Tim Lyne – Three Decades of Private Credit at Antares (EP.346)

0:04Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators .com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

0:44Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. My guest on today's Sponsored Insight is Tim Lyon, the CEO of Antares Capital, a $65 billion private credit manager that began funding private equity -sponsored businesses in 1996. Antares is one of the longest -standing lenders to private businesses, having passed ownership to GE in 2005 and CPBIB in 2015, all the while steadily providing liquidity to the economy. Our conversation covers three decades of lending, from the early years dominated by bank activity to the modern era of private credit asset management.

1:29We discuss the changes in the business over time, the resources required to succeed, and opportunities and risks going forward. Before we get going, following up from the last spread the word when I went to create an auto response on LinkedIn messaging, I found out that LinkedIn limits the number of characters you can put in that message. My actual auto -response now includes links for our mailing list, premium content, and sponsored insights application, but here's what I'd really like to say. Thanks so much for reaching out. I'm incredibly grateful you enjoy the show, and I wish I had the extra 15 minutes you and everyone else on LinkedIn requests to pick my brain.

2:07And by the way, we both know that 15 minutes would turn into a half hour because that's the minimum time block available in Outlook's calendar. It's possible you're reaching out just so you can tell your buddies we spoke. I'm cool with that. This whole podcast celeb thing is pretty awesome. So go ahead and tell them anyway. Since I just can't afford the time, I'm happy to tell you exactly what wisdom I would share not just once, but every week. All you have to do is go to our website at CapitalAllocators .com and sign up for our mailing list. Even better, you can subscribe to a premium membership for just $250 and get in the inner circle.

2:43Lastly, if you're asking why you can't find the latest Private Equity Deals episode, it's because Private Equity Deals is a different podcast from Capital Allocators. Just like the Tim Ferriss Show, all in and invest like the best. So go ahead and search on your podcast player. You'll find it waiting for you there. Thanks so much for spreading the word. Please enjoy my conversation with Tim Lyons. Tim, great to see you. Great to see you, Ted. Thanks so much for having me. Why don't you take me back to how you got started in the credit world? I was the son of two educators. So when I chose a college, I chose University of Illinois.

3:26My parents were both big fans of smaller liberal arts colleges, So they weren't a big fan of me going to Illinois. But they said, hey, if you're going to go to a big public university, you're not going to go straight into business. I had been fascinated with business since I was a little kid, was focused on the stock market in second and third grade, a little unusual. But they said, hey, if you go to University of Illinois, you're going to get that liberal arts background. So I majored in economics. So I took a lot of the liberal arts classes, but I also took finance and accounting was really, really interested in finance and economics in particular.

4:04And I spoke to one of my father's friends who is a very successful business person who said, you should really go work for one of the banks in Chicago. They spend a lot of money on their training programs. You're going to learn about a lot of different companies. And importantly, you're going to learn about credit. So I interviewed and ended up getting a job with a bank in Chicago called American National Bank. It was part of First Chicago, and it was the fifth largest bank in Chicago. Great training program, and that was the starting credit. What was credit work like back then? So I still remember back then we're doing income statements and balance sheets by hand on a ledger.

4:48I'd say at American National Bank, I learned credit, but I actually learned a lot more about cash flow lending when I moved to Heller Financial. and that's where I really started to learn, okay, how do you underwrite cash flow transactions? How do you underwrite loans to private equity sponsors? The market though was quite inefficient, Ted. If you think about it, this is, I'll be dating myself here. I joined Heller in 1990. So the private equity market was nascent for sure. If a sponsor had a three or $400 million fund, that was pretty big. And there was no term private credit or private debt.

5:27So that's where I learned about cash flow lending was at Heller Financial. What was the distinction for you between cash flow lending and asset -backed lending? At American National, I was doing more asset -based lending. So it was underwriting a company -based loan. You advance against AR and inventory and PP &E, and you're looking at it from a liquidation standpoint. So it was this totally new approach of underwriting the business itself and knowing that there's no way I'm going to be repaid from a liquidation of the assets. I'm underwriting the value of the business. So I want to underwrite companies that are market leaders, something that they do is proprietary.

