 00:13:17)
Of course, or you, you do, you redo your underwriting because effectively when you are buying a, an aged portfolio three, five years into the deal, it’s very different from what it was, you know, three years ago. But that’s where you are the price setter. You know, primary market had become a market of price taker because so competitive, so much money, the BDCs, public, private, the asset manager, the banks, the, uh, mid-market CLOs, you know, it’s really crowded out there.

Sonali:
Yeah.

Mathieu:
So, you be, you, you become, you know, a price taker on the secondary, because on the supply demand imbalance, you are much more of a price setter. And so, you can build into your price, you know, the, the, the discount you need to effectively reflect your underwriting and getting to the return that you deem are the fair, you know, value for this asset.

Sonali Basak (00:13:18 -> 00:13:30)
So, what can you tell us about the types of, um, opportunities you’re seeing? Uh, you know, uh, what are the returns? Like, you know, if you can’t talk about returns specifically, I mean, what kinds of discounts are achieved?

Mathieu Chabran (00:13:30 -> 00:14:34)
No, I can certainly, you know, exactly, you know, tell you, you know, what we’ve seen and, uh, you know, we’ve been deploying, uh, um, mean it’s been five years now, five years on average, a portfolio was bought at 85 cents a dollar, uh, uh, you know, discount to the NAV. And, you know, with an average life of let’s say three, three and a half years left, it gives you, you know, 15 discount, three years, 500 basis points, pick up to what you would normally get, you know, in the primary. And that, I think is effectively the, uh, uh, uh, it’s the illiquidity premium or the liquidity premium, depending, you know, which part of the table, you know, you’re sitting and, uh, that gets you into some, some kind of, you know, meeting return, you know? And, uh, I think that for that, you are fairly compensated for the risk you’re taking because you’re not the managers, you know, you’re effectively getting into a, you know, in the backseat of someone else, you know, driving, uh, driving the portfolio. But you can build in the cushion to, uh, make up for when and if there are more default, you know, in the, uh, in the portfolio. Uh, that’s how we’re approaching it.

Sonali Basak (00:14:34 -> 00:14:41)
So, it’s interesting to me in some ways, you’re, you’re kind of hunting for discounted private credit assets right now.

Mathieu Chabran (00:14:42 -> 00:15:30)
Yeah, well, it’s not hunting for, it’s where, you know, the market, you know, settles. And here again, you’ve got different type of players. You’ve got the real credit investors, and I can think of, you know, some of our competitors and peers really come from the credit and do the bottom-up underwriting. And then you’ve got on the other side, the, uh, uh, uh, solution providers who are more like secondary players, and they have more, uh, top-down approach, if I may say. But these two groups, you know, they, they, they, they, they, they co-ex, co, coexist, you know, uh, together. And, um, that enables to cover, you know, the full, you know, the full, uh, spectrum of the, of the market. But, um, um, you have to do the work. That’s the other thing, you know, fundamentally, you have to do the work and not be, as I said, you know, incentivize just to deploy it and overlooking maybe sometimes some big fundamentals.

Sonali Basak (00:15:30 -> 00:15:49)
So as long as I’ve known you, we’ve spent a lot of time talking about the importance of good origination.

Mathieu:
Yeah.

Sonali:
So, as you do the work, are you comfortable with the marks that many fund managers are putting on their portfolios and the underwriting that’s happened by writ large, right? I mean, do you think that people have done a decent job reflecting the true value?

