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Sustainability Perspectives

Episode 71: How Can ESG Benefit Private Credit & Private Equity Areas?

Today, we welcome Mathieu Chabran, Co-founder of Tikehau Capital, a global alternative asset manager with $33.5B AUM, on the podcast as we talk about how ESG information can help those in the private credit and private equity areas, the energy transition space and other sustainable initiatives.

Host: Keesa Schreane

Guests - Mathieu Chabran, Co-Founder of Tikehau Capital

  • Keesa

    Looking at the private credit market today, we know that money is pretty cheap with low interest rates, especially in US and in Europe.

    How can those in the private credit area prepare for a shift in that scenario? And how can greater SG information help those in the private credit and private equity area?

    Here to discuss this and much more around asset management in general with us is Mathieu Chabran, co-founder of Tikehau Capital, thank you for joining us.

     Mathieu

    Thank you, hello Keesa.

     Keesa

    So I know Tikehau is launching a private equity decarbonization fund focused on North America. Let's first talk about why ESG in asset management is particularly important.

     Mathieu

    Yeah, well, that's a key. You know that's a great first question. You know? Here are keys a you know on the back of all the you know, discussion and and and and all this thinking about, you know this decarbonization and the ESG and these energy transitions you know at stakes global asset.

    Managers have the capacity and the responsibility to shape the solution. You know, we view this as the actually you know this transition as the biggest investment opportunity over the last 50 years. I I think there is a shared responsibility for all of us including abusing the asset management Industry, you know, to rethink all parts of our business models. If you take some, some some industry studies, you know if you, according to the International Energy Agency, their estimates the investment required to effectively transition is 10% of global savings and And asset managers. They do control this global savings, so we are talking about let's say 9 trillion US dollars that needs to be deployed to unlock, collect and root global savings in the right direction. It seems like you know a big number in absolute terms, but in relative terms, key sites you know only 10% of these global savings, so this is serious money and it's not just about, you know one company. Effort incremental change by a few won't get us, you know to where we need to go and This is why you know really the whole industry, the whole asset management industry has to come together to reach the.

     Keesa

    So let's talk specifically about PE. Are there hurdles or challenges in conversations with entrepreneurs about SGS? Why it's vital to Private Equity?

     Mathieu

    Well, I'm I'm gonna you know I'm going to take actually the opposite side I I think that there are more opportunities than Challenges with our equity investment. For example, the objective is to scale up and and by design, many of these companies we work are already, you know, fully SG, you know compliant.

    So we are finally at a point where entrepreneurs and partly I would say in the in the US, which has lacked lacked historic links.

    They have begun to to recognize the importance of acting against climate change and are ready to contribute to this effort in a in a meaningful way and.

    You know when when we we are focused on helping them understand the immediate needs for decarbonization to achieve these goals, you know, and the goals I'm referring you to the one you know set up in the in the Paris Agreement. You know the the the goals that have been received by the new administrations here so. That that these sources of energy consumptions consumptions are are changing to renewable source. You know from the the fossil based fuels, and so the question is how long the shift will take and and what is the best and and most responsible path. So we believe that the sooner it can happen, the better.

    And we are Tikehau investing to make that effectively reality. So it's it's crucial to invest in pragmatic solutions that can be applied today.

    That will work in concert with what is being developed for the future. So they they I would say there are, you know, these entrepreneurs who are, you know, referring to.

    I mean there are many companies that are making great strides. With this I mean partly in. In in meeting, you know the players, you know where, where, where they are. I'll give you one example. A company called Green Yellow, which is a solutions based.

    In Europe in Paris specifically, that we've invested in and they were focused on working with retail food and logistics companies to transition toward a lower cost and lower emission energy consumptions. And So what does it mean in practice? You know it's effectively going to the. Big shopping mall retail space. You know, installing some you know some, some some some, some panels using the roof and then you know using the grid to to maximize the energy efficiency. You know in the shop so effectively more and more you know it's just an example on taking key selling when talking to those entrepreneurs.

