The transcript from this week’s, MiB: Mathieu Chabran, Tikehau Capital, is below.
You can stream and download our full conversation, including any podcast extras, on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
~~~
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. Mathieu Chabran is the co-founder of TIKEHAU Capital, a Paris-based alternative asset manager. They run over $40 billion worth of assets.
I found this to be really a fascinating conversation about approaching the world of investing from a different angle. Being creative, thinking out of the box, looking to not just imitate what other people do, but create new opportunities by just thinking about the world differently.
The conversation was really informative and quite fascinating. I thought it was great, and I think you will also, with no further ado, my conversation with TIKEHAU Capital’s Mathieu Chabran.
MATHIEU CHABRAN, CO-FOUNDER, TIKEHAU CAPITAL: Thank you, Barry.
RITHOLTZ: I forgot to mention, you have received the Chevalier dans l’Ordre de la Légion d’Honneur by the president of the French Republic in January 2022. We’ll circle back to that at some other point. I don’t know how relevant that is to asset management, but let’s talk a little bit about you were doing before you were being lauded by the French president.
You went to school in Paris, but you began your career in London at Merrill and Deutsche Bank. Tell us a little bit about that background.
CHABRAN: Yes, no that’s right Barry. You know, that’s one thing in Europe where London was, I actually think, still remains the one place where you want to get exposure when you join financial services. So I was lucky to get this summer internship at Merrill Lynch back in the late 90s. I met Antoine, effectively my co-founding partner. So that was a while back, but nonetheless, I don’t know if it was love at first sight, but we got to get along pretty well, and after a few years working for investment banks, he then joined Goldman Sachs. I joined, effectively, Deutsche Bank. We decided to try to have a go on our own. We were 28, 30 respectively.
And looking backwards, as much as investment banking, even with banks that are no longer there, was a great, that was a great training. I think it was a great training. I think we learned a lot. The exposure you get in investment banking, I was a leveraged finance banker by background. And so late 90s, that’s the emergence of the high yield market in Europe, you would print deals like never before. You get this exposure, you’re a young analyst, associate, you get to go on the road show with management teams. I look backwards, that was a hell of a training in terms of the exposure we’re getting.
RITHOLTZ: Yes, I can imagine. Was the plan when you were going to school in Paris always to go into finance, or were you originally leaning in another direction?
CHABRAN: Prior to joining a business school in Paris, I studied political sciences in my native Provence, in Aix-en-Provence. And there was no hint at the time that I would be heading into finance.
And so when I then got the exposure and getting to learn with great teachers, by the way, what, and again, way back in the late 90s, but then you start reading books, and I’m not talking about the theoretical books, but some experience, the people, I remember these books, reading the, “Liar’s Poker” from Michael Lewis, reading “The Predator’s Ball” about Milken and the junk bond, and that’s where the excitement started. And you’re like, I have to get exposure to that.
So no, there was nothing written, but it was a great step.
RITHOLTZ: So fast forward to today. You now work in a large European firm in the USA, but really you began your career at big American firms in London.
CHABRAN: That’s right.
RITHOLTZ: What are the cultural differences like a US firm in Europe versus a European firm in the US?
CHABRAN: Yes, well it’s an interesting question. Looking from the US, Barry, at times, Europe may be an easy concept, but it’s a very complex reality. And so doing business in Europe is obviously, it’s all about being local, because Italy’s not Spain, France is not Germany. At times, people in London think that they cover the whole European play field, but again, it’s a complex reality.
So having met people back then, Americans working for these US banks, now they understand that. And the ones successful, and even some of our peers, competitors, friends, American franchise who are competing and tackling the European market, very often the ones successful or very successful are the ones who’ve been spending a lot of time on the ground.
And then on the contrary, hopefully, having worked for US franchise, having spent time with people and great mentors, you know, for me, I now can hopefully understand better the cultural difference as we expand here. And as I’m sure you would appreciate, being here in New York is a very different reality than the rest of the Americas, partly when it comes down to visiting new clients in the Midwest, the part of the US.
So hopefully there’s a bit of convergence here to make it worthwhile.
RITHOLTZ: I love the old Spalding Gray quote, “I don’t live in America, I live in a small island off the east coast of America.” Because to your point, New York isn’t Kansas City and Kansas City isn’t Miami. But New York is definitely its own creature.
CHABRAN: It is for sure. And you know for us at TIKEHAU, it’s been an important step to open and expand here in North America. Just background, Barry, when I moved here five years ago this year in 2018, we had barely no relationships in North America. We had made a few investments, relationship from a client standpoint, from an LP standpoint. And fast forward, today is close to 10 percent of our AUM that we have raised here. We launched new initiatives, we try to be differentiating. And obviously it’s a long-term game and you have to be definitely long-term greedy when you set up a business in the US.
But in the business we’re in today, the alternative asset management space, as competitive as it can be, but the structural opportunity now is such that the commitment as a European that you have to make here has to be long term. I made the commitment personally, and I can see the path because there is room to expand the business.
RITHOLTZ: So let’s talk about what led to the decision to launch TIKEHAU Capital back in 2004. You’re at Deutsche Bank, your colleague Antoine is at Goldman Sachs. What made you say, “Hey, let’s get the band back together again?”
CHABRAN: Well, you know what, it’s actually back to what I was just saying. We were watching all these franchises being launched, and obviously at the top of them and all the ones you can think of who are leading the industry today, but back then they were managing a few tens of billions of dollars, which was enormous back then, but it’s only a fraction of what they are today.