6:12They're highly diversified. They have a reason to exist. It's a recurring revenue business, that type of thing. So while it was new to me, I actually liked it a lot more than asset -based. What was the path from being a loan officer at a bank like Heller to what became an asset management business based on private credit? I'll give you the story of how we ended up at Antares. So we were at this very large finance company. And Heller, we were part of this small group that was doing sponsor cashflow lending. They were a big asset -based lender. They were a factoring business. And one of the individuals in our shop, a guy named Barry Shearer, had the idea that why don't we take our business and go do this on our own?

7:05And that's all we'll do is sponsor cashflow lending. It will own a piece of the business, and I think sponsors will love it. We'll make the credit decisions. So it's an interesting story. Barry ran it by a number of us, and we were all very interested. But obviously, to get started in our business, he needed a lot of capital. So he ran the idea by a close friend of his, a guy named Shel Lubar out of Milwaukee. And Shel was a very wealthy individual. He was talking to Shel about potentially investing in the firm. Unbeknownst to Barry, Shell said, hey, I'm on the board of MassMutual. And this is something that they may find really appealing.

7:46Let me set up a meeting. He set up a meeting. And within a month, we started Antares Capital. So it was a very, very quick process with MassMutual in terms of getting it approved. And they initially backed us with a billion dollars. And we owned the company with them. What was the activity like back then? It's really interesting when I think back to those times because it's so different than today. The market was multiples were more like sponsors were buying companies for seven and a half, eight times. Rarely would you see a purchase price above that. We were loaning three and a half, four, four and a half times.

8:28The pricing was actually quite good, but the competitive landscape was so different than it is today. So back then there were banks. And what's interesting is banks have come in and out of the market over time, but back then it was more of the regional banks. So we competed with LaSalle Bank out of Chicago, Key Bank, even to a small extent for Chicago. We competed with some of the French banks. For some reason, the French banks were pretty strong back then. So it was BNP, Credit Agricole, and Induswez, but it was an inefficient market. The syndication market was there. And if you had a financing that was greater than $100 million, it was syndicated because lenders at that time only held $30 million in a deal.

9:20So just very, very different from today. What happened with that business in terms of its size and scale over that first decade? So I'd start by saying sponsors loved the idea that their coverage person was in many cases sitting on the investment committee and owned a piece of the firm. I started covering the West Coast and it was a time when there were a lot of middle market private equity sponsors that started on the West Coast, particularly in San Francisco in the mid to late 90s. So Antares resonated with a lot of the sponsors. Now, we were still competing with our prior firm, Heller Financial, and I would argue Heller was number one in the market.

10:04GE was probably number two, and we were number three. What happened along the way, which was hugely beneficial to Antares, is that we started the company in 96. In 2001, GE acquired Heller. So what was life like under GE? It's an interesting story. None of us wanted to sell to GE because we had seen what had happened with the Heller business. So we were interested in a lot of the other buyers. GE lobbed in a pretty big price. So we and MassMutual had a fiduciary obligation to review the deal. MassMutual actually agreed to this, that we would only sell to GE if the Antares management team was running the business, meaning we were running the business and we were making the credit decisions because it was really that credit process that was a mess.

10:52We were there almost 10 years. It worked well for about eight. The last two years, GE could not in any way, shape or form, keep up with the regulators. It was a company that had very poor systems. They had made all these acquisitions and were operating on a bunch of disparate systems. So all of a sudden, the credit process changed. Things became a lot more difficult. So if GE had not decided to sell the GE Antares business, they would have started to lose a lot of the people. So what happened in that sale? So they decided to put the Antares business on the block because they felt like it had significant franchise value, and it did.