    It's more opportunity than challenges and they all get that.

     Keesa

    OK, so in talking about these entrepreneurs it sounds like to your point, they're innovators so they see opportunities.

    Glass is always half full. Let's take that theory. I'm wondering if we look at private credit and direct lending the impact there. People really focused on.

    Just answering the question, can you pay us back our money? Is it as simple as that are in the private credit market? Do we see the conversation going further when it comes to direct lending impact?

     Mathieu

    I actually think that you know on a private credit we we are we are seeing the similar trend you know for for quite some time and maybe all the more you know on the back of the very accommodating policy that we've been enjoying for the for the past ten years, landing has become some kind of.

    Commodity, and today even the landing and the I mean the borrowing, let's say from a from a from an entrepreneur standpoint, can be can be impactful, right? Because I I would say that any entrepreneur now realizes that you know you have to be so.

    Symbol to be profitable. This is the new paradigm you know for for today and that they they realize that all stakeholders you know their client, the customers, the shoulders, their lenders.

     You know, expect you effectively to be, uh, to be sustainable. Otherwise there's too much you know too much at at risk. So what we are seeing more and more in credit.

    Is that this? Impact lending is basically being provided with some ratchets. OK, so you've got your credit metrics, your credit ratings, and then what if you do?

    Meet the goals. The extra financial goals that you have set yourself. You know with your lenders that will improve your cost of funding.

    And obviously, if you reduce your of course, your cost of funding by meeting some PSG targets. Well, guess what? Your return on equity will improve accordingly, so you see that net net. There are some very interesting.

    Very interesting movements happening only on the private equity, but also the private credit in order to maximize the allocation to where you can do good and be impact.

     Keesa

    True, so clearly the benefits there is when we can really are those in that space can really reduce the cost of funding and return on equity improves so clearly benefit there. I want to talk a bit about Tikehau. Specifically, you're now in 16 countries in terms of what you're seeing when you're talking to Your stakeholders, how do you see things rolling out differently as it relates to SG in these different countries?

     Mathieu

    Yeah, that's a very interesting you know Question. So because effectively so we we come from Europe, we were now here in EU.

    S We we've been having a an interesting footprint in Asia and as much as these ESD challenges are global, you're right that there is different, uh? Perception, which can be very cultural. Sometimes you know depends on the on the jurisdiction. It's really about how can you best adapt to make sure that you meet.

    The uh objectives that an investor in any given geography jurisdiction you know is is pursuing. So we like to say that in Europe, clearly there's been a. I think we've been. We've been leading on the environmental. For example, right when. Here you know in the US, My experience lately has been more, you know, on the social right. So I mean you, you see that there are some some different different approach which You know, by the way, all aiming you know for the same for the same goals and an objective, but with a different different criteria. So, the the challenge is a is a global one, but we have to tackle it locally. As I said with let's say local workforce and you know market specific approaches so that we are.I I would like to say no energy is energized by the differences each geography brings. To tackle this issue right? So for you know for for like for example at TKO, we've been developing some geographical semali.

    Effectively megaphones, if I may say to decarbonize our system. We started in. We started in Europe. We raised, you know, more than a billion a year on the first time, firm targeting energy transition, which was, you know, a very interesting milestone and achievement. We're replicating that now, you know, in North America, approaching trying to replicate.

    You know the best practice, but, uh, tailoring that to the to the US market while Europe has been, you know you know ahead of the US. We've seen U.S. policy turn in favor of the Paris climate accord. You know, the the Paris Agreement and reaching global climate emission goals. So the tide is turning off for for investors and already we are seeing growing investor interest in the US for each of our let's say. Areas of focus. So the energy efficiency of Industry building renovation. Remember that real estate is probably the biggest source of greenhouse gas emission. To building renovation, you know it's not, I'm sorry to say no, it's not rocket science, but it has a huge impact on on emissions and reducing emission. Development of unique renewable source of energy. You know how do you develop? That and distribute I. I would say that the penetration also of low carbon mobility. There's a lot of, uh, innovation on that front. Obviously, you know the EV side, and that's a key or that's Acciari alpha of focus and and and I would say that you know obviously the the reduction of Methane leakage linked to the shell gas and LNG exports supply chain, so we see we see if you will focus around all of those. All of those industry and wise, they're all aimed for the same goal and objective. They can be tackled differently depending on where you know you're you're.