And we were seeing all these American franchises launching in Europe, out of London, and we were like, “Why don’t we give it a go?” We learned leverage finance, we learned real estate debt, we knew high yield, we knew opportunistic investment and we’re like, it’s never too late, it’s never too early and we decided to go with a huge $4 million AUM that we had gathered from friends and family.
RITHOLTZ: Right.
CHABRAN: So you can appreciate the challenge back then but you have to start somewhere.
RITHOLTZ: Right. That’s walking around cash back then.
So let’s talk about not too late, not too early, you launch right after the dot-com implosion.
CHABRAN: Correct.
RITHOLTZ: But a few years before the great financial crisis …
CHABRAN: That’s right.
RITHOLTZ: What was that period like, what was that lull like between those two giant volatility events?
CHABRAN: It was an experience because the dot-com bubble, I remember being a young associate at Merrill Lynch, and all the investment banks, they had to reinvent themselves to make sure they could remember this retained talent that we’ve been hearing lately again.
So they were creating some cool working space and you would no longer wear a tie and all that, which was all form of a substance and as if there was a shift. And then you have this ramp up from effective year four when we launched to the GFC and we’re three years, four years into business at TIKEHAU. And I remember we feel extreme pride because then we were banking with Bear Stearns, we were banking with Lehman Brothers, and that was a step in the entrepreneurial development. And then all of a sudden, over the weekend, those banks are gone.
And so you’re like a young entrepreneur leaving this near-death experience, despite thinking that you were close to certainty because you were working with the best institution and counterpart you can think of. And then all of a sudden, it’s all about how you see and look at the world, never take anything for granted, always be in the world of challenging everything.
So it’s not good for your stomach pain every morning, but only the paranoid survive. And I think that was a great learning experience.
RITHOLTZ: So let’s talk about what took place post Bear Stearns and post Lehman from a business perspective. Bear Stearns gets absorbed into JPMorgan Chase. So your contacts at Bear Stearns are still in business.
The best parts of Lehman Brothers get absorbed into Barclay. So I got to imagine a lot of the folks you were doing business with at those places landed on their feet and you still had some relationship or am I being too sanguine about it?
CHABRAN: No, no, that was a bit of all of the above. But more importantly for us in our development, as I said, it was about never taking anything for granted. Because Lehman Brothers is what, a single-A rated bank on the Friday night and it’s defaulted you know, on the Monday morning, and even if I’m sketching a bit, from there on, at the time, we’re 800 million AUM, I guess. We have a team of 20, 25 people, most of them still being with us today, by the way. And it’s great when you’ve been to work together, if you allow me, because then you just have to look at someone in the eyes and you know exactly how they’re going to behave, because we’ve been through that together.
And so for us, beyond the people and beyond the institution, It was the beginning of the second phase of the journey. I’d like to say maybe less naive about how easy all these things are, because they’re not easy. Steve Schwarzman wrote his book. It’s called “What It Takes.” And so for us, that was, everything being equal, the beginning of the second phase of the journey, where it was no longer the teasing part.
You were effectively into the real stuff.
Now, on the positive and the silver lining was that this whole situation started putting a lot of light on, let’s say, the alternative market. Private debt, private credit was unheard of in Europe until the banks effectively went into this massive liquidity squeeze and all those asset managers had to step in and fill this void. Great opportunity for us. Private equity at the time was only about buyout and LBO. Only few had heard about the growth equity part where you need to strengthen an entrepreneurial company’s balance sheet because it’s not, well she’s not trying to sell the business, it’s just about making sure you find the right partners to strengthen the balance sheet. And so on and so forth.
We started a new period adding on top of that this very accommodating monetary policy where that was the beginning of a new chapter for private markets. And we were lucky to effectively embark on this journey at this time.
RITHOLTZ: So let me follow up on the financial crisis, the period afterwards. Clearly it was highly disruptive, lots of damage done, lots of people lost their jobs, lots of businesses went out, but it sounds like a lot of opportunities were created in what came after.
CHABRAN: It was certainly the case for us. Again, many challenges, but with the hard work and with people who could see the opportunity and possibly with a European approach thinking that, yes, you can develop a very multi-local footprint organization in Europe, be an alternative to global investors, to clients, to the one established, mainly Americans, I must admit. That was very exciting. It was very exciting to get into that. And to a certain extent, we had been looking forward for the day where we could face another of those crises.
And we all know they’re all different, but better prepared. Better prepared with more resources, with a more powerful platform, with a bigger footprint, and leaving COVID aside, leaving Brexit aside, leaving all these little steps over the past 10 years, 12 years, we’ve been getting better prepared for when the cycle change.
And we may have entered this new chapter of this new cycle, raising interest rates, started a year ago, we’re of the view that it’s not getting lower anytime soon. And so we go back to the basics of what our job should be, risk underwriting, risk assessment, asset prices are different from asset valuation.
I mean the valuation is the future cash flow discounted at a risk-free rate plus a risk premium. Well guess what? The risk-free rate now is 5 percent is no longer zero and the risk premium is closer to 5 percent than it is from two.
And so all of a sudden the whole merits of our job gets back into the center of the pitch and that makes our job much more exciting.
We’ve never been more excited than we’ve been for the past 12 months to invest today.
RITHOLTZ: So let’s talk about what brought TIKEHAU to the US. Clearly you guys were very successful in Europe. You now have 13 offices around the world. Is it just the size of the US market? What was the attraction here?
CHABRAN: Well, I mean, size is definitely a reason. But I would add, we had just gone public at the time, 2017. And for us, the listing, maybe way before it became more spread in the recent years, the main objective of the listing barrier was really to promote the brand, the franchise. We never sold a single share on the occasion of the ’60s.
RITHOLTZ: You guys only allowed a small piece to go public, right?
