Around fifteen years ago, Permira Credit set up (then as Permira Debt Managers) to capture the emerging opportunity of private credit investing in Europe. Since then, in direct lending alone, our funds have invested more than €13.5bn in 160+ companies. During those years we have witnessed a wide range of economic environments, and while each of them has had different consequences, we have been able to observe some key trends that hold true regardless of market conditions. Here are our four key reflections…
1. ESG risk is a credit risk
We strongly believe that a focus on ESG risks has a material impact on investment outcomes, and that companies that manage ESG and sustainability risks well have a stronger financial and general business profile, ultimately delivering a better outcome for their investors.
While the underlying ESG risks for lenders are similar to those for a private equity sponsor, the approaches to ESG engagement differ. That said, lenders increasingly have opportunities to influence ESG risks with portfolio companies. The ESG agenda in the private credit market has come a long way since we started, and continues to evolve today. We are committed to evolving our approach to assessing ESG risks and seeking opportunities to engage considering these market developments. For example, we are further developing our approach to using margin ratchets and external sustainability ESG ratings. We also engage with portfolio companies on the ESG Data Convergence Initiative metrics.
2. Diversity and inclusion drive better decision-making
For a long time now we have found that a diverse team and an inclusive culture form the foundation for the diversity of thought that leads to innovative and critical thinking, and ultimately, better investment decisions.
A culture that accommodates diversity means we see things from different perspectives, and that is a huge advantage when assessing risk and identifying potential across a broad opportunity set.
3. The most powerful leverage is insight
The ability to leverage the local knowledge gained from having six investing offices across Europe, as well as benefitting from insights on market trends via the global sector teams within Permira’s private equity business, is fundamental to our success. Having access to a global firm with vast resources and a large network has been a huge differentiating factor over the last 15 years.
There is no limit to the number of questions a lender can ask, but knowing the right questions to ask, being able to quickly zero-in on the crucial points, and most importantly, being able to draw on institutional knowledge across sectors and geographies, is by far the most powerful tool we have.
4. Volatility is not risk
During our 15 years, there have been numerous periods of volatility caused by external market shocks, and our funds have continued to invest and create value through them all.
As a long term investor, it’s vital to know how to structure deals and navigate a credit portfolio though economic uncertainty. Exogenous shocks are challenging, but with a rigorous approach to underwriting at the initial investment stage, active portfolio monitoring, and a robust action plan to protect capital and recover value in a downside scenario, we strive to construct portfolios which are resilient to economic cycles.
For us, this means continuing to invest in companies with high profit margins, a high level of predictable revenue and high cash generation capacity.