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EXCLUSIVE INTERVIEW: Grovepoint Looks For Financial Jewels Amid The Post-Crash Debris
Tom Burroughes
29 June 2012
Surveys point to investors scurrying from risk as worries continue about heavy debt in the eurozone and US, but as ever, there are some financial boutiques which believe indiscriminate selling points to jewels in the rubble. One sector being eyed in this light is the leveraged loans market, an area that got hammered in the 2008 financial market crash when credit markets froze, and hasn’t really recovered much since. (Leveraged loans, put together by several lenders, are typically arranged for firms that already have a significant amount of debt, and hence are relatively risky and carry a high risk premium to interbank interest rates.) European Leveraged loan spreads above the three-month London Interbank Offered Rate are around 600-800 basis points. (In 2006 when markets were tranquil, spreads were closer to 300 bps, according to the Credit Suisse Leveraged Loan Index.) If an investor is smart, this sort of price shift is too good to miss, argues Brent Geater, who leads Grovepoint Investment Management, a business set up this year to work alongside Grovepoint Capital, a business founded about two years ago. “With a turn of low-cost term financing, it is possible for a diversified portfolio of senior secured loans to yield annual returns of around 13 to 15 per cent on a hold to maturity basis. The floating rate nature of loans also provides protection from inflation in a rising interest rate environment,” Geater, a native of South Africa, told this publication in a recent interview at the firm’s offices in London’s Mayfair district. Joining Geater was Sascha Sauberlich, who works in the same team and also spent time in South Africa. “We are global investors with the flexibility to invest across the capital structure. Our general focus has been on out of favour assets that we look to buy at bargain prices. These opportunities have typically been created through a lack of funding or arise as a consequence of forced selling, Our flexible mandates and longer-term investment horizon allows us to exploit these less liquid opportunities for our clients,” said Geater. He gave the example of recently buying residential US mortgage backed securities (originally sold before Lehman Brothers went bust in 2008) at 45 cents on the dollar. Grovepoint has bought non-performing UK loans and various mortgage pools. His firm has close relations with world-class alternative managers such as Oaktree and Apollo. Conversation goes back to the European leveraged loans market. “Everyone is panicking out of European assets; that is, for us, a perfect scenario,” Geater said. The South Africa connection Geater speaks with the experience of a man who has spent a large amount of his working career in the specialist financial sector. He was raised in Cape Town and is a qualified chartered accountant. Geater later moved to Europe, working in the merger and acquisition field for five years at Svenska Handelsbanken, before moving to Canada’s CIBC in sectors such as natural resources. In March 2005, Geater joined Investec Wealth and Investment (formerly Private Bank), where he headed its Specialised Opportunities business, investing sophisticated clients’ funds into distressed assets and select private equity, real estate and growth capital opportunities. The Specialised Opportunities team also provided bespoke portfolio management services to its clients. As for Sauberlich, he also has spent a fair chunk of his time in South Africa but is not originally from there: he was born in Germany, but he moved to South Africa at the age of 19, living in Pretoria and attending university there. He has worked in areas such as leveraged finance and private equity in Investec. Sauberlich got to know Geater at Investec when they worked together, and moved to Grovepoint in April 2012 to help set up Grovepoint Investment Management. Boutique The Grovepoint businesses, with a total of 10 people, are still small by comparison to some of the biggest private equity/alternative finance shops out there, such as the Blackstones or Carlyles of this world. Grovepoint Capital, the principal investments business, looks for opportunities in which to invest, such as in private equity, bringing in the partners of the firm as investors. This firm has put together investments of more than $1.0 billion so far. As far as Grovepoint Investment Management goes, it serves external clients, tapping into a range of sectors such as distressed real estate, leverage loans, private equity, specialist credit, and so on. This arm has around $300 million of client assets. (The plan is to get to around $1 billion in the next three to four years.) The client base is drawn from City executives, family offices, pension funds, entrepreneurs and various financial institutions. Such clients want performance, without wrenching levels of volatility, so how are results so far for these young operations? “The team has developed a strong track record in specialised opportunities investments, with some clients with mature portfolios annualising over 20 per cent per annum,” Geater said. Grovepoint also manages a Guernsey investment company which was launched in early 2008 and invests in distressed debt and other specialised opportunities. The vehicle is up over 10 per cent (net asset value) with a target for an overall gain of 80 per cent. The company is in the process of returning capital to investors. GIM is working on a launch of another vehicle focused on opportunistic credit investments. Some credit market investments pay off pretty quickly, such as 18 months. Equity-based investments typically take a bit longer as an exit relies on receptive capital markets for an IPO or on finding a buyer prepared to pay an attractive price to us as a seller, said Geater. “We are not sourcing thousands of investments; we only need to source a handful of good opportunities a year to do well for our clients,” he continued. “We think it is a good time to attract talented people to an entrepreneurial firm like Grovepoint where we enjoy a strong partnership culture. We are speaking with a few talented people we would like to bring in…We feel we are in an exciting niche at the moment; we are finding attractive opportunities for our clients in these stressed markets and see a good premium for taking illiquidity risk,” Geater added.