CHABRAN: Yes, that’s right. And all our historical backers, shareholders, they actually kept on supporting the business. We tapped the ECM market twice and they all reinforced their ownership. So unlike many IPOs, which are a way to monetize the business, for us it was really about rationalizing the platform. We had just come out of 13, 14 years of very entrepreneurial development during a period, as you mentioned, which was pretty bumpy. And so it was a great way to rationalize the platform, come with one brand, one name, getting the name out there.
So that was in 2017, we went public on Euronext Paris. And coming to the US, there was no other alternative than coming to the US at some point. And we thought the timing was right, both because we had now, we had then, 20 billion AUM. We’d been in Asia for a few years, and it had been extremely promising. So I decided to come here to promote this brand, to convert into a commercial relationship, raising more capital towards US investors, which to your point is one of the deepest market in the world.
And then also start deploying capital here in the US.
Not that there is a shortage of capital by no means, but as we like to say at TIKEHAU, create not compete. And so we started initiative like secondary private credit. Private debt was a mainstream developed strategy here, I mean globally and here in the US. I think we’re one of the first one to move into secondary private credit.
Fast forward a couple of years, three years, now we can demonstrate the merits of the strategy, the track record of the strategy. We started expanding into a mid-market infrastructure. That was right before the Biden election and all the focus on infrastructure when we were not active in infrastructure in Europe.
So we tried to find some play that could differentiate ourselves, not only vis-a-vis Europe and Asian investors, but also here in the US, to be able to tell a different story to LPs with one key differentiating factor is the skin in the game that we have as a structure and as founders into the organization.
RITHOLTZ: So a lot of companies that go public then have a valuable currency they can use for acquisitions. How did that play into the thinking?
CHABRAN: Yes, that’s right, and we used that a couple of times very selectively since going public. Infra was one of them, another one in real estate in Europe. And I mean, they were very selective, bolt-on acquisition. An acquisition in our businesses is always a big bet, right? We’re in the people business, and you need the chemistry, I mean, you need the culture to work out.
But looking forward, it’s certainly, we’re in a better position today to counter acquisition than we were in a few years ago. So as the market and the industry restructure, we’ll certainly be very opportunistic.
RITHOLTZ: That’s kind of interesting, the thought of Bolt On as opposed to within the same space. There’s a long history of financial acquisitions that didn’t really work out all that well because of the chemistry, because of the cultural issues.
CHABRAN: That’s right.
RITHOLTZ: But something you said earlier really stood out to me. You want to create, not compete. So let’s talk a little bit about how you guys at TIKEHAU think differently, tell us, or in Steve Jobs’ term, think different, tell us how you approach the world differently than a lot of your competitors.
CHABRAN: Yes. You know when we started, as I told you, extremely modest, there were plenty of franchise out there when even if you talk to private investors, high net worth, family offices, who can be a bit more nimble in the way they approach their asset allocation, they need to see a reason why they would go with what was back then a TIKE-who, more than a TIKEHAU.
RITHOLTZ: (LAUGHTER)
CHABRAN: And find a reason why they would allocate there.
Back then in Europe, back in the day, when we start doing private credit, direct lending, today is very much mainstream. I can tell you that back then it was not. At the time, they even called it shadow banking in Europe.
RITHOLTZ: Yes.
CHABRAN: It’s been quite a while since I last read about shadow banking because it’s become so mainstream and structural today that it’s really part of the year.
So we’ve always tried to effectively be a little bit, I don’t know how it comes across, it’s not the underdog, but coming with something that is different so that you can —
RITHOLTZ: Clean slate?
CHABRAN: Yes, so that you can make a name for yourself and then use these adjacencies of the business then to scale and make them very mainstream. I was saying the secondary private credit that we launched a couple of years ago now here in New York is becoming a bit more mainstream.
Every day I would see one of the large bulge bracket banks launching or speaking about the initiative. We’re like, well, maybe that was a good idea we had. And competition is good, by the way. Nothing wrong about competition, but at least you’ve established a name for yourself. And obviously, you’ve got the track record, and you can showcase that.
So that’s step one.
The second thing, Barry, if I may, is in our industry, what should make the biggest difference is the skin in the game that the managers put into their business.
I like to say that in our industry, you come across a lot of people who are willing to make money with someone else’s money. You come across less people willing to make some money with their kids’ money. Any entrepreneur is taking risks by borrowing some capital and investing into his business, whatever the business is.
And in our industry at times, I think that there’s been a little bit of irony, not to say hypocrisy, in the way that we showcase the skin in the game. I don’t think carried interest is a great alignment of interest. The only alignment of interest is the amount of capital that any given manager or firm is putting into its fund.
When you read that, okay, well, we put 1 percent of the fund as commitment from the GP, the is a billion, you know, we put 10 million, it’s a lot of money, yes, but you’re charging 2 percent for the next 10 years, so the option cost is not that high.
When you’re putting 10 percent, 20 percent of your balance sheet capital side by side with your LP, you can do a basic Excel spreadsheet and you’ll see, you know, what is at stake, and that effectively, yes, you’re going to make some money on the management fees and the performance fees of the carried interest, but you know, what you have at stake side by side with your client is a totally different magnitude.
And I think this is where the industry should be heading. And many of our peers, competitors, they all have different models. But the one with significant skin in the game, from the GP, from the partners, from the balance sheet, and going public, by the way, Barry, was a great way for us to strengthen this equity base, which is partner’s own and control and management own, to effectively create what has been so far, certainly in Europe a second to none skin the game model.
RITHOLTZ: I like the way that sounds. Let’s talk a little bit about Europe.