Mathieu Chabran (00:15:49 -> 00:17:08)
Yeah, well, I, I, I hope they do. Uh, that’s certainly what we do on our, uh, primary, uh, on our primary business, you know, on our primary direct lending business. On the secondary, the interesting party that if we’re not comfortable, you are once again, the one who is putting the price, you know, on the, uh, on the asset. I know there’s been a lot of, uh, comment, a lot of press around the fact that, you know, some different managers into the same assets might have, you know, different marks. Um, you know, I’m not calling for more regulation, but, you know, I’m certainly calling for, uh, a better discipline, you know, of, uh, of everyone’s, because here again, you’ve got other bias. Um, some people get paid on the NAV, right? And back to my point, if you don’t have a strong alignment of interest there, you will have an incent incentive maybe to, uh, you know, beef up a little bit of marks when there is no point doing that, because effectively, why would you do that when, if you are living through the life of the assets and there can be some ups and downs and cycles, and if you are fully invested in your fund as well, then you know, effectively, you know, what, what it’s reflecting. So, uh, there might be, you know, bits and pieces of the industry that needs to be, uh, tweaked a bit, you know, in the way it’s, uh, it’s being, uh, approached. And, um, some people have to be honest. I mean, fundamentally, you know, just be a discipline and honest, and you will help, you know, the whole market.

Sonali Basak (00:17:08 -> 00:17:32)
It feels like the evolution of a lot of different markets where you start kind of in a very private place where, um, you know, there’s not a lot of assets trading hands, so there aren’t a lot of marks like you would with the stock trading hands. But, um, you know, another way to ask that question is how, how much are you passing right on, on assets? How many times are you looking at a new investment and saying, okay, we don’t agree with, with what’s underlying here?

Mathieu Chabran (00:17:33 -> 00:17:41)
Yeah, well, I can tell you our underwriting, we are converting 5 to 7% of the situation we’re looking at. And that has been consistent.

Sonali Basak (00:17:41 -> 00:17:41)
That’s very limited.

Mathieu Chabran (00:17:42 -> 00:19:11)
It has been consistent since 2007, almost 20 years ago when we started our direct lending business. And that’s because, you know, the rule number one of credit is diversification, right? You have to kiss a lot of, uh, frogs, you know, to find your prince, as you say, right? So, uh, you know, you, you, you have, that’s why you need a big origination platform. You need the team. You have to be, you know, that’s our job, you know, as owner of the firm, you know, to be able to say no, you know? And, and even because the investment team, they’re in love with their, they’ve been working two months on the situation, of course, when they come to the investment committee, they want that to go through, right? And that’s where you need to be the sparring partner with them and saying, maybe that’s where experience, you know, comes a little bit. And when you tell them, you know, what, maybe what at the refinancing, uh, uh, um, the base case scenario for refinancing, you know, what, what is your assumption? Oh, it’s going to be refinanced at, uh, five times. Okay, why don’t you do, you know, maybe three and a half? Oh, and by the way, you know, software is, is going to be at three. And I go, why don’t you put at five? And they compute all that, say, well, but it doesn’t work. I say, well, that’s the point, because if you want to make it work, you will always make it work. If you, if you can factor in a little bit of experience and cycles, but sometimes effectively, you know, you shouldn’t be doing the deal. And that’s the, uh, uh, that’s also a, another lesson learned, I think. And a lot of people who got burnt into this, you know, moment, I think they will look back and say, effectively, I remember the discussion at DIC and there was some debate, and we push it through, and maybe we should have, you know, stepped back.

Sonali Basak (00:19:12 -> 00:19:44)
So, the big elephant in the room when it comes to private credit, first there were questions around, oh, okay, how liquid or not liquid are these vehicles? Then the question before that was, okay, are there cockroaches as Jamie Diamond called them because we saw a few losses that were outside really of the private credit space, but it drew questions. And then the third wave was how many issues are there when it comes to software?

Mathieu:
Yeah.

Sonali:
How do you see this issue? Do you think that in general the narrative has been overblown, or do you think that there’s actually been not enough attention paid to this issue?

