Private Credit Overview May 2019
CONFIDENTIAL – DO NOT DISTRIBUTE Presenters
Jonathan Marotta, Managing Director, Private Credit
Arthur King, Vice President, Private Credit
2 | CONFIDENTIAL – DO NOT DISTRIBUTE Table of Contents
I. Introduction to Crescent Capital Group
II. Private Credit Overview
III. Considerations for Manager / Strategy Selection in Private Credit
IV. Private Credit Investor Outlook
V. Summary and Q&A
3 | CONFIDENTIAL – DO NOT DISTRIBUTE I. Introduction to Crescent Capital Group
CONFIDENTIAL – DO NOT DISTRIBUTE Crescent Capital Group Platform
Facts Highlights
Founded: 1991 • Independent credit firm with complementary strategies AUM: $24B+ • Primarily focused on below investment grade credit Employees: 165+ • Prioritizes capital preservation and high current income Offices: 4 • Depth and breadth of investment professionals Client Base: • ~95% Institutional Investor Base • Over 450 Client Relationships • Long track record of demonstrated performance through multiple cycles • No Investor >5% • Crescent Mezzanine and Crescent Direct Lending have experienced a Historical Net Loss Ratio of less than 20 bps and 10 bps, respectively
Below Investment Grade Corporate Credit Mix (1) Strong Growth in AUM Global Investor Base
($ in billions) ($ in billions) ($ in billions) Europe and $24 + RoW Asia $2.5 Public $3.9 Markets $9.0 Private North Markets America $15.6 $8 North America $18.2 $19.3
2011 2018
Crescent seeks to deliver attractive returns with less volatility, lower default rates and higher recovery than the market average
5 | CONFIDENTIAL – DO NOT DISTRIBUTE(1) AUM is preliminary as of December 31, 2018 Past performance is not a guarantee of future results. Dynamic Organization
Management Committee
• Includes Managing Partners and leaders within Investment Management, Investor Relations, Legal, and Operations
Dedicated Investment Professionals Operations Team / Administration
• 80+ investment team members • 85+ operations and administrative team members • 50+ Private Credit and 30+ Public Credit professionals • Pursues highest risk management / compliance standards • Strong sourcing, structuring and portfolio management • Provides best-in-class support functions
Local Market Presence Across Four Offices
London
Boston New York
Los Angeles Headquarters
Information is current as of December 31, 2018
6 | CONFIDENTIAL – DO NOT DISTRIBUTE The Crescent Competitive Advantage in Private Credit
1• Strong market presence and relationships
2• Robust, proprietary sourcing
3• Proven, disciplined investment approach
4• Experience across multiple cycles
5• Long‐standing, over 25‐year track record with U.S. Private Strategies having deployed over $17 billion(1)
7 | CONFIDENTIAL – DO NOT DISTRIBUTE Past performance is not indicative of future results. As used here, Private Credit refers to Crescent’s experience in the asset class generally and not to the proposed partnership structure with its specific investment objectives, which does not have a track record. (1) Inclusive of Crescent Direct Lending and Crescent Mezzanine deployed capital. As of December 31, 2018. 2019-2020 Crescent Fundraising Timeline
Strategy 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20 4Q’20
Crescent European Specialty Lending CESL II Lending
Crescent BDC, Inc. CBDC
Crescent Private CPCP I Credit Partners
CDL III Crescent Direct Lending (Tentative)
Mezz VIII (Tentative) Crescent Mezzanine
Currently Fundraising
Projected to Begin Fundraising
8 | CONFIDENTIAL – DO NOT DISTRIBUTE Strong Market Presence and Robust, Proprietary Sourcing Select Sponsor Relationships Private Credit Deal Flow by Year 1,600 1,524 1,532
1,399 1,400 1,299
1,200 1,165
1,000
800 735
600
Number of Deals Reviewed 400
200 35 16 37 34 37 30 (2%) (2%) (3%) (3%) (2%) (2%) ‐ 2013 2014 2015 2016 2017 2018 Includes investment opportunities from Crescent Mezzanine, Crescent Direct Lending and Crescent European Specialty Lending. Deals Completed As of December 31, 2018.
