Jan Gruter
For us, the question is never is capital flowing or is it not flowing? Private capital will always flow. It's just a question is like, where is it flowing next?
Laura Uberoi
Hello and welcome to Everything Financial Services, a podcast from international law firm Addleshaw Goddard. In this series, we'll be unpacking key developments, trends and insights shaping the financial services sector. I'm Laura Uberoi, a financial services partner at Addleshaws. On the show with me today are Jan Gruter and Karl Clowry, partners in our private capital sector at Addleshaw Goddard. Jan, Karl, welcome. Thanks for joining me and actually, you lead our private capital sector so all the more exciting. Tell us, why is everyone talking about private capital at the moment? Jan, I'm going to fire at you first.
Jan Gruter
Thank you, Laura. Thanks for having us. Great to be with you. Look, I mean, if private capital was a country, it would be similar size as US and China. I mean, and that just tells you why everybody is talking about private capital. It's about investment in the private markets and the money that is flowing into the private markets. It's absolutely massive. I think it's predicted to reach 20 trillion US dollars by 2030. So, you know, it's a sizable sum of money and investors are really interested in how they can deploy into private assets, into private markets and how they can make returns. So yeah, that's probably the overarching reason why private capital and private markets are on everyone's lips at the moment.
Laura Uberoi
Huge. Karl, anything that you'd add to why everyone's talking about it to you at the moment?
Karl Clowry
Yeah, indeed. I think it's really evolved very quickly over the last 10 years to create a hybridised universe, really meaning a lot of private equity shops have started to move into the private credit world and then acquiring insurance sector assets and vehicles to park some of the assets they put in their balance sheet. So it's become a very complicated ecosystem. It's still relatively simple in some of the products, but the idea being a private capital shop or a private capital house can provide all of the solutions for an issuer, a borrower, fellow private equity houses, and indeed to fund other private credit funds, so it's a real mixture of different credit and debt products. As Jan said, it really has ballooned particularly over the last 10 years because of low interest rates that’s really helped set their sails and those sails have been full of wind and then it remains to be seen whether we're going to be calmed, you know, or will there be storms ahead?
Jan Gruter
And I think the one thing I would add there as well is like, we always used to talk about private capital and about this space as the alternative space and actually, it's actually not about alternatives. It's become completely essential when you look what private capital has been deployed to, whether it's greening of infrastructure, funding of healthcare solutions and so forth, so a lot of what used to be public markets is actually now becoming private markets.
Karl Clowry
You could even include banks in that, but obviously they've retreated for capital requirement reasons and these funds, as I say, both originating private credit funds and private equity funds have sort of merged together and really fill a huge need for further growth in the market.
Laura Uberoi
I completely concur, but I'm utterly biased because I've only ever worked in a private capital world, albeit more the family office side on mine. I think it's always been loads of fun, well for many reasons, but the utter flexibility on what is of interest, what is in trend, even from year to year, you know, one year last year it was sports and health tech, this year it's direct lending, but being able to facilitate whatever that is and with whoever. Well, I don't get out very much but it is loads of fun. So tell us when you are at the school gates with the parents or on date night or wherever you might find yourself, what do you tell people is why your job is so important to the economy in this world?
Jan Gruter
Well, I mean, what I would say as a private capital lawyer, I think myself as a little bit of an architect and a plumber at the same time, basically, designing the structures to get money to the right place, right? So whether that is to fund hospitals, to have new infrastructure, buildings, etcetera, and projects in place, wind farms, and so forth. A lot of that money obviously needs to come from somewhere, whether that's a pension fund or investors, and what my role and my clients do is to create some of those structures that enable those kind capital flows. So it's techie, but it has got a real world impact.
Karl Clowry
And I do a mixture of finance and restructuring. So a lot of my clients are distressed opportunists so if they see a struggling balance sheet, it doesn't mean that the underlying company, a borrower is a bad business or enterprise, it's simply that it might have too much debt or it needs to do some turnaround. And so I enjoy playing both with new money and turn around special situations, restructurings, because you're actually, to use Jan's analogy, you're designing new types of houses, maybe from bits and pieces of plumbing that's been left over from the original deal. You're trying to put them together in a different way, sometimes very creatively and that is a lot of fun. You're not just doing the same thing day in, day out. Now, a lot of products are very profitable, leverage-financed products and so on. But looking at some of the special-sits and the restructuring lens through those lenses, it really allows one to be quite creative, particularly then when you introduce the international element of it, that's really what I suppose gets us all up in the morning at AG to sort of do more and more cross-border work with different cultures, different backgrounds, different legal systems, and it makes for an interesting life.