11:32And many of our competitors, many of whom you've interviewed in the past, were in the running to buy the company. And in the end, CPP prevailed. What did that transaction look like? They were buying a large book of loans. So the book was a little over 12 billion, and they paid more than book. And they invested significant equity, and the management team also invested equity in the business. So basically, when the deal was done the first time, it was just CPP and management. And about a year later, they brought another Canadian investor in NorthLeaf Capital. So over those, call it close to 20 years since you started, you go from 1 billion to 12, two transactions, syndicated market.

12:21What did the market for what you were doing look like seven or eight years ago when you did that sale to CPP? You were hearing some people call it private credit, but still it was nothing like it is today. And as you know, the market's been growing at double -digit rates. It's expected to grow at double -digit rates for the next five years. You still had some banks around, and what I would say some of the smaller middle market players had more of a presence back then. So Madison, BMO, it's now known as APAGM. Aries and Gala were around at that time when we started. All Rock slash Blue All really was not even around at that time.

13:04So the market has grown exponentially over that eight -year period. So I'll give you an example. So CPP bought, let's say, $12, $13 billion balance sheet. Today, we manage $64 billion. So just to give you a sense of the growth over that time period, and the balance sheet doubled in size. The asset management business that was essentially nothing at the time of the purchase, that was basically a startup, is now significantly larger than the balance sheet. When you grow the amount of capital you're managing, whether it's on balance sheet or in funds, how did the nature of the market change? You think of a syndicated market as everyone's in it together, or you're trying to find the capital for the deals.

13:49Then there's so much capital that You can imagine there being competition and you probably don't syndicate anything anymore. When did that start to shift in the market? So we had created the Unitronch product when I was back at GE and Terry's. I actually led that effort. So we started that in 2010. And honestly, when we started the Unitronch product, we really thought this is going to be an alternative financing vehicle for sponsors to use during periods of market dislocation. had no idea that it would actually become this primary financing vehicle, which it has. In 2000, let's say 16, a three or a $400 million unit tranche was a pretty decent size deal.

14:33By 2019, that was $600 million. And as you know today, it's multi -billion dollar unit tranches. is lenders can hold north of a billion, but a lot of lenders in the private credit market hold two, three, four, $500 million on a deal. So the evolution of the industry is this idea at one time people say, what's the EBITDA where a deal goes syndicated? At one time it was 50 million, then it became 75 million, then it became 100. If a deal comes in our shop today, $100 million EBITDA company, there's a very good chance that's going to go private credit, not syndicated. You mentioned the asset size of Antares today.

15:17I'd love to hear how you've evolved into the breadth of activities that you participate in. When we started the asset managed group, and we really didn't start raising outside funds for a couple years after CPP's purchase. So we closed our first SMA a few years after they purchased us, raised a couple multi -investor funds. We've raised significant separately managed accounts. I did a lot of research talking to others in the industry. One of the things I learned is, yeah, you might get paid a little bit less for the larger separately managed accounts with really large global institutional investors, but there's going to be economies gained with that as well.

16:02So it probably is going to be better to have, in example, 10 to 15 really, really significant separately managed accounts versus trying to manage 80 small ones. To me, a small separately managed account is anything under $300 million. So in this marketplace that's changed so dramatically, when you're talking to a company, how do you differentiate yourself from your peers? I talked first, Ted, about the sponsor because more of the sell for the financing is with the sponsor than it is the borrower, unless the borrower is already in our portfolio. So with the sponsor, in many cases, we've known these private equity sponsors since the sponsor started the company.

16:45We're now 27 years in business. So many of these sponsors, we were around when the firm was founded. We've worked with them for many years. We've worked through difficult situations with them because not every deal goes the way it was originally intended. So they've spent time in our credit advisory group, aka a workout group. We've had very difficult conversations with the sponsors, but that's actually further enhanced our relationship with them. So that's one thing. These sponsors know that we see the vast majority of deals in the marketplace. We're really responsive. They know that we're going to be competitive when it comes to the multiples and basically the leverage we're willing to provide and the pricing, and then also how much can we hold?