If we look at the past few decades Europe outperformed the US in the 2000s while we were going through dot-com and financial crisis. In the 2010s the US markets were just on fire and really did very well. 2020s things started out a little shaky. How do you compare the investment environment in Europe over the past few decades versus the US?
CHABRAN: Well both of them were obviously driven by interest rates and they moved you know the same direction but in different patterns and when we first got into negative interest rates in Europe a few years ago on the back of the euro crisis you know it was the GFC first with the sovereigns but then you know with the IG market with the investment great market right you had corporates basically borrowing 100 and being asked to give back 98.
And today when you look backwards, and with no back trading you’re like, okay, what were we thinking about back then? Because for what we do, and I mean, you know the business, Barry, like risk underwriting is about effectively scaling the risk, the return. And we were in a very awkward environment.
And so that’s why I was surprised to see so many people surprised. You know, a year ago, May 22, you know, interest rates started rising and all of a sudden the whole software were bugged.
I mean, what we do is not rocket science. And it all comes down to the, you know, value of liquidity and the cost of credit. And then we can start, you know, doing what we are supposed to be doing, you know, risk underwriting. And so Europe, US went into a different pattern on the way down and very different on the way up.
I mean, here in the US, obviously, you were much more reactive in raising rates, rightly so in my view. Maybe Europe is lagging a bit that time around. They were actually faster at reducing interest rates, even so into negative territory.
But there is a little bit of decoupling going on right now. And for us, it’s a great way, particularly at TIKEHAU, where we are very exposed to the yield play, credit, infra, real estate, bespoke credit. And so all that’s the starting point of this risk underwriting.
RITHOLTZ: So let’s talk a little bit about the difference between the 2010s and the 2020s, starting with, hey, it’s pretty arguable that by the time the Fed began raising rates here in the United States, they were already behind the curve. Their 2 percent target had been hit a year earlier, and CPI kept going higher.
So if the Fed was behind the curve, how much further behind the curve are the central banks in Europe in terms of dealing with their inflation issues?
CHABRAN: The Central banks in the US and in Europe, they may have a different mandate. One might be more political than the others, and at times when you have to effectively financing all the deficits, you have to be mindful that you need to be able to issue and pay down this debt.
I think that right now and without getting into too many political details, I mean Europe is probably not in a good place relative to where they were in reacting to COVID for example or reacting to the euro crisis you know 10 years ago. I mean the political situation in Europe has created indirectly some effect maybe on the ECB and as much you know I mean Christine Lagarde has been doing a terrific job after Mario Draghi there, but the institution maybe should be a bit bolder in the way you’re tackling this inflation issue.
Because we all know that a period of very low interest rates create massive inequality. Inequality between people having access to credit and the people who don’t have access to credit. And when I say people, it’s individual, it’s corporate, it’s states. And so ironically, you save a system, but you make it a bit more unequal in the way people came out of this period.
RITHOLTZ: So that’s really interesting. During the post-financial crisis era of very low rates, anything priced in credit, real estate, equities, bonds, did really well. Certainly that helps the top 10 percent in the United States. During COVID, rather than just a monetary response, we saw a massive fiscal response, which seemed to have really helped across the entire economic strata, especially the middle class. So what do our experiences, post-financial crisis, post-COVID, tell us about the need for balance between monetary and fiscal stimulus?
Yes, you’re absolutely right. But by the same token, we know that right now, I’m not an economist, but in the US, in Europe, the inflation, the structural inflation, people might have a different view about that, is certainly hurting the one with the less resources.
RITHOLTZ: Right.
CHABRAN: Obviously, food, energy, housing, and not even talking about school, healthcare, and obviously in Europe we have a totally different environment about this matter.
So it’s a tricky situation, and where I think asset managers have a role to play is in making sure that whenever someone is saving a dollar, or investing $1 billion, be a private investor or a large institutional investors, is that there is the appropriate risk return associated with the strategy that is being implemented.
That was very complicated to do in the zero interest rates environment, because everyone threw the dices and it was a double six, because you can only make it right when money is free.
RITHOLTZ: Right.
CHABRAN: Because when money is free, investment has no merit. And now that we are in a situation where money has some value, then you can be discriminating, and that should benefit, again, the one individual saving a dollar, or the one institution only investing a billion.
And that, in that respect, regardless of this macro situation, if I come back to our role as asset managers, that’s where we have a role to play.
RITHOLTZ: So let’s talk a little bit about valuations relative to risk and reward. Arguably the United States, both the public markets and the private markets, are not cheap today. They’re not crazy dot-com expensive, but they’re certainly not inexpensive. How does Europe and the rest of the world compare on a valuation basis to the US?
CHABRAN: Maybe because I come from a leverage finance background, as I told you, I tend always to focus on the downside. But I also learned along the way that you rarely die, I mean as a company, from your P&L or from your assets, but you always die from your liabilities.
And I think that effectively this excess in very cheap money, this excess in leverage, this excess in thinking that you could access unlimited for an indefinite period of time of cheap to free capital may have created some, the wrong asset allocation pattern in some places.
So I think we’ve now entered a period where we have to swallow this whole mispriced, over-levered assets out there. Corporate credit was one, obviously the bonds, I mean the sovereign bond market, and we remember the SVB story, it’s about T-bills.
And then you, obviously the real estate, many areas that were over-levered at the wrong cost. And that could be painful, because someone will have to take the pain, even if, unlike 2008, where the risk was concentrated on banks’ balance sheet, today is much more spread across, let’s say, asset managers. But you have to find a way to dry up all this excess of liquidity, which was necessary on the one hand, but maybe mispriced on the other hand.
And so today, I think that part of the IG fixed rate corporate bond market, obviously part of the real estate, and we’ve been talking at length about that, we have to suffer some of the pain or losses in some way shape or form.