Laura Uberoi
And I always need a plumber. Actually in fact, do you know our daughters tell people, bearing in mind that my husband works in the criminal justice system, that mummy helps people move money and daddy helps people be good? And I've never really, I mean, she's completely right, but I've never found a way of trying to make it sound like I do something a bit more valuable to the world, but I guess on a sensible note, it means that you do see some absolutely cracking things and being nothing other than completely nosy, Jan what's one of the most interesting things that you've worked on?
Jan Gruter
Yeah, actually, maybe a bit surprisingly for like a transaction lawyer is actually not so much a deal anecdote, but actually something related to where things can go wrong. So I worked on the fallout of the Madoff Ponzi scheme. So Bernie Madoff, you know, was supposedly that super genius who was delivering all these great returns for investors. But really it was a Ponzi scheme, a pyramid scheme where the money went absolutely nowhere, but into the wrong pockets essentially. But it kept going for many, many years and actually a lot of asset managers, kind of investors entrusted Bernie with their money and then when things finally went wrong or all these things came to light, a lot of people were asking questions like, well, why did you invest my money with Bernie Madoff? Did we actually know that it was going there and what was happening to it? And were really challenging some of those funds who had invested with Bernie Madoff. And I worked on the fallout of some of that litigation for asset management clients. We had to revisit the documents, all the interactions that they had with their investors, figure out where the liability lay. It was a joint thing between the team that I was in, the funds team and the litigation team, a really collaborative effort. Actually, it was one of those matters that then actually resulted in lots of seismic changes in the industry as well. There was a lot more regulation that came in on the back of it, a lot more scrutiny applied to investment processes. Certainly kept me busy for a number of years but actually had a real impact on the wider industry as well. And so I always give that as an example of something super interesting.
Laura Uberoi
I absolutely would, that's absolutely cracking. Here's a good one for you, Jan. Who would be the actor playing you in the film?
Jan Gruter
You should answer that. I think you were going to say Brad Pitt there, right?
Laura Uberoi
I was really stuck between Brad Pitt, George Clooney.
Jan Gruter
Hahaha.
Laura Uberoi
Yeah, there's a real Robert De Niro about you as well.
Jan Gruter
Okay I think we're getting to the bits now that we have to cut from this podcast, but actually it's the one thing I was actually proud of. I was a mid-level associate at the time, but like I came up with this diagram and like some of those kinds of relationships in the Madoff world and that diagram was then actually used by the bankruptcy trustee in the New York courts basically, who was like trying to recover lots of assets in various court filings. So I actually had like a small, a small piece of my work actually made it into some big litigation in New York. So pretty proud.
Laura Uberoi
That is really cool and it just goes to show that the advice we give everybody, which is if it sounds complicated draw it, is completely the way to go.
Jan Gruter
Yeah, there have been other instances of really high profiles. If you think about Abraaj, what happened there, again, had a profound impact on the investment industry, especially in the Middle East. It took quite a long time for some of the industry to recover from the fallout from Abraaj. At our firm, we actually helped one of our clients to essentially take over and manage some of the funds that were previously managed by Abraaj and kind of, you know, essentially provide the right returns for investors, make sure that the assets were still being managed and that was interesting and high profile transaction as well. If anything, maybe I should have become an asset management litigation lawyer. Karl, I'm straying into your world here.