Mathieu Chabran (00:19:44 -> 00:21:35)
Yeah. Well, I mean, if, if the underly question is, uh, will AI effectively challenge some businesses? I guess we’ll agree to say that the answer is yes right? And, uh, I hope, and I think that people did not wake up two months ago to the fact that AI, you know, was there and challenging some businesses. You know, I’ve been, because I’ve been asked many times, you know, this question over the past, you know, few, few months, and I could only give this, uh, example that some people, you know, are too young to remember that. But 20 years ago, 25 years ago, Sonali, what was the one asset class that all the big buyout firms, you know, were eager to pay a lot of money for because banks, at the time, it was only banks in capital market were ready to finance so much because it was such a resilient credit with such a high margin of cashflow conversion, because that was one business where the customers would never stop paying until they die. They called that the Yellow Pages, you know, the Yellow Pages across the world that was the, you know, the most, uh, the most hype, you know, asset, you know, that people are going after. Before we knew it, the internet as we called it, you know, arrived and in few quarters, everything was, was gone. So, this look, I mean, some, some big disruptions in the market always happen and, you know, will AI challenge some businesses? Absolutely. And that should be, you know, priced in, in the leverage of putting in on your deal, obviously, you know, at the, uh, uh, uh, uh, in the structure, you, you, you’re putting, you know, in the deal. But, um, I, I think there’s a bit of that. I think people maybe forgot that credit was about cycles, that those cycles could be, you know, either macro or micro and very, you know, idiosyncratic and, and, and, you know, coming back to basics. I mean, some assets they cannot, they should not be leveled more than four times and don’t put six times just because, you know, the competition was so aggressive, you know, stick to your, uh, stick to your discipline.

Sonali Basak (00:21:35 -> 00:21:46)
And then a lot of this, too is underwritten where we saw rates rise in 2022, and then valuations drop off and also before ChatGPT. So, what happens to those vintages?

Mathieu Chabran (00:21:46 -> 00:23:13)
Well, I mean, two things. First of all, as you said, you know, it’s, it’s 2021, so now, you know, we’re five years later, um, you know, it’s, uh, uh, you know, it’s, it’s money time because, you know, you have to pay back the debt. Um, so there is this first part of the, uh, of the, the situation, which is effectively, you know, there is a maturity to, to, to the debt, and that’s when it’s coming due. And that’s when you look back and say, oh, effectively, you know, when we did this underwriting, you know, interest rates were so low spreads were so, and, and I, I add up, you know, 6 or 7x, you know, uh, leverage on this credit. Well, now because the business has suffered every thing being equal, I should be refinancing at 10 x. And that doesn’t work, obviously. So, what happens? You need to restructure, you know, your balance sheet. You need to find more, more capital. Maybe, you know, you won’t be able to sell for the, the mark that you thought you would be selling for. And, you know, kicking the can down the road here, you know, doesn’t help. And I’ve, I’ve, I’ve seen those stats where now you see, you started seeing last year, in Q1 ‘26, some, uh, managers now starting selling below the market. I think it’s great because it gets back the liquidity that, that the market will need because these vintages, they will be, if not losses, you know, certainly some underperformance, but I’d rather have, you know, some underperformance to be effectively realized rather than effectively, uh, doing CVs and PIKing and, uh, and, and, you know, effectively keep, keep trying to wait for better days when you should actually more take the pain now and move on.

Sonali Basak (00:23:13 -> 00:23:15)
You’re saying investors should bite the bullet with their software exposures.

Mathieu Chabran (00:23:15 -> 00:23:17)
Exactly. Potentially some of them, yes.

Sonali Basak (00:23:18 -> 00:23:19)
Do you think that some of them have yet?

Mathieu Chabran (00:23:20 -> 00:23:57)
Um, it’s comp, it’s complicated because it’s such, you know, it’s a, it’s a, a deal by deal. And, you know, some, some of the thing we’re seeing, and you saw that there’s always been already been some, um, some enforcement, some repossession by some lenders. We’re generally talking about the very large companies, you know, part of the, uh, the, the part of the market of the private market you know, we saw multi-billion, uh, uh, private financing, but you’ve got all the rest, you know, you’ve got effectively the mid-market, and you saw that the mid-market default rate has been picking up and certainly here in the US, you know, uh, um, over the past, uh, 12 months. So, uh, uh, it has started already, but again, it’s just a natural part of a credit cycle.

Sonali Basak (00:23:57 -> 00:24:02)
So, talk to me about how you see this credit cycle, if you believe that we have one coming as playing out.

