'This could be the best vintage for private credit in a decade': Churchill Asset Management's Randy Schwimmer

Randy Schwimmer, Head of Origination & Capital Markets at Churchill Asset Management, joined The Final Round to discuss his firm's investing strategy and why this may be the best time for private credit.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round here on Yahoo Finance. Myles Udland with you in New York. We mostly talk about what's going on in the equity market here on this show, but our next guest has a lot more insight into what's happening over on the credit side of things. And for that conversation we're joined by Randy Schwimmer. He's the Head of Origination and Capital Markets over at Churchill Asset Management.

Randy, great to have you back on the show, and ahead of this interview I was actually looking at the talking points you sent us back in June. Because a lot has changed in the world since we last spoke about 10, 11 weeks ago. And I guess as you see the world over that period, how would you characterize the shift, if any, you've seen in your section of the market through this summer?

RANDY SCHWIMMER: Yeah, Myles, and it's great to be back with you and your team. A lot has changed, so we were just starting to get into the second quarter. The first quarter ended, obviously, on a very depressing note in the markets. But what happened was we went from a panic-period in the market to much more of a restoration of some new kind of normal, particularly based on the behavior of the companies in portfolios.

So one of the things that the private equity investors that we align ourselves with and private credit arrangers, like Churchill, did is they went through their portfolios and looked at the businesses that were COVID-sensitive and those which weren't. Now in our case, we typically are focused on defensive industries. That's what we've been doing for 15 years, so we came out looking pretty good. Most of our businesses were non-affected by COVID.

And the private equity folks were doing the same thing since that June period and recognized in a number of cases, particularly the ones we deal with, that they had focused on the right sectors, that they were looking at non-consumer-facing businesses, which had actually done well during that April, May, June timeframe.

And since then, just to catch it all up to date, since that period, the flow of transactions has started to come back. So once the portfolios were settled, then now people are thinking about all the dry powder that's been raised in private equity and for folks like ourselves at Churchill that are trying to put it to work.

MYLES UDLAND: And that theme of dry powder has been building for years now, or we could say probably the next to last decade plus. Is this the moment, I guess, that a lot of the folks you are working with have indeed been waiting for? Have they come into the market with the kind of enthusiasm that I think is implied by issuing years and years of investor updates that say, "We have lots of dry powder. I can't wait to deploy it."

RANDY SCHWIMMER: Yeah, and think about the irony of what people were saying about private credit. For example, last year, "Oh, it's too crowded. There is too much competition. Spreads are compressed." Well, look at what's happened now. There are a lot of lenders who have been sidelined, because they're dealing with their portfolio issues, while folks like Churchill have come out with strong portfolio performance. They're looking to put our capital to work. We're working with private equity firms who are aligned. We're an LP in many of their funds, and so we're working with them to actually go after businesses that are less impacted by COVID.

And so now, from an investor's perspective, you got spreads widening. You've got structures that are more conservative, because leverage is coming down. These are secured assets, so private credit. Our portfolio's all secured by the assets of the businesses and cash flows. So I think this is this could be the best vintage for private credit in the decade.

MYLES UDLAND: Well, and you talked about or made some reference to the protections that lenders are getting. And that had been a big story in this part of the market for the last couple of years is how much looser some of those covenants have gotten. Are you seeing standards-- did standards tighten abruptly, and certainly didn't tighten too much that you couldn't get any deal done? And I think you're speaking to an environment where everyone is getting the kinds of terms they want, and and deals are getting done. Whereas previously, you might have had to go several turns, even though you didn't want to actually get to, things like that.

RANDY SCHWIMMER: Well, that's the beauty of our strategy, which was to be conservative even when others were being more of less conservative. And that so the proof of the pudding now is the fact that the structures that we invested in, which tend to be tighter covenants and so forth, it's actually worked out. Because we looked at our portfolio and said, "Well, it's a really good thing that we are investing in more defensive industries. We had tight covenants. We have collateral." And so forth.

So I think for investors who had been giving private credit a look can now look at it and say, it's the old buy low, sell high. You're coming in when the performance of some of these businesses are, certainly, could be bottoming out. And we hope over time that these businesses are going to be up from here, particularly in sectors that we focus on, which is business-to-business services, technology, some select health care businesses, distributors. It's essentially, again, the non-consumer facing businesses, which have done well in the last six months.

MYLES UDLAND: And then just finally, a quote you have in here, which I think is very interesting is you have lenders you're working with, they want to take this year from zero to a hero in four months. And I guess you can see that two ways. You say, "Oh well, the environment's not as bad as I think."

Alternatively, maybe this is a little bit of performance chasing as we see things like the equity market do well. Certain parts of the market you are going to have friends, or you're going to have a-- is as a part of a pool of capital that's performing better than you would have expected. When you look at that attitude in the market, does that speak to you to any froth maybe or kind of a-- because that's a quick change, I guess, in expectations from, "Let's hunker everything down, and make sure that we can get through this period," to, "Hey, maybe we can squeak out a little bit of return here in a year that we'd pretty much written off."

RANDY SCHWIMMER: Yeah, so again, private credit is these are companies that are non-traded, non-public businesses owned by private equity business, supported by private-credit providers, like Churchill. These are not-- there's no volatility in these businesses in terms of pricing, because in prices because they're not traded, these are investments that are on the ground level with businesses that have been growing through this period.

And one of the beauties of the way that we operate is it's active portfolio management. So we are seeking out these opportunities that we believe are going to be winners for the long run, and we've designed our portfolio and our investment strategy going forward to account for what we think are the sectors that are going to do well in this economy. Because who the heck knows where COVID is going over the next couple of years?

And so for investors who were looking for stability and are looking for yields that are going to be outsized relative to historic numbers, I think private credit is increasingly going to be an asset class that's going to get a lot of good attention.

MYLES UDLAND: All right, Randy Schwimmer, Head of Origination and Capital Markets at Churchill Asset Management. Always great to get your thoughts, Randy. Thanks for joining the program today.

RANDY SCHWIMMER: Thanks for being here.