17:31So a lot of it is the consistency. We've been doing it forever. Our reliability, it's a huge thing and it sounds so simple, Ted, but if we say we're going to get there, unless there's something crazy that pops up in diligence, we're going to get there and we're going to get there on the same terms that we had originally outlined. So I think that's really a big part of it. And the people, they know our originators and credit folks. It's a really, really experienced group. So most of these sponsor coverage professionals have been covering these sponsors for a long time, and I know most of them as well.

18:06What's the breadth of the Antares organization today? So we have 435 employees, and it's about evenly split between what I would call the front end and the infrastructure side of the business. And how about on the investing side? It's essentially half. Half the business is front end. Front end would be originators that call on sponsors, the underwriting team that's underwriting the new deals, portfolio management team that's both managing the deals and doing a lot of work on industries. So each portfolio manager covers a specific industry, goes in depth on that industry, knows what's going on in that industry.

18:47and then we also have our credit advisory team. That's the investing side. As you work through those teams, I'd love to hear a little more about how your process works. So you mentioned originators, long relationships with the sponsors. What does that look like day to day? Sure. So the goal of the originator is to gain trusted advisor status with the sponsor. So that means we want to be the first call on the last call. So we want that sponsor to call us, to run the company by us, the structure that they're considering, what they like about the deal. You need to understand too, the market's pretty efficient.

19:25If a deal is an auction deal, we may be seeing that from as little as two or three sponsors to as much as 20 sponsors may be contacting us on that one deal. So we have a screening committee, very senior folks on the front end. So when I say the front end, I'm talking about originations and credit professionals that are evaluating the deal. So basically, the best way to think about the originations team and the credit team, they're investors. It's our investment team. They're looking at it and determining, is this a company we want to finance? And if so, what do we think the appropriate leverage multiples are and how would we price it?

20:03But they also really dig in and say, okay, okay, it's early on. It's an investment banking book. The investment bank is going to sell. It's all positive. From our side, we're lenders. There's downside risks. There's really no upside. So we're looking at it and saying, what are the major issues with that particular company? How do we think we're going to mitigate those? And then if it makes it through screening, we would do a little bit more work, take it to our investment committee. Assuming it goes well with our investment committee, we issue a proposal. If we win the deal, we continue our diligence, ultimately commit and then close.

20:40That process, Ted, has not really changed in 20 plus years. So it's the same process, the rigor that's applied on every deal that comes in the door. And there are deals that come in where our originator doesn't even need to take it to the screening committee because he or she just knows up front, we're not going to do this deal. When you go from, in the old days, a sponsor to as many as 20 looking at a deal, I'd love to hear more about the information that comes to you, particularly when you have many sponsors looking at the same deal and what that does to your ability to understand the company and underwrite the risk.

21:19It can get a little tricky if a couple sponsors are doing additional work and trying to win a deal at the very end, trying to gain exclusivity. and normally that's only down to three, and maybe they're doing a lot of diligence work that they're paying for, and if they lose the deal, they're out of pocket. That's where you may need to create trees because one sponsor may be sharing information that shouldn't benefit the others, i .e. they're doing a consulting report with McKinsey or Bain. But other than that, you're basically working off of a investment banking book, and then our investing team puts together a list of questions.

22:03And they're going through those questions with sponsors. But until such time that you really would need to have people tree off, it's the core, the originators covering their sponsors. The investing team or credit team is the same team. So let's say that's four or five people from associate up to managing director, they are taking in all of the information, getting answers to all of their questions to make a really informed decision. How much different information would you get compared to the other lenders that sponsors may be showing the same deal? I think it's a pretty efficient market. What we may gain is If we're going to be seeing the deal from more sponsors, so maybe some of our competitors are seeing it from four or five and we're seeing it from eight.

