Ahead of the Private Equity Wire Private Credit European Summit, Amit Bahri, Co-Head, Direct Lending Europe at Goldman Sachs Asset Management, talks to us about the early days of private credit, the tenets of GSAM’s senior direct lending strategy and playing devil’s advocate.
Private Equity Wire (PEW): You started at Goldman Sachs in 2006 and made the transition to private credit in 2008, which is when direct lending really took off. How does the private credit market track now compared to when you started?
Amit Bahri (AB): Private credit and direct lending were both terms that didn’t exist when I started. The way the market worked was that the senior part of the capital structure would be underwritten to be distributed to CLO investors and partially held by banks. At the time, what I joined was a mezzanine fund, the subordinated part of the capital structure, that sits between senior bank debt and equity. This was not attractive to banks and there were less than a handful of funds that invested in it. GS was a pioneer in this field with the first subordinated debt fund raised in 1996. At the time, I was attracted to the fact that I wanted to be a credit investor and felt this was an interesting part of the capital structure where the risk-return looked quite interesting.
I joined around the time we added our own senior direct lending business with our inaugural fund back in 2008, so I had the opportunity to work on the first few senior debt deals in the market. I think what none of us realised was that was really the inception of multi-decade growth in what is now called private credit, or direct lending, as an asset class.
It’s been a fascinating journey observing that market from infancy to the stature it has achieved now, and I think there’s more to come.
PEW: Goldman Sachs has been investing in private credit since 1996 and launched an open-ended fund focused on the European market in February. How would you describe Goldman Sachs’ direct lending strategy?
AB: From inception, our senior direct lending strategy has been focused on capital conservation, particularly within the upper end of the mid-market to large cap. These are businesses that tend to have median EBITDA’s of $100m or more. Secondly, they tend to be in the core sectors of mission critical business services, software and healthcare. We tend not to invest in sectors which are cyclical, capital intensive or exposed to commodity prices. Thirdly, these businesses tend to be private equity-owned assets. Almost the entirety of our portfolio is owned by some of the most successful private equity buyers in Europe; we don’t tend to do a lot of non-sponsor deals. If you can get these basics right and focus on credit underwriting, understanding downside risks and maintain a capital conservation mindset, you can create a portfolio which can achieve superior risk adjusted returns for investors.
In addition to senior direct lending, Goldman Sachs has a large and longstanding history in mezzanine debt and hybrid capital, and is building its presence in asset finance and investment grade. The overall credit platform is around $130bn today, and our leadership has stated that we hope to grow the portfolio to around $300bn over five years.
PEW: Why has Goldman Sachs AM chosen to focus on senior debt and subordinated capital?
AB: In credit, it’s all about avoiding losses. It’s a strategy which, by its very nature, means that you will not make outsized returns by taking on the risk. Conversely, if you do take on undue risk, you can face reasonable losses, which you can’t offset, because unlike an equity transaction, your upside is capped.
I think the best way to create a portfolio is by focusing on these basics, working to create an investment team and culture — where you’re finding reasons to poke assets and playing devil’s advocate. You should do a small sliver of the deals available, saying no to a lot of things and having discipline and prudence. This is especially key during periods when certain economies might go into recession, when the consumer wallet is under pressure — which is the case now, when there is inflation and there have been sudden increases in base rates. Even with those shocks, that portfolio will perform well. That’s been our experience in how you can excel in credit investing.
PEW: Will you be drawing on some of these themes during your panel at next month’s summit?
AB: Absolutely. I think we can talk about portfolio construction, what we’re seeing within our portfolio and what our management teams are telling us. We can double click on inflation: we obviously see the headline and macro data, but are we seeing that within portfolio companies? Also new deal volumes, investment outlooks and sponsor M&A volumes — where are they trending now? Or are they continuing to be subdued as they have since 2022? Are we seeing the green shoots of more activity?
PEW: What are you hoping to gain from the day?
AB: I’m hoping to meet and engage with my other panellists as well as other market participants who I may not already know. I’m really looking forward to the networking session.
Want to learn more? Join us at the Private Equity Wire Private Credit European Summit on Thursday, 16 May at etc.venues County Hall, London. Register for your complimentary pass here.
* Please note that registration for this summit is only open to senior executives at fund managers and investors. If you are a service provider and would like to attend, please get in touch with us on [email protected].