Mathieu Chabran (00:24:03 -> 00:24:56)
Yeah, um, there’s been a lot of money put in the system because, um, um, of everything we discussed. And this money was relatively, uh, uh, cheap not to say free, right? And so, these cycles, you know, deleveraging, not, not only at the company level, but at the system level. Um, I, I, I think it’s what we should, we should witness, you know, in the, in the, in the, the, the quarter to come. And then on the other hand, you still have these very strong and robust institutional flows, you know, as you, uh, as you mentioned, you know, insurance companies in, um, uh, um, you know, global capital, you know, so some part, I mean, you should realize that in the US private credit is very well established and people have, you know, 20, 30% exposure to that. You take Europe, it’s probably, you know, 7%, you know, 5%.

Sonali Basak (00:24:56 -> 00:24:57)
Very underpenetrated.

Mathieu Chabran (00:24:57 -> 00:25:07)
Underpenetrated. And so as, you know, part of this, uh, uh, liquidity pool, you know, get into this market marginally, you know, you create, you know, this marginal demand. So, uh,

Sonali Basak (00:25:07 -> 00:25:08)
What’s your estimate for Asia?

Mathieu Chabran (00:25:09 -> 00:26:00)
Uh, on, on the, um, um, institutional market? You know, you know, if you take Korea, Japan, they’ve always been, you know, big, you know, lenders into the system. So, you know, probably in around 10%. But, uh, retail, you know, there were a lot of those late comers, you know, uh, you saw that on the real estate, you saw that on the, um, uh, on the credit, and they come, you know, levered and you should not put, you know, leverage on leverage. That’s the other thing, you know, the other discipline that people should, uh, you know, should stick to. So, you’ve got this strong positive that are effectively supporting, supporting the market. Um, and, and as people get more educated as people, and I’m talking about part of the retail, part of the institutions, uh, uh, as people get a bit more, you know, sophisticated in this, in this allocation, uh, you know, credit will always be a strong, in my view, will always be a very strong part of any investor’s allocation.

Sonali Basak (00:26:01 -> 00:26:40)
So, one other thing about the software industry that I think a lot of people aren’t really coming to terms with is there’s the private credit part, but then there’s the private equity part.

Mathieu:
Yeah.

Sonali:
And let’s talk through how this really works at the end of the day.

Mathieu:
Yeah.

Sonali:
Because you’re looking at loan to value ratios such that you will have 60 to 70% equity cushion. So, what happens to the private equity firms that were exposed to pre-2022 deals? Is this a matter of seeing more losses or is this a matter of the companies themselves, as you started to say, simply just having to borrow at a higher rate?

Mathieu:
Yeah.

Sonali:
Because there are fewer lenders now for them, and those lenders now are demanding a higher rate of return.

Mathieu Chabran (00:26:41 -> 00:27:58)
Yeah, well, I mean, that’s a good point. And you know, I was really surprised that, I mean, some people, you know, brought it up, but, uh, as far as I remember, you know, when you’re a lender, when you are a first lien, uh, senior secured, normally your position is better off than when you are the first loss, you know, which is called the equity, right? So, uh, um, I think it’s good that, you know, you, you, you, you are asking the question that some people start thinking about that, because effectively if there is an issue with the credit, there will be big issues, you know, with the equities. Um, and that was not really highlighted so far. Um, on the software space specifically. Um, we know that some, some companies, you know, might die, you know, from the, uh, AI that you were, uh, you know, mentioning earlier. But all those will be able, you know, to adjust and effectively benefit from, from, you know, from this, uh, from this new, new tool. So, um, today I’d rather be, uh, 2026 vintage lender, uh, even, you know, in some of the, the, the software, you know, for example, you’re mentioning then being the first loss holder, you know, by being the equity. Now, all that, you know, is not mutually exclusive. You know, when you build, you know, when you build a portfolio, but, but by definition there will be more losses, you know, for the equity holders than for, for, for, for the, for the debt holders.

Sonali Basak (00:27:58 -> 00:28:02)
Now, is this an industry that you’re staying away from, or that you would actually look at some opportunities?

