PGIM’s Michael Jones came to Australia in 2016 to build a corporate private debt business in Australasia. We spoke to Jones about how he got involved in the industry and his journey to build a $10 billion capability across Australia and New Zealand
Although many investors claim to have a long-term focus, private capital lenders seem to truly fit the moniker well. PGIM, in particular, sometimes spends years cultivating relationships before this translates into actual transactions.
Michael Jones, Managing Director with PGIM Private Capital (PPC), says it is not uncommon for his team to have relationships with prospective borrowers that span 5-10 years before they end up doing a transaction.
“Today, it seems that proprietary deal flow is a bit of a buzzword, but I do think that you have to manufacture your own deal flow and this process really starts with proactive outreach to companies, oftentimes with a cold email, to explain who we are and how we are different among so many options,” Jones says.
As an example, Jones points to a recent transaction PPC did with recycling business Close the Loop, which listed on the Australian Securities Exchange on 2 December 2021.
“I’d seen they had listed and I wanted to start the dialogue with them, so I reached out to the CFO (Chief Financial Officer), Marc (Lichtenstein), and he was open to having an introductory chat,” Jones says.
“Lichtenstein recognised they probably didn’t need to use us anytime soon, but he was quite relationship-oriented and focused on growth so he wanted to, at least, keep us in mind as they were looking to scale up their business.”
Today, it seems that proprietary deal flow is a bit of a buzzword, but I do think that you have to manufacture your own deal flow and this process really starts with proactive outreach to companies, oftentimes with a cold email
When Close the Loop identified a potential acquisition target in the US the following year, in the form of Texas-based refurbished electronics business ISP Tek Services, PPC was there to support the deal with a US$52.5 million debt facility.
Often, Jones finds the person in a company most open to engaging with a non-bank lender has been through at least one business cycle, understands the importance of having multiple avenues to obtain financing and is thinking dynamically about the company’s strategy and growth plans.
“Over the last couple of years, there’s been so much liquidity in the market that it probably hasn’t been as big of a focus [for many companies].
“But now there is liquidity coming out of the system through central banks unwinding their balance sheets, I think having regular dialogue with potential capital providers, from a company’s perspective, is helpful. Just so they know if something does come up, they have an alternative avenue for where they get their financing from as growth plans and existing investor appetite can evolve through cycles,” he says.
Jones says it was exactly this long term, relationship-driven nature of private capital that initially drew him to the sector.
“When I was in university, I actually thought that I wanted to be an accountant. I did an internship and quickly realised that that was not going to be for me. Then I went to this presentation about PGIM Private Capital.
“It immediately resonated with me; investing in companies over the long term in a buy-and hold approach. I didn’t know as much about debt at the time and I think that’s a function of universities tailoring their programs more to the equity markets. It’s a little easier to follow and everyone thinks about just picking stocks and that’s finance.
“But I was given the opportunity to work on an international team where, when I first joined, I was looking at investment opportunities spanning corporates in Australia and Europe, to banks and structured transactions in Latin America. And so, it was the breath of opportunities that was the interesting thing about this job. We just looked at so many different types of businesses,” he says.
Inflation
Jones started in 2008, right before the global financial crisis (GFC) was due to hit. Although the GFC caused severe turmoil for many sectors, private capital firms ended up being more or less beneficiaries as banks pulled back from the scene, leaving many businesses looking for alternative sources of funding.
“The GFC for us presented a step change in our platform because that was where the banks were pulling back. It afforded us the opportunity to really expand our originations to provide that capital and to be that trusted partner by demonstrating how we support businesses through cycles,” he says.
Following the GFC was a period of low interest rates and lots of liquidity in the system, but this all came to an end when the US Federal Reserve started to raise interest rates in March of 2022 on the back of rising inflation. Most central banks around the world followed suit.
Today, many market participants are still concerned about inflationary pressures and Jones is no exception.
“I think margins are still under some pressure and you do start to see some of the revenue growth softening, but you still have the fixed cost base that has increased because employee expenses are higher now, due to wage inflation, while other operating expenses like IT and insurance costs are also increasing,” he says.
“Companies are really having to spend more time focusing on their cash flows and allocation of capital to ensure they are generating adequate returns. It has forced businesses to become more disciplined in how they are spending their money and also ensure they are operating more efficiently,” he says.
Companies are really having to spend more time focusing on their cash flows and allocation of capital to ensure they are generating adequate returns. It has forced businesses to become more disciplined in how they are spending their money and also ensure they are operating more efficiently
This environment highlights the importance of good covenants and solid deal structuring, while engaging regularly with borrowers to address any issues they might face.
But Jones is also carefully optimistic about deal flow in the coming years.
“Borrowers are starting to be more accustomed to rates going back to more normalised levels, which should hopefully support increased M&A activity since it has been fairly quiet over the past two years,” he says.
Future Growth
Jones moved to Australia in 2016 to establish the private debt platform for PPC in the region and has grown the book to now over A$10 billion in debt investment across Australia and New Zealand, with around 70 names in the portfolio.
Although not all private debt is rated by external agencies, PPC does its own ratings and estimates the majority of its book is in the investment grade space. The loan book spans various sectors, including infrastructure, REITs, utilities, but with a growing focus on the traditional corporate/industrial universe.
PPC has found a particular niche in lending to family-owned businesses, who tend to favour a patient, longer-term, and more flexible capital provider that will be responsive and willing to support their businesses through cycles.
For example, PPC closed a transaction in October 2022 with Palm Lake Group, a 100 per cent family-owned, Queensland-based provider of resort-style retirement accommodation.
It owns and operates a portfolio of housing estates and retirement villages in several states across the country.
Palm Lake sought a long-term debt facility that would better match the long-dated nature of its assets. Historically, the business had been solely financed by shareholder equity alongside shorter-dated bank debt.
PPC put in place a US$200 million facility and Palm Lake issued senior secured notes split across multiple tenors of up to 15 years.
Financing usually takes place around acquisitions, transformative CAPEX programs, or overseas expansion.
“We traditionally have focused more on old world, industrial businesses: manufacturing, distribution, business services, et cetera. There can be mining, but we tend to be more mining adjacent,” he says.
“Within that private, family-owned space, as there are either generational transitions or more acquisitions, it is still an attractive area for us to grow,” he says.
PPC has also built a mezzanine debt capability, something that Jones was initially sceptical of working in the Australian market, considering the difference in the profiles of companies that tend to list in Australia compared to the United States.
“Mezzanine debt is a good product as a transitional form of capital,” he says. You don’t want to have mezzanine on your balance sheet forever. But if you’re making an acquisition or pursuing a recapitalisation or other transformational event where you need a patient partner, then it is a good product,” he says.
“We’ve been very consistent in our approach and in where we want to play and be active,” he says. “We have avoided a number of strategies because of our focus on covenants and terms.”
But Jones does expect to continue to grow the business in other areas.
“We are continuing to scale up the platform and build out the team here. I still see a lot of white space on the prospect list that we have. There’s still a lot of education work to be done, because this sector is still pretty much dominated by the banks,” he says.
This article is sponsored by the PGIM. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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