As always, on the other side of this trade, that will create great opportunities for people liquid, nimble, who don’t have to carry aged inventories, if I may say.
I have the impression that the US will be more realistic in the way they approach that, in terms of taking the heat, taking the pain, and starting again. In Europe, maybe there’s a little bit of a pre-turn and extend game, but it’s always better to, what has to be done ultimately should be done immediately.
RITHOLTZ: Tear the band-aid off, don’t wait.
CHABRAN: Exactly, and that’s what we should do when it comes to financial risk and financial pricing.
RITHOLTZ: So you mentioned the excess liquidity is causing excesses and dislocations. Have higher Fed rates and other around the world, higher interest rates, taken some of that out of the system, and combined, what is the impact of the regional banks that have gone belly up, a handful of them, but it certainly has put the fear of God into a lot of, you small banking shops, what does that do to all the excess liquidity that’s out there?
CHABRAN: You know, on the regional bank, I’d rather not comment, I’m not an expert, and it came as a surprise how quickly large, very large institutions could get into some liquidity stress. Coming back to my comment, again, it’s your liability side. And there’s been plenty of comment there.
What I see is that, once again, for asset managers, It’s a very interesting structural opportunity because it creates a bit of void in terms of the market that we can fill in in some way, shape, or form. So I think that on the positive side, investors, allocators.
Today they can effectively allocate capital into strategies which will create a compounding effect to their portfolio. Because what was, I don’t know, three, four percent in some strategies two years ago, now can be eight to 10.
And so when you start compounding your new allocation into these type of strategies, that can make up for the part of your portfolio which itself could be a little bit underwater as a consequence of those rising interest rates. Again, credit, real estate, what have you. So that’s the positive. You have to be able to do that, right? So how do you do that? I mean, if you have effectively the denominator’s effect that people have been talking about, or more liquidity constraint because cash is not coming back as quickly as you had anticipated because your managers cannot sell their portfolios.
The secondary market has been developing like crazy on the private equity, for example. As I said, private credit is another one. Real estate will be an obvious one, given the amount of capital out there.
And so it’s about being prepared to say, okay, I’ve been making five, six, seven percent on this strategy, maybe I will exit this strategy, albeit at a discount, the lowest possible, but the proceeds will be able to be reinvested into strategy that will generate a higher return, which over a short to medium timeframe can make up for this cash flow requirement that I need for my pensioners or what have you.
So I’m actually very optimistic that all asset owners, asset allocators, the one can be nimble. It’s a very exciting time ahead.
RITHOLTZ: Let’s talk a little bit about how TIKEHAU champions impact investing. Obviously the goal is to get to some sort of sustainable future. What’s your investment thesis there?
CHABRAN: Yes. I think we were relatively early in what has become a very mainstream strategy, you know, rightly so, and that was really a combination of many factors. We launched our very first growth private equity strategy in 2017-2018, way before it has, as I said, become a must-have strategy for many managers and for many allocators.
We started doing that because in Europe, we’ve been investing alongside entrepreneurs, families, as I said, we’re not a buyout shop, we don’t take control, we don’t lever up companies, we’re trying to, in our role of the middleman between the asset owners and the companies, to allocate where we see a financial play, but an impactful financial play. So when we started this strategy in 1718, and started allocating capital, investing in entrepreneurs who had a solution, that had to be massified. Because when you want to meet these targets and these goals in terms of climate of CO2 reduction, it’s great to be investing in what will change by 2050 but it’s more important to find what works today and it’s to be massified.
Scale up. We’re investing in profitable mid-market companies making 20 million, 25 million, 50 million EBITDA and needed capital in. These guys are not looking to sell their company, they need the capital in to scale. And we started doing that across low carbon mobility, across energy efficiencies of the buildings. As you know, it’s 40 percent of the green gas emission. And so we started doing that, I would say, naturally, five years later, we now can represent effectively the case studies. Obviously the track record, it matters, but people want to understand what we’re talking about when we’re talking about this type of impact investing.
Here it’s about climate.
We then launched regenerative agricultural strategy because one of the key objectives is how do you capture carbon and there’s nothing like the soil and the ground to help do that. That’s on the equity side.
And then we started doing some private credit impact financing. What does that mean? You’re a borrower, we’re lending you some money, at 5 percent, you’re three times your EBITDA, we take all the traditional credit metrics of financial analysis, and then we add a third dimension. If you hit certain targets, certain goals, extra financial goals, then you will improve your cost of funding. And your 5 percent coupon will go down to 4 if effectively you demonstrate that you reduce by X or Y or change this production process.
And all of a sudden, you realize that if your cost of funding goes down, as a consequence of some extra financial goals being met, well, your return on equity goes up.
RITHOLTZ: Right.
CHABRAN: And so you can demonstrate that it’s not about being a philanthropy. It’s about making sure that we use the capital available to send it where it makes sense, and then all stakeholders benefit from it. And so as much as five years ago, it was nice to have, and once again, create not compete, we’re trying to push that forward.
Today, it’s non-negotiable. It’s not negotiable with our LPs. It’s not negotiable with our customers, with our partners, with our banks, with our clients, with our staff, Barry. I mean, when we talk to some of our 20-something, 30-something colleagues, professionals, It’s part of their commitment to the firm.
Because one big issue you know in this, when it comes to this impact and ESG, let’s say in the wider sense, at best you can come across very opportunistic, at worst you come across as fake. And in both situation, it’s not good.
And so us, our colleagues, our staff, people and all the stakeholders, I mean, they are the guardians, they are the stewards of us being real here. So again, now it’s no longer a nice-to-have, it’s a must-have, and there’s only one way.