Mathieu Chabran (00:28:02 -> 00:28:55)
I mean, we at Tikehau, you know, we’ve got a 7% exposure. We communicated on that, you know, we’re publicly listed, you know, we commit 7% exposure, you know, to the, uh, to,

Sonali:
but for future deals,

Mathieu:
For future, you know, what will be very interesting now that those businesses that has to be, that have to be restructured in some way or, or recapitalized, that’s where, you know, it’s going to be also a great opportunity. You, you come, you know, through your special ops or you know, whatever you want to call it, and then you do a real bespoke financing structure. But obviously it’s a, it’s bespoke, right? So, when it’s bespoke, you know, it’s more expensive than it’s when it’s, you know, you know, a totally commoditized product, uh, like the unitranche or something. So, uh, that’s where I see an opportunity that, because not everything, you know, will, will have, you know, will go to the, you know, to, to, to, to zero. Uh, but they might need a little bit of, um, you know, uh, um, haute couture approach, you know, maybe, uh, uh, and not just one size fits all.

Sonali Basak (00:28:55 -> 00:29:03)
So interesting. So would you say that that opportunity set exists today, or is it something that you need to see things shake out a little bit more before you get…it’s emerging

Mathieu Chabran (00:29:03 -> 00:29:21)
Yes, and the companies, some companies are very well aware that they have to do something now. And so, you know, you better start, you know, working with your lenders, shareholders, you know, new capital providers now, uh, rather than waiting for effectively, you know, the accident when you are, you know, two days before, uh, capital coming due.

Sonali Basak (00:29:21 -> 00:29:42)
Right, that’s what I keep telling people when we talk to the investment banks, what they say is, the reason this is such a big deal today, right now, is because when you look at 2027, those are when the maturity walls start coming.

Mathieu:
Yeah.

Sonali:
So really, it’s almost a year in advance that in the background, all the lenders and companies are talking, and really what they’re doing is negotiating a higher rate.

Mathieu Chabran (00:29:42 -> 00:30:16)
Yeah. And, and, and, and yes, you, you will have to pay up, you know, you have to pay up. I mean, not only your base rate is higher, and for some of the, in, uh, this industry, you know, the, the, the, the spreads, you know, the spreads will be higher. So, if effectively your cost of funding was, you know, uh, six, and now it has to become 12, yes, your P&L looks different. And by the way, if your P& L looks different, what is left for the equity owner, you know, will also look different. So, you know, once again, not all of these companies, you know, will go bankrupt, but they might effectively suffer some, uh, some earnings pressure. And that comes down to the return for the, uh, for the equity, uh, equity owners.

Sonali Basak (00:30:16 -> 00:30:20)
And in other words, you can do well on the credit, even if the equity is under some pressure.

Mathieu Chabran (00:30:21 -> 00:30:35)
Absolutely. Absolutely. And, you know, looking back to, uh, you know, modern financial history, you know, this market you looked at on the long term, the compounding effect of credit, you know, has, you know, most of the time outperformed, you know, public equities or private equity markets.

Sonali Basak (00:30:36 -> 00:30:53)
So interesting. So, let’s talk about the flip side. Let’s talk about the positive side of the artificial intelligence story. There are some mega trends that are very much driving investment right now, and AI can’t be ignored. So, what angle do you look at the AI industry and say, this is the way that I’d like to get into it?