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9 II. Private Credit Overview
CONFIDENTIAL – DO NOT DISTRIBUTE What is Private Credit? (Also Called Private Debt or Direct Lending)
• Strategies where manager sources debt investment opportunities directly from a company (sponsor-less) or through a private 1 equity firm acquiring the company (sponsored)
2• Investment instrument typically structured as a loan or a bond; negotiation is led by the credit manager
• Return normally created from structuring fees, contracted cash or capitalized interest, prepayment penalties and, in some 3 cases, equity enhancements
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11 Why Private Credit?
INVESTORS’ PERSPECTIVE BORROWERS’ PERSPECTIVE
Pros: Pros:
• Significant yield premium • Customized, flexible solutions • Lead due diligence process and legal documentation • Certainty of execution and terms • Generally better credit terms • Enhanced reporting and monitoring tools • Privacy / no disclosure requirements • Access to management and Board • Partnership-based lender approach • More control in downside case scenarios • Sometimes the only option Cons: Cons: • Generally lower liquidity • Generally higher coupon
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12 Middle-Market Lending Opportunity
• Continued growth in global buyout dry powder • Bank share of the leveraged loan market has declined from 30% in 2000 to 12% in 2016 • Smaller banks have curtailed lending meaningfully since 2008 • Only 54% of small business lending is addressed by small-to-medium sized banks
ANNUAL PRIVATE CAPITAL RAISED BY ASSET CLASS BANKS WITHDRAWING FROM LOAN MARKET (1994-2018)
1000
900 $23 100% $77 $24 90% 800 $67 $20 $94 $40 $132 80% 700 $18 $14 $41 $32 $61 $132 $44 $44 $134 $137 70% 600 $147 $36 $140 $115 $142 $49 $121 60% 500 $123 $104 Non‐Bank Investors $74 $100 $26 $79 50% $33 $110 400 $11 $27 $89 $76 40% $13 Banks & Securities Firms 300 $21$15 $33 $77 $565 & of Leveraged Loan Market $53 $58 $45 $68 $522 30% $24 $459 Aggregate Capital Raised ($ in billions) 200 $409 $410 $42 $421 $417 $329 20% $239 $244 100 $213 $187 10% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% Private Equity Private Debt Real Estate Infrastructure Natural Resources 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Preqin; S&P LCD.
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13 Leveraged Buyouts: Purchase Price and Leverage Trends
• Leveraged buyout purchase price multiples are at historical highs
PURCHASE PRICE AND LEVERAGE MULTIPLES
10.6x 10.3x 10.1x 9.9x 9.5x 9.6x 9.0x 8.7x 8.3x 8.3x 8.4x 8.6x 8.6x 7.8x 7.7x 7.0x 7.0x 7.2x 6.6x 6.5x 5.9x
6.1x 5.7x 5.7x 5.8x 5.2x 5.4x 5.3x 5.0x 4.9x 5.1x 5.3x 5.6x 5.4x 4.2x 4.2x 4.6x 4.6x 4.0x 3.4x 3.7x 3.9x
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201320142015201620172018
Leverage Equity
Source: S&P LCD.
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14 Leveraged Buyouts: Equity Contribution Trends
• High level of equity contributions provide a substantial valuation cushion to debt investors
EQUITY CONTRIBUTION
46% 43% 41% 40% 41% 41% 37% 39% 38% 38% 36% 37% 34% 35% 35% 32% 33% 30% 31% 31% 27% 28%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012201320142015201620172018
Source: S&P LCD.