22:53And a couple of the ones that we're seeing it from have operating partners that bring expertise. So on a couple of the calls, our credit team early on may be on calls with someone who has deep knowledge of a particular industry. And we're learning from that individual as well. When you see a deal that you'd like to underwrite and you know it's competitive, how do you think about pricing it? We're not underwriting really tough credits. We're not a distress shop. So we're underwriting really solid market -leading businesses. So maybe on the spread, there could be a 25 basis point difference and maybe on the fee, 25 to 50 basis point difference between different lenders competing for a deal.

23:44You have a bunch of really experienced people on our investment committee, our investing team all looking at it saying, here's where I think we need to be to win the deal. It's a bit of a give and take in terms of the deal and the pricing. Up until the last, call it year and a half, there was just an abundance of capital and deals getting done and obviously the boom in private credit. As you're going through that period of time, how do you think about where you're a price taker and where you're a price maker? There certainly were periods of time, Ted, where from a relative value standpoint, you look at it and you just say, wow, the competition out there, we knew about a number of lenders that had pulled back.

24:26They were short on capital. You're very aware of what's going on in the market. You begin to hear those types of things. You're surprised to see that, hey, someone else isn't showing up on this call. They're not competing for the deal. So in those cases, you look at it and you say, wow, I think that our pricing on this deal can be 50 basis points higher than it may have been, 75, 100 basis points higher than it may have been in a very hot market. And I hate the term price taker, to be honest, because if we don't feel or believe that the pricing on a deal, the risk rewards in line, we're just not going to do it.

25:07So I look at it and say, we're going to make that decision on each deal that we're doing. And on some deals, yes, the market's moved up. There's less competition. We're going to receive some enhanced pricing. So is everyone else that's doing that deal. How do you build a portfolio out of all these companies that come through the door? We've been doing it for 27 years. And the way we approach it is very diversified and defensively oriented portfolios. Generally, we're trying to make portfolios as diverse as possible, diverse by obligor concentration. So generally low, 1%, 2%, 1 % even better, diversified in terms of industry for sure.

25:54So our largest industries are healthcare software and business services. They're about 50 % of our portfolio. So that's the idea. That's how you build it. So today, that portfolio, if you take all the companies that we finance today, it's about 480 companies. When you have that broad of a mix of businesses, how do you integrate what's happening in the economy through what you're seeing in the businesses with some of the decisions that you're making? So it's a combination of investment committee that's making the real -time decisions on deals and our executive committee. Our business today is a 24 -7 business.

26:34Originators and the investor front -end folks are constantly providing us feedback on deals that are happening in the market. Particularly, let's say we lose a deal. So we're learning of the terms of that deal, were you acting real time? Hey, was that an anomaly? Is that maybe some new lender in the market just trying to gain share? Or has the market really moved that much? That's on the investor side. We have a portfolio of 480 companies. So we're able to see what's going on in a bunch of different industry sectors. That makes us much better investors on the front end, because so many of these companies that are coming in, one of the first things the team does is look at comparable companies in our portfolio to see, okay, what has revenue been growing?

27:21What are margins? What's CapEx? So that helps us make informed decisions. And then at our executive committee level, it's a combination of talking about just competitive dynamics, fundraising, what's changing in the environment. So investment committee meets three official days a week. They typically meet five because there's deals that pop up. Our executive committee meets once a week, but we're talking to each other every day because we have to, to provide each other with feedback that we're learning in the market to make better decisions. How has your process changed as you've scaled the business?

28:00I think it'd be really tough today to be a player in private credit that's a billionaire of 5 billion or even a $10 billion player. It's tough to make it work. So you need to be a player of scale. Is it more complex than it was 20 years ago? Sure. But we've set up the company to address that. So I would argue that this is a business that actually becomes easier the bigger you become, because there are significant economies of scale on the infrastructure part. And honestly, even on the front end, as you grow this business and have more AUM. As the economic winds are shifting a little bit these days, I'd love to walk through some of the opportunities and risks you're seeing.