Mathieu Chabran (00:30:53 -> 00:32:14)
Yeah, well, first of all, it’s making sure that before studying, looking at, you know, someone else, businesses that your own businesses is well prepared and well equipped and well invested, you know, with this new technology, I, I’m certainly not an AI expert, but I, I’ve become, you know, totally, uh, obsessed with what we are doing. You know, at Tikehau with that, you know, the, the, the young kid, you know, running the program for us. He’s 24 years old, and I’m learning from him, you know, every single day. And, you know, I’m playing, I’m being the sparring partner there. So, first lesson is making sure that you are well prepared as an asset manager, because our industry is going to be challenged, you know, big time as well. So that’s, that’s lesson number one. And then effectively be curious, uh, um, when you, you are being approached by these companies who are developing, uh, some new solutions, uh, um, effectively some of them will kill some software proposal, but others, you know, will, will enable your business, you know, much, um, you know, much, uh, much better. And, um, and they will be, um, you know, and I’m not only talking about the big, you know, hyperscaler and all that, I’m talking about the all ecosystem, you know, surrounding that. Um, they have to be properly capitalized. You know, that’s another lesson, you know, Sonali, that I think we should, uh, collectively remember that no credit, I don’t think that credit should be valued off an ARR multiple. I mean, for me, an ARR multiple is a VC KPI,

Sonali Basak (00:32:14 -> 00:32:16)
Annual recurring revenue

Mathieu Chabran (00:32:16 -> 00:33:09)
Annual recurring revenues. And, uh, you know, the way I learned credit, it was, you know, cashflow multiple, you know, an EBITDA multiple, an operating, uh, uh, uh, margin multiple. And, and it’s starting, you know, valuing a business or, or leveraging a business off some, uh, ARR multiple, because you are actually not generating any cash flow. Well, you shouldn’t have any debt. In the first instance, you should be having only equity. That’s why, you know, equity is for, so, uh, that’s the other part I hope that the market will, uh, will remember, uh, in the discipline I was, I was referring earlier, is, uh, I mean, when you lend, the act of lending is, you know, is giving credit with a coupon, a nominal, and a maturity, and you should be doing the work bottom up on how much, uh, debt, at what price, and over which period of time, you know, a borrower, you know, is, would be able, you know, to sustain this debt.

Sonali Basak (00:33:10 -> 00:33:37)
It’s interesting, ARR has become such a big practice in the private credit world, but realistically speaking, the business model of software is also changing. And so, I’m wondering how much this will change. There’s a lot of companies moving from seat-based pricing to token-based pricing for software.

Mathieu:
Yeah.

Sonali:
Um, expand a little more though. I’m kind of curious to see when, if you see, if you believe that AI is also going to change the investment industry also, you know, what are some of the things that you keep in the back of your mind as somebody who runs a business?

Mathieu Chabran (00:33:38 -> 00:36:01)
Yeah. Well, I mean, obviously it goes beyond, you know, the credit part, you know, for, um, uh, of our business, and it’s across the value chain. So, it starts, what is our business? Our business is to raise capital, uh, um, and, and to deploy that into some, uh, um, uh, some, some businesses, some situation that we believe, you know, uh, uh, makes sense. So, transforming savings into, uh, investing into the real economy. So, the first thing in this value chain is the way you interact with your clients, the way, you know, you approach clients, the way you portfolio monitor, you know, uh, um, uh, client exposure. The way you communicate, you know, reporting with your clients. Then it comes to the, the factory, okay? The origination factory. How do you make sure that effectively you’re using all the state-of-the-art technology, but it’s just a technology. Um, you know, I remember, you know, when I started in the industry, you know, yes, Excel existed, but you know, many things like, uh, this, uh, uh, digital communication was still, you know, very early. And then, you know, everybody embraced that, and it became part of the toolbox, right? So as, as soon as you can embrace all this technology and making your business, uh, uh, more robust, more resilient, certainly for the people also, you know, more, uh, uh, um, you know, user friendly, um, credit analysis, right? I mean, now you’ve got some models, so some, some AI, you know, uh, solutions where you no longer, you know, put some all-nighters, you know, doing your models. It’s approaching the business differently and saving times for our people to do what matters most is to be in front of, uh, in front of the borrowers, in front of their clients. But in, in a live, in live situation. I mean, remember that’s part of the, you were referring to, uh, part of the, um, cockroaches or the big default. I mean, most of them were frauds, you know, from what I understand. And so, when you get to spend time with the CFO, the treasurer, you know, when you, when you do these type of things, it will not prevent you from not doing mistakes, but it’s not just a model telling you, you know, how much you could lend. And, uh, and I think it’s important that you, we bring back all that and, and the, this AI shift will normally and hopefully free some times, you know, for the people in our business to, uh, to, to get back to the basics and being in this, uh, trustful, you know, relationship.