Karl Clowry
Well, I was about to say all the most interesting war stories are about restructurings and when things go wrong. I mean, everything from the Russian Federation sovereign debt crisis, I was on VSED, which is a Slovak steel company, where I was asked to leave my firearm outside the negotiating room. Not that I had one on me at the time or subsequently, but I think TXU in the UK was a Texan utility provider based with a European operation, very large insolvency and £3 billion was a lot of money and that had a huge impact on the whole power generation sector in the UK 20 years ago now. But again, I think it comes down to the exuberance that Jan was alluding to with Madoff and some of the receivables fraud issues that we're seeing at the moment that have been seen before. They don't really look to see really what is underlying this. Is it the emperors wearing no clothes? People only realise that that is out of fashion when the music stops. But up until that point, yes, it was discoverable. If people kicked the tyres, if people just had a look, peeked behind the scenery, they could see really there was nothing there. And we've seen that time and time again. It's the same old ways that people pull the wool over the eyes of investors. Whether that's debt or equity. And once it's been going on for a while, that merry-go-round continues. And it's only as I say, when interest rates go up, when there's a challenge maybe in the underlying business or particularly by two-part of short sellers really do some digging that the whole edifice collapses, which is then when ambulance chasers chase after the fallout and the opportunities. But obviously a lot of those businesses do have some good underlying assets and that's where people move in. I tend to regard myself and some of my clients as really the cleansers in the financial system to clean up some of the messes, to put zombies finally in the cemetery, winnow out those that are good businesses, bad balance sheets from bad businesses that really should be put out of their misery.
Laura Uberoi
That is a cracking start to the memoirs. I never thought of it like that. I guess moving on to the sort of the here and the now. You're in the lift, this happens every day to you and people constantly stopping you saying what you up to, what's going on. What is the hottest topic raging at the moment in your world? Kick us off.
Jan Gruter
So there's loads of things that are hot, I suppose, but like one of the hottest is actually really what we're seeing at the moment in the mid-market. There's loads of activity and capital now flowing into the mid-market, which is great because if you think about especially the European economy and SMEs, which really are the backbone of the wider European economy, they really benefit from this investor interest in investments into SME businesses. One particular area where I see this is what we call independent sponsors and those are essentially private equity firms that invest into specific deals and transactions rather than raising a big blind pool fund. They find an asset and then they raise the capital for it. It's a huge trend in the US. It's now coming to Europe. It's been in Europe for a while, but it's really exploding in interest, it's very hot work. We're doing a big networking event in the space with a firm called Headway Capital Partners, our independent sponsor forum. Super well attended. I think we've got 500 people who signed up for the next one which just shows you like, you know, that people really want to access those opportunities. So that's a very hot area. If I can have maybe one or two more, we've all been talking about ESG and responsible investing, ESG and impact investment and that is still like a really big theme. But what I find really interesting how some of those perspectives have now changed in terms of like what's going on in the wider world. So, and that is particularly true for when you look at investments in the defence space, right? So ESG actually used to be all about excluding certain assets and not investing into certain things. And that is shifting a bit to actually, okay, picking assets for impact and actually for responsible investment and defence has become quite prominent in that. So lots of investors who shied away from making defence investments are now actually actively seeking that out because they realised actually for the greater good, we need to have strong defences basically in Europe and in the world. So there's a lot more capital flowing into that and we're seeing a lot more opportunities in that. It’s not as simple as that, there's still challenges. Certainly some investors won't touch certain parts of the defence industry, but there's certainly been a bit of a mood shift in that space. That's two areas I would single out there. I could name some more.
Karl Clowry
I agree with that Jan. I think we've seen Germany in particular having challenges with adopting EVs. Their automotive industry has really faced some strong headwinds from China, obviously, and the imports into Europe from Asia generally and I think the social benefits of strong defence of liberal democracies etcetera and as we've seen other geopolitical issues challenging European defence networks, then there is a move to really up defence spending, which obviously drives technological innovation and it's part of the whole transitional finance, which we're seeing with data centres, etcetera, and the exposure to AI. I think it's double edged. There’s a lot of exuberance around AI and there are going to be winners, there will be losers. It's obviously very difficult to work out as I would really compare it to VHS, Betamax or LaserDisc, which platform, which ones will be the winners in the next two, three, five years when AI really will play a much more central role. We're seeing them unloading baggage in Japan at the moment. We're seeing them obviously being deployed sometimes negligently in court proceedings. Seriously, we are going to see some real winners and it's difficult to predict who those will be. There's a huge demand for energy. I think as we all know at the present time in the world, even if everything was resolved in the Middle East tomorrow, there's going to be a lag problem, whether it's three, six or nine months’ time in the worldwide economy and there's a risk of stagflation, which obviously Japan has suffered in the past from, and many European countries had at least for some periods of the last 20 years and we may see more of that at the moment. And I think also, as Jan was alluding to in the mid-market, we're seeing the levels of complexity in the bulge bracket deals dropping into the mid-market. So you might have a multi-billion-dollar deal but even if it's in the low hundreds of millions or in the 50 to 100 million, the same technology is deployed legally in financing, restructuring, and particularly when you've got an international dimension as many businesses are these days. So that makes for a very interesting issue. Something I've been writing about another theme is really the weaker covenants and the underwriting standards across a lot of debt and equity products, simply because they're originated, distributed and piled into CLOs as has happened before the global financial crisis. We're seeing elements of the end of a really strong credit cycle over the last 11 years, really since 22. And I think we'll also see some fallout from that in the next three, nine months, I suspect, in particular sectors. And then the contagion may spread, but it's been very resilient. We've seen equity markets remain resilient despite all of the bad news that we seem to get on a daily basis.