    OK, so that that's why you know it's our conviction that in the next 10 years impact and climate action will drive returns across geography. And that's why we need to tackle that. You know, very you know very locally. So it's as much as, and that's where having kids are. Let's say, a global team. Very diverse culturally. You know in terms of Nationalities you know is really is really fueling the way you can approach that and be best positioned to make sure that you cannot. Plus, every single investor objective you know locally, so it's it's very interesting. It's it's fascinating to be able, you know, to navigate both sides of the ocean, at least for Europe and the and the US, and operating within this new administration framework here in the US we present Here again, you know historical opportunity.

     Keesa

    So it's very interesting much UI note here in the US, specifically with our new administration, there has been a focus on a multi-pronged focus climate change energy with the new infrastructure information and infrastructure development that the president is rolling out as well as even an adherence to Diversity and inclusion as it relates to corporations and general broader culture. One of the things that I've said before is that you know we can walk and chew gum at the same time in turn Of developing and dedicating resources to each area because they're all very important. Much you have you seen a prioritization of If we look at the E versus the S versus the G, we know that in many cases they are interrelated. But do we see a need to prioritize one? Or do we see a response as one is being prioritized over the other in terms of what you're seeing in the different markets that you're doing business in?

     Mathieu

    Well, that's a you know. It's a it's a tricky one you know to you know to prioritize. I would like to say no. Obviously they are being tackled in different in different in different. Ways, and as we're seeing kids that you know effectively depends. Very often on Joe on geography, so you know our job as asset manager is to make sure that we are counterparty a legitimate counterparty for global allocators. OK for asset gatherers, so you've got that here in the US, the public. Pension funds some insurance companies, some endowments. Let's take the big retirement plans or insurance company in. Europe and all those allocators, you know the guy, I mean that these companies were effectively accumulating savings. And remember that savings have increased dramatically over the past 10 years. Let's say you know since the big GFC and accumulating monetary policies, those investors have some boards. OK, they have a board of trustee. They have, you know. A board of directors and they're taking some macro views. Macro location to say, you know, we need to increase. Or let's say impact lending or climate change, a private equity investment by 5% by 10%. And because the managing billions of money and that very often they don't have the in-house investment team, they are turning to, uh, external asset managers. You know, like us. And that's where we're trying to We're trying to leverage. You know these position. And so, but by having, I think a way to answer your question, he said that you should never take a one size fits all approach. You know, here's my SGF and here's my climate change is by Energy Transition fund because because the reality of the investment criteria or what allocators Trying to pursue, you know, in their in their allocation goals are very big. I think that you know that that's why I think it's a great opportunity for for the years to come is to be able to be bespoke, to make sure that you have the platform as a manager as an originator to meet you know the needs and the and the goals. And I guess it's a way to answer your question. I mean, you're not prioritizing. Being the E the S or the G, but we're trying to have a bespoke approach so that you meet the goals and the objectives or your of your clients or the allocator while making sure that you you're still selectively deploying. You know this this capital and you know I would, just, you know.

    Add one last thing. If I make key size you know all these.

    All these themes around SG A I would not lose sight of what should be the first governance principle for an asset manager pretending to help you deploy in that field is to have a second to none alignment of interest. I think that having the manager fully aligned with its clients With these investors is the first principle of VSG so bespoke approach. Alignment of interest and you won't have to choose between the the E, the S and the G

     Keesa

    So the the bespoke piece. I really think that that definitely applies to the next question too. We know that their disposal needs for each situation, but there's also need to understand externalities too, right? So what's going on?