Sonali Basak (00:36:01 -> 00:36:11)
What you’re saying is that even with all of this investment in AI, as an investor, really, you have to get on a plane and go visit the company that you are investing in.

Mathieu Chabran (00:36:11 -> 00:36:46)
Of course. You have to show up, and you have to do the work. The short answer is yes.

Sonali:
Judgment.

Mathieu:
Absolutely. Yes, judgment, and not, uh, you know, when you become such a commodity of, uh, you raise all this money, you have to deploy, you have to do, and, and, and, and you are, you are losing sight from, uh, you know, I mean the, the, the, the basics of the due diligence, you know, and due diligence, you know, there are the numbers, but there are the people. You know, when we, because when we went to businesses, you know, also lending to the, to the people and effectively going into the factories, you know, and going there and, uh, and seeing if the, uh, the stocks and the, uh, inventory are effectively there, and yes, just doing the work.

Sonali Basak (00:36:47 -> 00:36:55)
So, talk to me about some of the large mega trends that you’re seeing outside of AI also, because they, I think you call them the three Ds.

Mathieu Chabran (00:36:55 -> 00:38:45)
Yes. Yeah. Oh, yeah. We, we, we like that, which is, you know, effectively you’ve got digitalization, decarbonation, and defense, you know, opportunity. And those are mega trends. Those are fundamentally mega trends, uh, that started, you know, in a different context and for, uh, different reasons. And as much as digitalization, you know, we, we, we, we talked about that a lot, but, uh, look what happened on decarb right now. People woke up to the fact that being too dependent, you know, to, uh, fossil fuels, uh, energies, uh, it was no longer just the issue about is it good for the planet or not. It’s just like, you know, can I be only in a dependent to one you to one source of, uh, of energy. And, you know, this decarbonation play, you know, that we started 12 years ago now, uh, came back with a vengeance, you know, because the past two years, two, three years, you know, people are like, well, actually all that was just a, a scam. You know, we should go back to, but, but the reality, it’s not, I mean, look at what happened across the board from low carbon mobility to energy storage across the board, and as asset managers, that’s where effectively we believe back to the, uh, you know, our value chain, you know, taking some savings and transforming that into the real economy. That’s a massive, uh, uh, mega trend opportunity. And the third d, you know, effectively defense, um, unfortunately, you know, the, uh, you know, the world we’re living in has demonstrated that, uh, CapEx opportunity, if I may say, because here you need real money effectively to, uh, to face and to finance this new world order. And so, yeah, these three big mega trends, digitalization, decarbonation, you know, defense are going to be capturing a lot of the investment needs, um, over the, uh, in, in the, in the short term. And as an asset manager, you know, as someone effectively being there to, uh, to transform, we are convinced of the, uh, you know, long term opportunity.

Sonali Basak (00:38:45 -> 00:39:07)
What’s interesting to me too is that when you think of the three Ds that you are looking at, all of them are kind of converging, right? Um, when you think about defense, uh, artificial intelligence and technology is playing a bigger and bigger role. Yeah. Uh, decarbonization matters also for the AI story, to your point, given that there’s just not enough energy to

Mathieu:
Exactly, yeah.

Sonali:
…feed all these data center buildouts. And so how does that apply to defense in particular?

Mathieu Chabran (00:39:08 -> 00:40:00)
Well, um, you know, first all, it has to be, as I said, it has to be financed. Uh, and, and it, it comes down to CapEx, you know, uh, uh, um, yes, you will, will have to, you will have to build some factory for the defense industry the same way you’re building some data center for the digitalization, uh, uh, opportunity. Um, and as asset managers, that’s what we should be, you know, really focusing on is when we’re taking some of these resources and that we are investing in some business. Are we, are we doing a, a, a, a good allocation of capital? Um, what is the proper return on assets on capital you know, we’re going to be making, you know, out of that? And once you’ve got this mega trend, as I said, you know, which all come down to, you know, to, to resilience in some way, shape or form, um, normally, you know, you’ve got a good, you, you’ve got a good configuration, you know, as a, as as an investor to play that.

