Q&A: Golden age for private debt? Tikehau Capital co-founder thinks so

Tikehau Capital co-founder Mathieu Chabran
(PATRICK T. FALLON/Getty Images)
Entrepreneurship has always been a core part of Tikehau Capital's approach. The asset manager, with a presence across private equity, private debt, real assets and public capital markets, was founded in Paris almost 20 years ago by Mathieu Chabran and Antoine Flamarion. The two former bankers—then in their late twenties and early thirties, respectively— staked their own savings alongside investor capital to start the firm.

It has since grown from an initial €4 million (about $4.2 million) in assets to more than €40 billion under management, with the majority of that growth taking place in the last five years since its listing on the Euronext Paris exchange.

Chabran said he believes that Tikehau Capital's continued focus on entrepreneurship—partners still invest their own capital into the firm—feeds its success. In its first-half results published in July, it reported €3.3 billion in fundraising—its highest-ever level for a first half since formation—with €1.8 billion of that coming from private debt fundraising activity. Not satisfied with being a European success story, Chabran, who is now based in the US, wants the firm to develop its Asia, Middle East and US presence even further.

He sat down with PitchBook to share his views on why he believes the end of cheap money is good news for serious investors, why he thinks we are about to enter a golden age for private debt, and how private equity still has plenty of gas in the tank to fund growth in innovative, real economy businesses. The following interview has been edited for length and clarity.

PitchBook: What are the most impactful trends in the private markets right now?

Chabran: Speaking frankly, the biggest change is that we're back into an investable environment. Liquidity has a cost, and money has some value. For the past 10 years, when money was almost free, an investor throwing their dice was almost guaranteed to get a double six, and it was hard to differentiate between skilled investors and those who were just lucky.

As painful as the repricing that we are currently going through may be for some, I welcome it: As asset owners, we're getting back to a situation where we can value assets based on a meaningful risk-free rate and a risk premium.

Many of those responsible for investing other people's money over the past decade have been able to make money from it very easily. In this changed environment, having an alignment of interests between GPs and LPs is going to be paramount because returns will be more differentiated. That alignment and having "skin in the game" alongside LPs is something we feel particularly strongly about at Tikehau Capital.

Tikehau Capital often emphasizes its "skin in the game" model. Why do you feel that is so important?

It has been at the heart of our approach since Antoine Flamarion and I first began. We have consistently aimed for a robust balance sheet—majority-owned and controlled by our partners—to guarantee complete alignment of interests. This strategic approach has remained unwavering.

If you fast forward to today, the group structure is that all of the partners in the group own 57% of the publicly traded entity, which is [an approximately] €4 billion company—so the "skin in the game" has been taken to a much higher level. Certainly, within Europe, we are an outlier at that level, and even in the US, where I'm now based, it is a pretty unusual model.

Sometimes people question why as an asset management business we ask our partners to put capital into the firm. The answer is that we want partners who think and act like entrepreneurs, and a structure where partners are invested creates that environment.

As an entrepreneur, it's essential to be skilled in investing not only your own capital, but also that of others. We firmly believe that this is paramount—particularly in an industry where compensation and carried interest have been disproportionate relative to individual financial commitment.

In recent months, several senior industry figures, in one way or another, have suggested that the golden age for private equity is over. Do you buy that?

It comes down to what you mean by private equity. If private equity means leveraged buyouts, then yes, absolutely, that model no longer works. Making returns by increasing the debt level on an asset, at a very cheap cost of funding, has gone for the foreseeable future.

If private equity means private capital invested alongside entrepreneurs around mega-trends such as decarbonization, regenerative agriculture, or cybersecurity, etc., then there is a different golden age still to come. These are the areas where growth is going to happen, and crucially, it will come from the underlying performance of the companies—not from financial engineering based on cheap borrowing.

Also—and I am far from the first person to say it—I think we are about to have the golden age of private credit, driven by both structural and cyclical factors. Now that interest rates are at 5%, and credit spreads have doubled over the last 18 months, as a lender you're already looking at 10%. If you then look at more complex situations, that could be 15%.

The structural aspect is that banks are operating under a lot of pressure and do not have as much capacity to play in this space. Within Europe, particularly, there is an open field because there aren't a lot of non-banking financial institutions that provide credit.

Tikehau Capital has had a very strong fundraising year. What do you put that down to, particularly at a time when the wider market has been struggling?

If you're asking me specifically about fundraising, then of course, that's the fuel that we must put in the engine. But as far as I am concerned, fundraising is only a consequence—not the cause of our performance. Fundraising is the result of the franchise you develop, the returns you have delivered, the risk management processes you have put in place, and the client service you deliver, etc.

When you are focused on processes, people and performance, fundraising follows from that. I'm not saying it's a walk in the park, but we try to put the right things first.

Tikehau Capital has been clear about its ambitions to become a large international player in the private markets. Do you expect Europe to be less of a focus for you going forward?

Clearly, private markets are becoming more global. Global platforms—and that is what we're aiming to be at Tikehau Capital—have a huge competitive advantage when talking to investors. You are able to offer a broad perspective rather than offering a product in one market.

I have just come back from several weeks in Asia, and my pitch to prospective clients was that Tikehau Capital as a platform is so different [compared to]  five years ago when we were only in Europe. Our European footprint will remain strong, but we are a growing platform with a presence in Asia, the Middle East and the US, and the discussion is totally different.

I think the name of the game now is to become more institutional and truly global in our offering. There is room for sizable, entrepreneurial and driven platforms to make a big impact in this next chapter for the private markets.

This article originally appeared on PitchBook News