Company Profiles

Adding More Tools To The Box: Cairn's Purchase Of Bybrook Capital

Tom Burroughes, Group Editor, London, 18 October 2021

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Covering all aspects of the credit cycle, taking into account rises and falls in markets and potentially tougher economic conditions, makes strong wealth management sense. This is particularly the case in the European market, where there are untapped opportunities.

When there is talk of rising interest rates, heavy debt and how the economic cycle might pan out, smart wealth managers want to tap into the opportunities that come in the tough times as well as when the economic sun is shining. 

In late August, London-based Cairn Capital bought Bybrook Capital, a firm with expertise in stressed/distressed debt and special situations areas in Europe, which covers sectors that could loom larger for investors in future. Following the transaction, Cairn now boasts a total of $9 billion of assets under management across performing, non-performing/distressed, and special situations credit strategies. Cairn, majority-owned by Mediobanca, established in 2003, had more than $6 billion of AuM prior to the deal. Bybrook, which was set up in 2013 with seed capital from Blackstone, grew to a $2.5 billion-plus European-focused player before the merger. 

This news service spoke to Nicholas Chalmers, CEO of Cairn Capital, who joined the business in September 2019 with a mandate to re-focus the business on its core competencies where it has a genuine best-in-class track record. Cairn's main business is leveraged finance where it has developed a collateralised loan obligation management platform. 

“Investors are increasingly looking for managers who can offer more than an “arm’s length” relationship but rather can serve as a long-term partner and offer breadth of capability and investment expertise to navigate the investing landscape as the opportunity set shifts over time,” Chalmers said. “With the combined firm having strong, proven track records and expertise across the spectrum of performing and non-performing/distressed credit as well as special situations, the organisation is now well positioned to deliver that kind of partnership approach to large institutional investors.”

“We’ve felt for some time that special situations and distressed debt was a natural complement to our existing capabilities within performing and structured credit as it would allow the firm to offer more compelling through-the-cycle investment capabilities to long-term institutional investors,” he continued. 

“We are one of the largest European CLO managers (top quartile) and are in fact the largest dedicated European CLO manager insofar as we are pure-play focused on Europe and have been ever since inception,” he said. “We also have a fund and managed account offering within leveraged loans which has a very strong track record within its peer group and consistently outperforms its benchmark.”

Opportunity set
Although forecasts of the credit cycle are notoriously difficult to make, the market has been expectatiing that if, not when, borrowing costs rise, and the hangover from the pandemic hits, there will be opportunities for canny investors. In February this year, PricewaterhouseCoopers said that the negative impact of the pandemic would “strike European banks hard."

“Throughout 2020, regulatory measures and state support camouflaged deteriorating asset quality in bank books, and stabilised NPL ratios. The full impact of the crisis is therefore only likely to materialise in 2021 and 2022 as support measures are scaled back. It is at this point, according to model-based scenario analyses, that pandemic-induced defaults are expected to increase NPL volumes significantly.”

On a far more positive tack, however, reports suggest that stress in the corporate debt side isn’t as severe as might be supposed. Net leverage - net debt as a proportion of earnings before accounting for interest, taxes, depreciation and amortisation - fell amongst investment-grade firms in the second quarter to the lowest level since 2018, and the European level fell to the lowest level since 2019, according to BNP Paribas (source: Reuters, 20 September).

Regardless of what happens, Chalmers argued that Cairn has covered its bases by the Bybrook deal. He also said that Europe is full of undiscovered opportunities.

“In Europe, there is a steady flow of special situation and distressed opportunities if you have the right relationships to get access to deal flow and know how to execute. This is due to the uniqueness of the European market and specifically the significant role that banks play in lending,” he said.

“It may not be immediately obvious that there is a healthy ongoing opportunity set for high return special situations and distressed in Europe when you look at only a few metrics such as GDP growth or the headline default rate on the European high yield market index, but that is because a large portion of the more interesting situations are not widely traded or readily visible in secondary market pricing. Rather, they are sourced directly from bank balance sheets or tightly held syndicate groups where the debt has never traded hands. We believe there are very few managers operating in the size and types of positions that we target which makes for a healthy and uncrowded opportunity set with the potential to generate strong risk-adjusted returns,” Chalmers said.

The combined firm has an investment team of more than 30 people, including a pool of analysts focused on single-name fundamental corporate credit analysis. 

The existing clients of the firm are primarily institutional investors such as insurance companies, pension funds, and university endowments. We intend to remain focused on the institutional investor market including growing our relationships among other institutions such as UHNW family offices and global private bank/wealth management platforms. 

Chalmers said the combination of talents will enable the firms to stand apart.

“There is clear rationale and investment synergies to be had from combining the two firms and having performing credit expertise sit alongside special situations and distressed expertise. The cross fertilisation of insights and information flow will lead to a more robust investment process and better expected outcomes for investors across the various strategies. That is a real point of differentiation that the combined firm can now offer investors as compared to some other competitors in the market,” he said. 

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