Laura Uberoi
I mean, that is quite a lot to talk about. Let's hope it's a long lift ride having those conversations. But yeah, it just goes back to the point about how it just is really interesting, everything that's going on and never a dull moment. I mean, entirely impossible to get the crystal ball out but I can't ask you to predict the future, but to put you on the spot. What are you most excited about in terms of what's coming? What are you hoping will change the market?
Jan Gruter
What I am excited about and actually feel positive about in these sometimes bit turbulent, let's be honest, anxious times, is actually there's lots of positives, things happening where capital has got a really big role to play. So when I look at some of the new sectors where private capital is flowing in, for example, female sports, keeping up with what's going on in wider society, gender equality, more interest, for example, in sports, female sports, that is now attracting more capital. That's another big trend and it's actually something that I still see accelerating even more. We've got a number of sponsors raising in this space and I think it's something we will continue to see and see accelerate so that is something I'm really excited about. I'm doing a lot of work in the natural capital space, whether that's investors who want to exposure to carbon credits, biodiversity assets. That's all really related with the race and the desire to get to net zero. And people will have different views on how to get there. But again, actually it just shows that private capital fund managers want to be part of the solution and are part of the conversation. I think that does fill me with some optimism and enthusiasm and that's getting me out of bed in the morning.
Karl Clowry
I don't mind uncertainty, frankly Jan. I think it's quite good in part in small doses. It does create some information arbitrage for people who are braver than others to deploy capital and maybe make a lot more money than they otherwise would. I think sometimes uncertainty can throw up countercyclical opportunities for people and I do think energy will be a major issue for everybody going forward I think we've seen, but then technological responses to the challenges have really helped a lot of, and I do quite a lot in Africa, a lot of countries that are still developing, they're actually moving straight from having to build huge levels of infrastructure to maybe doing local solutions. And again, that sort of transitional finance on the deployment of development capital has really assisted in the growth of small and medium-sized enterprises in Asia and Africa. Indeed, I think we'll see more of that in Latin America as well, assuming a degree of stability and inflation gets ratcheted down in some of those jurisdictions if possible.
Laura Uberoi
I see it constantly when you look on the world map and it's the thing people talk to me the most about which is where are you seeing money flowing to and from, and just watching the changing direction of capital flows and actually not so much changing just more greater volumes in flowing in all of the directions. I mean it's brilliant for us because we have people everywhere so it keeps us really, really busy.
Jan Gruter
For us, question is never kind of is capital flowing or is it not flowing? Capital, private capital will always flow. It's just a question is like, where is it flowing next?
Laura Uberoi
Let's go back to putting your superhero capes on, changing the world, predicting the future. If you are going to do that, I'll give you a magic wand. What would you do to make the market hotter? What would you do if you had one wish? What would you change?
