Ahead of the Private Equity Wire Private Credit US Summit, Ben Radinsky, Partner at HighVista Strategies, talks to us about developing investment muscle, regulation and the contagion effect, and why we should pay attention to natural resource lending.
Private Equity Wire (PEW): As a newly promoted partner, what immediate priorities and goals do you have for yourself and your team?
Ben Radinsky (BR): Our private credit program has evolved throughout the history of HighVista, which has been in operation since 2005. As a firm, we have prided ourselves on delivering what we believe are best-in-class investment solutions that give careful consideration to both market performance and potential opportunity for outperformance. We consistently seek out investments that we believe can outperform the market for specific reasons, whether due to capital flows, liquidity mismatches, structural aspects of the investment, or factors that make it challenging for larger investors to act. These factors create inefficiencies, which in turn generate market opportunities. Our private credit program was designed to be true to this HighVista approach.
In the coming years, our goal is to continue refining and enhancing our offerings, providing clients with diversified portfolios of specialized credit designed to pursue outperformance relative to the market. We are already well along this path, with a strong foundation in place, and our focus remains on further strengthening our capabilities to meet the evolving needs of our clients.
PEW: What are the biggest regulatory challenges currently facing private equity and private credit firms?
BR: The general regulatory challenge posed to private equity and private credit firms is one that is constantly evolving. But the regulatory changes are not unique to firms operating in private credit as significant regulatory scrutiny is focused on the entire private funds industry. What is unique to private credit, however, are rules issued in late 2023 by the Financial Stability Oversight Council, providing guidance on non-bank lending. The question regulators are grappling with is the growth of private credit. According to most estimates, the size of the private credit market is now close to $2tn — this is comparable to, or bigger than, the leveraged loan market — and it’s expected to grow to $2.8tn by 2028. Given that so much credit is entering the private markets, what does this mean for regulators? Credit has historically been provided by banks and regulated by banking regulators, but today, with the rise of private credit, this regulatory regime appears to be somewhat outdated. Historically, there always was a syndicated loans market, but now credit is not just in the securitization market; it’s private credit. Private credit has historically not been quite as regulated. Given the size of private credit today, there could be a contagion effect across the broader markets. Will the increased size of private credit have a contagion effect if something were to go wrong, because banks are providing credit funds with leveraged facilities? Are there valuation issues? What are standards for the asset valuations of illiquids? How do we think about that, and how does this all come together? Should there be a major systemic, macro impact? From a regulatory point of view, there’s quite a bit to think about. My guess is we’ll see quite a bit of change over the next five years.
PEW: What should LPs be most concerned about regarding regulatory changes in the private credit sector?
BR: If you’re an LP and you’re in private credit, one of the advantages that private credit has over private equity is its shorter duration. On the plus side of the ledger, private investors and private credit don’t have to worry as much about regulatory change, because fund lives are relatively short (around five years) and significant regulatory change often takes years to develop and implement.
I think LPs should not focus so much on any specific regulation that would impact private credit broadly, or even private funds generally. Instead, I think they should focus on the strategy of the private credit manager, and how good they are at securing the assets they’re looking for. How strong are their covenants? What is the legal regime under which these loans are being made? I think those are far more important considerations than any of the regulations that may be at the top level of the fund.
PEW: Looking ahead, what opportunities do you see emerging in the private credit space that investors should be aware of?
BR: Private credit has grown dramatically but in a very specific area: traditional leverage buyout financing. It is growing in the general direction of corporate credit, where there is known cash flow and private credit funds are providing multiples of the cash flow.
Take a company with $100m of free cash flow per year: they’ll get credit of something like five times that ($500m). What we have been concerned about over time is that the cash flow upon which investors are focused is often adjusted and not as consistent as one would think. It is therefore possible that cash flow, instead of being $100m, is really only $60m. If the cash flow is 60% of what people think it is, which means that the leverage — which was five times (500 divided by 100) — is closer to nine times (500 divided by 60). This means that there is systemically more risk in private credit than might be apparent.
The last 15 years have seen growth in private credit as an asset class, but also growth periods for the underlying companies, so excess risk hasn’t been a major concern. But if we are not in a similar growth cycle in the next 15 years, things may be a little bit tougher at the macro level. What may be possible is to see is a decline in the performance of some of these core assets.
So what opportunities do we see? Rather than the type of private credit that I would call just traditional leverage buyout financing, we are focusing on a non-traditional, specialized form of lending where we are senior secured and where there are assets that can protect us. We are focusing on traditional assets, like inventory and accounts receivable, or assets like real estate, or those that are a bit more esoteric like recurring revenue, as in a software company. We think that if investors can do asset-based lending well, the resulting funds will be able to outperform broader private credit over the next five years.
PEW: Will you be drawing on some of the above themes during your panel at the summit? What are you hoping to gain from the day?
BR: We’re excited to talk about the specifics of what we’re working on in specialized alternatives and specialized credit.
But also, where do we see markets? At the macro level, are we seeing trends in the new funds that have been launched? Are we seeing money leaving specific areas? For example, we’ve been looking at natural resource lending. Many pension funds are unable to invest in that space for ESG reasons, but there are still folks in that space who are excellent operators, both financially and environmentally. If you have a bit of a finer method for picking out the actual partners that you’re working with, it could be very fruitful.
I think the most important thing is sharing experiences with like-minded colleagues, where we can collaborate on interesting ideas and figure out new opportunities. It’s always interesting to hear other people’s perspectives from outside of your organization.
Ben Radinsky, Partner, HighVista Strategies – Ben Radinsky is a Partner at HighVista Strategies and focuses on the firm’s private credit and special situations investing. He joined HighVista in 2021 and brings over 20 years of relevant experience to the role. Prior to joining HighVista, Ben was a Managing Director of Private Investments at Crescendo Asset Management. He held similar roles at Bayberry Funds, Platinum Partners, and Bear, Stearns & Co. Ben received a BA from Yeshiva University and an MBA from New York University’s Stern School of Business.
Want to learn more? Join us at the Private Equity Wire Private Credit US Summit on Thursday, September 12 at Convene 101 Park Avenue, New York. Register for your complimentary pass here.
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