Sonali Basak (00:40:00 -> 00:40:15)
Yeah, so we’ve touched on a lot of areas, and now I’m going to do the very difficult thing of making you choose your favorite child.

Mathieu:
Oh, okay.

Sonali: [40:07]
So, when you think about where the most mispriced opportunities are, or the most underinvested opportunities, what looks most attractive to you right now?

Mathieu Chabran (00:40:17 -> 00:41:34)
The asset class where, you know, the cost of liquidity is, is appropriately remunerated. And so, we were talking about secondary private credit. Here, you’ve got an asset, uh, you’ve got a, a supply-demand imbalance, which effectively plays in favor of the investors. This mega trend we’re talking about in, in the, uh, as an equity investors, there is a real CapEx need so, you are effectively putting some money where there is a real need, you know, of capital. We could have discussed, I don’t know, real estate, you know, real estate right now. And, uh, the same, uh, supply/demand imbalance that we’ve seen, you know, in real estate over the past, you know, two, three years for all the good reasons we remember around, you know, the work from home and, and all that. That’s part of an industry that is la uh, uh, lacking some liquidity because some banks don’t want to, uh, they don’t want to deploy, uh, uh, more. Some investors cannot deploy more. And so, whenever you’ve got this, uh, um, supply/demand mismatch, you know, that’s where we, uh, we like to, uh, we like to engage. And, uh, that’s why, you know, coming back to the first point and direct, direct lending and private credit that was certainly in the US too crowded a market, you know, this past two years to effectively, uh, to effectively engage. And now the market, you know, is, uh, is becoming a bit healthy.

Sonali Basak (00:41:35 -> 00:41:58)
It’s also becoming more complicated, right. And, you know, before I let you go, I think it really raises the question of what is private credit 2.0, right? If we spoke five years ago, I would say, Mathieu you run a private credit firm right there, there are more popping up? What do you think? Or how, how are you competing in direct lending if that, that was the flavor of the day, but now there’s all these new flavors.

Mathieu:
Yeah.

Sonali:
And so, what does that say about where the market is headed?

Mathieu Chabran (00:41:58 -> 00:43:24)
Private credit 2.0 will look like much more what was basic leverage finance, you know, 30 years ago. And, and that should have, you know, remained. And, uh, it comes back to the fact that, you know, doing some ARR financing, no bad idea, you know, you should, you should be equity capitalized, you know, for these type of businesses, it looks, it doesn’t look good for the equity return. Well, that’s the point, you know, that effectively that’s why you should be, you know, finance. So, uh, if we come back to a, you know, good sense discipline in the underwriting, uh, and, and as I said, a bit of honesty, you know, in the way you are approaching, you know, your mark and the way you, you, you deploy. I mean, credit to the basic of the financial industry and the modern, you know, financial industry. And in a, in a world where there is no shortage of, uh, liquidity that can be, you know, deployed by banks, by the capital market, by the asset managers, by all these alternative lenders, I really believe we are in a, in a situation where, uh, it bodes well for the cycle that we have to, uh, uh, that we are facing right now. Um, and, and private credit is not, I mean, credit is not going anywhere. Look at what happening on the, well, what is happening on the public market. And on the private side. I think it’s a, it’s a maturity, uh, you know, it’s a maturity phase. You were talking about, you know, the, the, the, the child. Well, it’s exactly that. You know, maybe, you know, they were a little bit in the, in the teenager, in the teenager mode and now, you know, hopefully they become more adult.

Sonali Basak (00:43:25 -> 00:43:35)
Very nice. Mathieu, it’s been great to talk to you about this. It’s been a very interesting moment in the market. That is Mathieu Chabran. He is of course the co-founder of Tikehau Capital, and you’ve been watching The Bridge by iCapital.

END