Karl Clowry
I think some better reporting transparency metrics. I think we've seen in some areas of the private credit world, people not really trust the statistics compared with the behaviour of a public borrower, for example, in the public markets. That same borrower may be in the private markets and the default in the public markets is noted and those securities or that debt trades lower. But the private credit trade is still holding it at a much higher price and so that's unsettled, I think, a lot of high net worth retail investors, particularly in the US, who see this lag in performance KPI reporting behind the public markets and they maybe don't really trust what the true market to market position by their asset managers might be. Now that may be a function because some of those assets are located in CLOs that don't have to necessarily report every single default done on a larger program level. But I think a little bit more information and more trustworthy information. I think there are providers out there, but that level of confidence and potentially a canary in the coal mines sometimes will give people an opportunity to look at things more objectively as we've seen where funds end up gating the exits, people get very concerned and then it has a whole run on the bank type of situation potentially. And I think we've seen a variety of funds face that because they marketed to effectively retail investors and said these were relatively liquid funds. But then as those investors had to cover their positions elsewhere, they needed to liquidate these positions, which in turn has created problems. Speaking to some very significant private credit funds last week, they were absolutely adamant the requested outflows in their various funds are largely and overwhelmingly balanced by inflows. There is a lot of dry powder out there. Everyone says there has been for years. Some of it's probably double counted, but there is a lot of dry powder to be deployed that requires a return and so people are happy or need to put it to work. And so these asset managers and private capital managers do a good job in recruiting new funds to replace the old funds.
Jan Gruter
So Karl mentioned earlier that he doesn't mind a bit of uncertainty. While I do agree with that I mean, if I had a wish, I would probably try and make the world just a little bit more boring because a bit more geopolitical stability might do the private capital of the world a dose of good as well. I mean, certainly we've all heard stories, etcetera, of actions that are being put on hold because XYZ is now a little bit uncertain you know, that predictability and sense of maybe a return to normal where possible might actually might help. But whether we will ever get to that, we'll see.
Laura Uberoi
World peace in a very very eloquent manner. I guess maybe moving slightly away from the day job, although it utterly pervades everything, and probably to stop giving you quite so much of a grilling, and this is selfishly for my own purposes as well because it's always really interesting, is there a bit of advice that you were given during your career, any stage or in other careers you've had, that sticks out to you as the best thing someone told you and may or may not be of help to others as well?
Karl Clowry
I think it's having to be resilient. In our job, you have to have that naturally to a degree, but I think you can develop it as well. And being able to act on competing deadlines, demanding clients, but also being able to empathise with your client. I mean, they are lifeblood of any professional practice, matter what you practice. That is one of the key things to be able to really be in their shoes, see what their day is like, what their tomorrow is like and try to be there tomorrow for them as well as today, but predict where they might need your services. So I think it's always constant adaptation, being intellectually curious and as I say, just being resilient because no matter how good, lucky or great platform you might be in, there will always be headwinds, sidewinds. So you just need to dust yourself off occasionally and sometimes the clients and just carry forward.
Jan Gruter
Completely agree. I think the one I would add is building connections. It's all about actually connecting people or like it's a big element of the job is actually connecting people, connecting opportunities, having your ear on the ground. What are people up to? Are you really interested in their business? Because actually you'd be surprised that you will then, you know, in a conversation two months later, get a piece of information like, actually that might be something I should mention to so and so they're really interested in that type of business. Maybe I can make a connection here. And I think that what sets apart experts or excellent lawyers, which we all need to be, our clients accept that, from actually being really good business lawyers, being business minded. And actually, in a way, it comes back to what Karl was just saying, like being in the trenches with your clients, understanding what they're up to, what they're up against, bringing them opportunities to help them basically shine in front of their own superiors. I think that goes a long way.
Karl Clowry
Yeah and it's really being business minded I think. We see that in different jurisdictions. People used to be very fearful of sort of marketing their legal services. Now, of course, everybody's doing it, but it really is to connect with the business drivers of one's clients. That's the key element. They will obviously change and clients change. Everything evolves and moves on. That's the nature of the world. Once you've got that mindset, as Jan was saying, I think that will set you up for whatever comes up in your career.
Laura Uberoi
The value add really being the, well partly as well, who you know, who you can make your introductions to, what you can bring to the table aside from what everyone else says that they are already doing. Nice and easy in all that spare time that everyone's got. Jan, Karl, thank you. Thanks for joining us today everybody for this episode of Everything Financial Services. Please don't forget to like and subscribe on Apple, Spotify or wherever you get your podcasts. We would also love it if you would leave us a five-star review, please, as that helps others to find us. And we will see you next time. Bye bye.