RITHOLTZ: So ESG seems to have found a lot of support in Europe. Are you a little bit surprised about how this has become politicized in the U.S.? It seems like they’re a group of people who are pushing back against impact investing, sustainable investing, not because of the returns, but they just don’t like the politics of it.
CHABRAN: Yes. I’m not surprised because, and again, I’m an alien here, but I try to be an observer of the dynamic of the politics here in the USA. And we even experience that ourselves. Some of our LPs are very often made up of different boards, some teachers, firemen, policeman, you know, employees, public servants employees. And whilst we were dealing with the same counterparty, the same pension fund, some of their constituents, some of the underlying boards, disagree on the approach to take there.
So we’ve experienced that firsthand, that within one given investor or asset owner, there could be some divergence. And very often now I can say, because there was a bit of a misunderstanding of what we were trying to do and what others are trying to do.
So I’m hopeful that with a bit of education, the science-based approach, people will realize that it shouldn’t be a political game. I understand why. I’m not naive. I understand why. But I think the majority should prevail to understand that the asset owners today, the asset managers who can help them deploy the capital, have a historical mission because we will be judged 50 years down the road.
I mean, people will look back and say, what did you do with the amount of capital that was available back then to effectively direct this capital to where it matters? So I’m trying to take this perspective because effectively we’ve never been in an environment with so much cheap liquidity that could be used purposely.
So you talked about ESG ratchets where people get better rates if they hit certain metrics. And you talked a little bit about agriculture, regenerative agriculture. Explain for those of us not familiar with that, what is regenerative agriculture? What is the focus? What do you want to accomplish with it? Is it just carbon capture or is it more?
CHABRAN: It’s the whole chain. I mean, it’s the fact that soil goes without saying is a scarce resource that needs to be maintained in a way to be able to keep on producing in a way that for the next generation, you don’t look back and you leave a brown soil full of fertilizer or others that will not be able to generate the same quality of product for the future generation at a time where you’ll have to feed much more people.
So the technique here, very similar to the climate approach we took five years ago, is really about finding entrepreneurs and the companies who have a solution for soil, effectively a fertility, let’s say, or some technique. You know, it’s not really the agri-tech, as you may be used to, but some techniques have been proven and need this capital to scale, and this capital would not be available otherwise, because it’s not about buying land or acres or forest. It’s not about the agri-tech, which is effectively attracting a lot of capital.
But these entrepreneurs, these small cap businesses with a proven concept and profitability and they need this capital to scale. So you would be investing 20, 30 percent, taking 23 percent of the company, investing this capital to effectively help scale the business to a size where then you can get to more banking financing, capital market, which is not that open.
So it’s this whole band, so it’s certainly the case in Europe, we see it more and more here in the US, of this small mid-cap market that doesn’t have, and even more so, going back to your comment about the regional banks, you’ve got part of the financial market structure which is disappearing, and so you need the alternative source of capital, and so that’s where we can be a very relevant tool.
And that’s for the companies, and the investors also want to allocate there.
RITHOLTZ: And you partnered with some really interesting companies on this, AXA, the big insurer, and Unilever, the consumer products company, what’s their interest in this sort of sustainable investing?
CHABRAN: So one comment, as an aside, at TIKEHAU, we’ve always partnered with, or we try as much as we can, to partner with corporates to bring additional skillset. We did that in energy transition, for example, with Total Energies, very early on, ‘17, ‘18. We did that in the aerospace, cyber with a bunch of prominent European and global players such as Airbus, Dassault, Safran, Thales, bringing obviously some capital but more importantly some skill sets, some knowledge, some reach so that back to my create not compete, we can tell a different story with investors.
And as you just mentioned, the last one with Unilever, is the same, is exactly the same approach, which is bringing additional expertise alongside an asset manager, us, financial investors, and there’s no shortage of capital, as we said, out there.
In that case, one of the largest European insurance company, if not global, and having together a different proposal, fully aligned, with some complementary sourcing to the deal flow. And here again, at first, people were maybe looking at us like, why do you need to bring a corporate? Are there some conflict of interest involved here? And then, a few years down the line, they’re like, well, that’s a very different proposal that we may have heard from older managers and there are plenty out there.
RITHOLTZ: What’s the conflict of interest if you’re bringing in a consumer product try and make food on a more efficient productive sustainable way.
CHABRAN: That’s my point, they should be known and they are known but you know there’s you know people at times are a little bit reluctant or resistant you know to change …
RITHOLTZ: Status quo, it’s really powerful, isn’t it?
CHABRAN: Voila.
RITHOLTZ: I love this quote of yours I have to ask you about this. The longer the happy hour, the harder the hangover.
Explain. Very French.
CHABRAN: Well that was you know I think that was at Milken’s, at Milken Institute in May 22 and that’s when the interest rates are starting to raise and I think I was telling you earlier I was surprised to see that many people in a surprise because effectively the bar had been open for quite a long time with very cheap liquidity, if I may say, available.
RITHOLTZ: Going back to the financial crisis, the entire period that followed was free booze for everyone.
CHABRAN: Exactly, and that’s 10 years, if not more. And some of us, I think, had effectively lost sight that liquidity should have a price, and credit has some value. And so effectively, this comment I made was that, yes, people are going to have a hangover of this mispriced, over-leveraged asset they may have bought, invested into, as a consequence of this free liquidity.
RITHOLTZ: So let’s talk about, perhaps, a mispriced asset class that was relying on free liquidity, as we’re recording this, there is a recent Wall Street Journal headline, “Company insiders made millions before the SPAC bust.” What are your thoughts on the SPACs, special purpose investment vehicles? How do you look at those?