     Keesa

    In the marketplace to help clients meet the goal that they're trying to meet, we're in a low interest rate environment in EU.

     Keesa

    S and Europe. Now, as we said earlier. But Matthew when this shifts because it's probably a matter of when.

     Keesa

    Not if with the shifts. What are the top three things you expect to happen in the credit area that people will need to be aware?

     Mathieu

    Of, well, that's a that's a great great theme to tackle Keesao because Effectively, we've been operating for the past. You know, for the past, let's say, again, 10 years, 12 years, right?

     Mathieu

    Since the the GFC in a very accommodating monetary policy environment and by the way it has been increasing on the back of obviously of the pandemic, right? And and again the extreme.

     Mathieu

    The constructive move by the. By by by the central banks. So I think that some of us, hopefully not all of us, have lost.

     Mathieu

    Uh, uh, love at last side that you know when you're operating very low, if not negative you know for the Europeans and the And the Japanese and the Asian in a very low interest rate environment. And by the way, we might be, you know, lower for longer. We tend to forget that you know money has some some bad. Right, I like to say that you know when you know when money has no value investment has no merits, and so there's been a little bit of you know. You throw the diocese and it's double seeks. You know all the time because there was this very indiscriminating in discriminating interest rate environment. My concern is the following key side that. As we've been saying, there are more and more stakeholders, so I can think of. Thanks, I can think of the the bond market, the public bull market, the debt capital market who are becoming increasingly focused and vigilant on this very topic of ESG. And so borrowers will be trying to tap the debt market in a in a very ample, you know, Liquidity or scenario might caught by surprise when effectively this liquidity dries up either because you know there is a tightening in interest rate. I mean, we saw recently the, you know, the the direction that the Fed is is going here and whoever is not ready when that happens. Whoever is not ready when that happens.

    Will be between a rock and a hard place, as you say, because uh then, the market will become extremely discriminating. So, whoever is not ready to meet this ESG criteria you know from from a lending market standpoint from a bank market debt market you know could wake up with a little hangover. If you allow me the expression.

    So, you know we are ourselves. We benefited the I'll give you an example. You know when it comes to take your capital or publicly traded company where investment grade rated, we had few outstanding bonds and the last month we should the first sustainable bond for a European asset manager. It's you know. Eight-year bond. We benefited from an attractive in a one and one and 5/8.

    You know coupon and why do we get access to this funding is because we took some commitment. These Ivy or investors or bondholders that we will meet some extra financial targets when it comes to our ESG commitment and ESD target in terms of deployment. So you see that you you've got a whole part of the mark That which is now giving credit. It's you know if I may say to the people who are taking this type of commitment and what What was a few years ago and even in a few months ago, the exception is becoming the norm and the debt. I mean, you see more and more banks. You know retrenching from certain sectors, Certain industry, so the cost of funding is increasing is increasing dramatically for them This industry and again you know that will be an impact on the return on equity. So whoever is not ready for when the market or when the market, the CGT dries up, we will have some. You know we have some issues so I didn't give you 3 things case I give you. I gave you just one, but one that in my view will be very critical.

     Keesa

    But one yes, the most important. Possibly we can even add so very great great information here in terms of issues it relates to PE we definitely see more opportunities than challenges there because mini entrepreneurs recognize the importance of VSG even as we talk about the credit markets, they understand that when you reduce your cost of funding and also your return on equity improves and this is what happens when ESC really is at the center in this part of the decision making there. And also as we enter in or expect a different sort of interest rate environment in the US and Europe and parts of Asia, the market will become more discriminating and putting SG in the mix and really meeting those issue needs can be something that can really help. Help them as you said Mathieu, get from between the rock and the hard place. We'll just stick with that of being right now. Thank you so much for your time. What a great conversation we really appreciate it thank you.

     Mathieu

    Thank you Keesa, thank you.