CHABRAN: So we got into SPACs two years ago, hopefully not to follow the herd, but because we saw there a very useful technology that could help some of our private companies, which is what we do, the bulk of what we do is investing with private entrepreneurs, accessing the public market with the support of experienced managers, the operating partners, with the support of experienced financial players.
And effectively, we very successfully “un-SPACed” some. We took public on Euronext Amsterdam, a great company in the TV content production business, 3 billion turnover, 600 million EBITDA. It’s called FL Entertainment, great entrepreneur, Stéphane Courbit. It’s a real company. Our SPAC is trading at, I guess, 10 bucks or around. A real company. So the issue was not the SPAC as a technology. The issue was the type of company that were trying to access this market opportunistically and rightly so in front of some capital that had been given to SPAC’s promoters and managers.
Remember that interest rates were negative.
So SPACs were used by some investors as a vault. Here’s some cash.
RITHOLTZ: Getting 5 percent.
CHABRAN: Exactly. I’ll make up for the interest shortfall and I have the option to opt out.
RITHOLTZ: So it was a guaranteed higher yield, I won’t say high yield, but higher yield bonds with an equity option at the end, if you like the equity company, you can stay with it. Saba Capital is one, a few others did the same thing.
CHABRAN: The technology itself was excess of cash, interest rates are at zero, I get negative cash, negative interest on my cash account, so here’s the cash and I may opt out.
What we tried to do in what we did, and some work, although we decided to give back the capital because back to my skin in the game approach, the one we decided to return the capital that was last month, we had 150 million plus of our own capital committed to it.
So rather than chasing the cheap option with the view of hopefully making the return embedded with the option, we’re like, first and foremost, we’re depleting our capital. The opportunity is not there. We’re not going to deploy our capital for the sake of it.
RITHOLTZ: This comes back to skin in the game. When you’re a co-investor with your LPs, you don’t make dumb decisions because, hey, we have the cash. We might as well spend it.
CHABRAN: I think so. So that was just I think misuse of an interesting technique with some investors and a misuse of interesting techniques for the wrong company.
RITHOLTZ: So I read a piece recently, a research piece that said Brexit may have taken as much as 5 percent off the total GDP of the United Kingdom. You worked in London, you’re now in New York, originally from Paris. Does that sound realistic? What was the impact of Brexit on the UK, and who has stepped into the void that Brexit teed up?
So first of all, that’s a decision that was made by the British people, and I will not comment on the rationale beyond that. I read the same studies that you mentioned, and every day I would talk to some friends, entrepreneurs in Europe telling me how challenging it has become when just to move goods and things into, and just trading with the UK.
The one part I can comment on was the whole debate around the future of the city of London as a preeminent financial place, global but obviously European.
What I can tell you Barry, is since the world reopen and you can travel again, I’m actually going back more often to London than to Paris nowadays, which is the headquarter of my firm. Why that? Because London remains a critical business center for financial services.
There are some challenging associated with some regulation in the way you have to trade and why people and banks had to open or export some branches onto the continent. And I understand why and the technicalities. But when it comes to the cosmopolitan nature of London, attracting global talents, and as much as, I’m French, and Paris has been doing a tremendous job in attracting talents and firms, but the scale is such that I wouldn’t bet against London as a financial center. So we have to cope with technical aspects, regulation, cost of doing business for some has become very punitive if you don’t have the scale.
And that’s why if I’m a bit selfish in the approach, we were fully equipped on the continent to start with. We’re now moving back more aggressively into London because we were less over-exposed when many people are doing the contrary.
People are trying to reduce their investment allocation to the UK, their workforce in the UK. So we’re trying to be a bit contrarian and taking advantage of that.
RITHOLTZ: So people overreacted in one direction, creates opportunities.
CHABRAN: Maybe.
RITHOLTZ: Europe is dealing with a war on its eastern border. What has the Russian invasion of Ukraine done in terms of energy supplies and just the entire relationship of Europe with Russia?
CHABRAN: Well, it’s a complicated one, it’s a very sad one because, well, I can tell you, Barry, sitting here in the US, and when I talk to friends, family over there, the perception of the war is very different from one side to the other, because the reality that it’s two hours away from many of the Western European capital and the perception, the feeling with the population is very different.
So having said that, remember a year ago when the war started, obviously the concern about energy, independence, sustainability was front and center. That was, I think, the silver lining of the situation to put more light and focus on accelerating part of the transition and in itself that was an encouraging step.
Looking backwards a year or 18 months now into this situation, it’s “not as bad” quote unquote, on the energy side, which is good news. But the whole situation, which I think we are unfortunately stuck with for a relatively long period of time, as creating a lot of uncertainty in the region and beyond, but also by the same token a lot of political willingness to move quicker. And the response, if you remember, that the European government made right after the war, they made more progress in a matter of a few weeks than we had in a few years. And so at times it’s effectively when the essential is at stake that people can react constructively.
RITHOLTZ: So the concern, aside from all the humanitarian tragedy of the invasion, was oil prices would spike, it would eventually lead to a recession in Europe. But a lot of Europe seems to have avoided that.
What are your thoughts about greater Europe tipping into a recession? And pretty clear parts of Europe have slowed down dramatically because of the increased costs and dealing with the war. What does the environment in Europe look like to you?
So not dissimilar to what we’re experiencing here in the US and the reentering of production capacity, we’re seeing that in many countries across Europe. Reindustrialization has been probably the most popular world of politicians lately, not only because you need to demonstrate less dependency to outside market. The whole deglobalization theme, I think it was accelerating by this whole situation.
And so for politicians, it’s a way to show a direction for the population. It’s a new paradigm, a new software. And coming back to what we do for a living, asset manager, it’s a great frame in finding ways to allocate, reallocate, working with global investors to attract more capital in certain countries, for certain industries. It’s not happening overnight, but you can make it happen fairly quickly, fairly quickly being a matter of months.
If you’ve got all these stars aligned from the political direction to the population adhesion and then the capital allocation. I’m hopeful and I’m optimistic that that could be the silver lining of the whole situation, as dramatic the situation can be.
RITHOLTZ: So you have offices in Asia, if we’re de-globalizing to some degree, and China has been the big industrial driver of much of the world, what does it mean for investing in Asia generally, but more specifically China?
CHABRAN: So what we’ve been doing in Asia, first out of Singapore, where we started eight, nine years ago in Singapore, and then Korea and Japan. We don’t have any presence in China, as a matter of fact. And the dialogue we had with these investors locally was really about attracting them to some of our existing strategies in Europe or in the US.
Asia is, I have the chance to go back there from time to time, and each time I’m there I found local economies that have been transformed. If you look at Singapore, what it was when we first moved there, and eight years later, that’s a global hub. Like a global hub with all the consequences you’re reading every day. The Bloomberg news, the price of real estate, and the numbers of family offices who moved from Hong Kong, from part of the Middle East to open there for the very same reason that you have created a great talent hub, a very business-friendly environment. You’ve got the most sophisticated sovereign wealth funds in the world. We were lucky enough to have Temasek backing us as early as 2016. They’ve been a great partner ever since. Great marketplace.
The way we look at our Singapore operations today, we have a headquarter, Paris, and we have three global hubs, New York, London, Singapore. And out of these hubs, then you can reach on a global basis first investors and effectively attracting them where we think there is an interesting investment proposal and also creating investment opportunities when you’ve got this supply-demand imbalance.
Again, it all comes down to supply-demand and how we can best take advantage of that.
RITHOLTZ: Really interesting. So let’s jump to our favorite questions that we ask all of our guests, starting with what have you been streaming these days? What’s been keeping you informed and entertained, either podcast or Netflix or whatever?
CHABRAN: One I like and I recommend, because that’s being produced by this company we backed that we took, we helped take public a few months ago, is the “Peaky Blinders” that’s great entertainment. Not only because I love this whole story about the villain and the gangsters and all that, but more importantly because that’s great content.
RITHOLTZ: Is that Netflix or Amazon?
CHABRAN: It’s a Netflix one. It’s a Netflix one. I strongly recommend and produce by our friend at FL Entertainment.
RITHOLTZ: Really interesting. So who were your mentors? Who helped to shape your career?
CHABRAN: So few of them are senior people I worked for when I was a young analyst and associate, because every one of them in their own different approach helped me challenge the fact that we are going on our own at a relatively young age for this business. Some of them telling us, “Well, it’s either too late or too early for good or bad reasons.” And on the contrary, people saying, which was less, the case is in Europe than it can be the case here in the US, there’s never a good time and you should give it a go.
And so many of them were finance professional, most of the time in investment banking, and still remain friends. Some of them joined us, by the way, along the way at TIKEHAU. And that’s one thing that obviously was very valuable when you start your own venture firm.
RITHOLTZ: What are some of your favorite books? What are you reading right now?
CHABRAN: So two books I’ve started, very different. The first one, I was lucky to attend one of the, again, Mike Milken’s, you know, event, you know, recently both in LA and then later on, and as you know, he’s extremely focused on healthcare. And the whole focus is putting through his institute and all the philanthropy around there.
And the book is called “Faster Cures, Accelerating the Future of Health” by Mike Milken. It’s something which is fascinating because in our job day to day, it’s really short term. And when you step back a bit and you look a little bit of these demographic issues, we touch base on some of those issues, energy and all that, but the demographic is probably the most challenging one.
And even if it’s 50, 75 years from now, I think we should start factoring in many of that in today’s decision.
And the other book, more recent, I was lucky to meet a French professor in Boston who’s a teacher both at HBS and HKS. She’s been there for 20 years. Her name is Julie Battilana. And the last book is called “Power for All” And it’s all about the relationship to– I wouldn’t say even power, but if effectively power is about having an influence on making someone else change behavior, how it’s not only top down and the way we may have learned it, and how we should with a new generation, in a new cycle, and the perspective of things that are critical to me, which are democracy, but also capitalism, which is fueling many of that.
How do you reconcile all that, and it’s a worthwhile reading.
RITHOLTZ: Sounds interesting. Our last two questions, what sort of advice would you give to a recent college graduate who is interested in a career in either private equity or investing?
CHABRAN: Well, I would send him some of the mottos where you’re seeing everyday at TIKEHAU Capital. Be curious, think out of the box, be on the ball, think big. I will share that with them because that’s one thing that doesn’t change. Technology may change, but interpersonal skill set and being hungry, I think that’s what matters.
RITHOLTZ: Interesting, and our final question. What do you know about the world of investing today? You wish you knew 25 or so years ago when you were first getting started.
CHABRAN: Never take anything for granted.
RITHOLTZ: Thank you so much for being so generous with your time, Mathieu. We have been speaking with Mathieu Chabran, co-founder of TIKEHAU Capital.
If you enjoy this conversation, well, be sure and check out any of the other 500 or so discussions we’ve had over the past eight or so years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast.
Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. Follow all of the Bloomberg family of podcasts on Twitter @podcast.
I would be remiss if I did not thank the crack team that helps put the conversations together each week. My audio engineer is Sebastian Escobar. My producer is Paris Wald. Atika Valbrun is our project manager. Sean Russo is my head of research. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
~~~