15 | CONFIDENTIAL – DO NOT DISTRIBUTE Type of Private Credit Strategies
Capital Structure Focus
Geography/Industry Focus
Sponsored vs Non‐Sponsored
Target Company Size
Use of Proceeds
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16 Capital Structure Focus
PRIVATE CREDIT FUNDS SAMPLE CAPITAL STRUCTURES
EBITDA Direct Lending Funds Multiple • Senior Secured 0.0x • Stretch Senior (Unitranche) 1.0x Lower Mezzanine Funds 2.0x Senior Risk / • Junior Lien Secured Return 3.0x Unitranche • Unsecured Loans • Subordinated 4.0x Junior Lien / 5.0x Opportunistic Unsecured • Holdco / Preferred 6.0x • Structured Equity 7.0x • Distressed 30‐50% Higher 8.0x Equity Equity Capital Equity Capital Risk / 9.0x Cushions Return
10.0x Senior / Junior Structure Unitranche Structure
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17 Capital Structure Focus (cont’d)
11 Senior Loans Unitranche Loans Junior Loans Preferred Securities
Subordinated Position in Cap Structure Senior Opco Debt Senior Opco Debt Junior Opco Debt / Holdco
Asset Collateral 1st lien 1st lien Junior Lien / Unsecured Unsecured
Current Income Cash Interest Cash Interest Primarily Cash Interest Primarily in Kind
Floating or Fixed Rate Floating Floating Fixed or Floating Fixed
Indicative Coupon LIBOR + 4-6% LIBOR + 5-7% LIBOR + 7.5-9.5% 10-15%
Upfront Fee 1-3% 2-3% 2-4% 2-4%
Call Protection None Yes Yes Yes
Maturity 4 – 7 years 4 – 7 years 7 – 10 years 10+ years
Equity Upside None Potential Potential Potential
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18 Geography / Industry Focus
Geographic Focus Industry/Sector Focus
Corporate Credit Energy & Power Developed World Emerging Markets
Real Estate Technology
Country- or Region- Specific: North America Western Europe Middle East Infrastructure Structured Products Asia Pacific
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19 Sponsored vs Non-Sponsored
Private Equity Sponsored Investment Strategy
• Defined and consistent sourcing channels • Aligned investment horizons and realization incentives • Broader access to capital and managerial resources • Incremental resources for credit due diligence
• Enhanced governance and controls
Non-Sponsored Investment Strategy
• Requires a larger sourcing platform with local presence and • Potentially higher upside with more equity exposure more office locations • Generally higher risk • More direct communication with management/founders
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20 Target Company Size
PORTFOLIO COMPANY SIZE CONSIDERATIONS
Smaller Middle-Market Larger (<$25mm EBITDA) ($25-$200mm EBITDA) (>$200mm EBITDA)
• Growth-oriented companies • Greater scale and stronger market positions • Economies of scale and revenue diversification • Less sophisticated managerial controls • More revenue diversification • Longer operating history • Fewer available sources of capital • Greater balance sheet flexibility • Broad access to capital • Better pricing / covenant packages • Deeper management teams • Stronger managerial controls • Lower pricing / looser terms
Higher Risk Lower Risk
Higher Return Lower Return
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21 Use of Proceeds
Leveraged Buyouts
Mergers & Acquisitions
Refinancings
Growth Capital
Dividend Recaps
Rescue Capital / Takeover
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22 III. Considerations for Manager / Strategy Selection in Private Credit
CONFIDENTIAL – DO NOT DISTRIBUTE Manager Selection Considerations
Greatest Challenge: Fully Gauge the Level of Risk Taken by Each Manager Being Considered
1• Investors should first determine the level of risk they are willing to take
2• Investors should be careful about over-relying on presented track record data
– The success is not based on investment pace, but rather on capacity to recover capital and generate returns
– No reliable benchmark data available as investment strategies / styles vary considerably
Source: Preqin
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24 Manager Selection Considerations
Average Current and Target Allocations by Private Debt by Type Institutional investors’ plans for allocations in the near term
Source: Preqin
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25 Manager Selection Criteria Experienced investment team Strong market presence and relationships Robust, proprietary sourcing Proven, disciplined investment approach Quality of due diligence Stable strategy over long term Prudent portfolio construction Strong track record across multiple cycles Co‐investment opportunities
26 | CONFIDENTIAL – DO NOT DISTRIBUTE Credit Investment Process – What to watch for?
Opportunity Set
• Size of the overall market opportunity • Strategic focus by investment type, geography, industry, etc.
Monitoring Origination • Reporting rights / Board representation Key Performance Metrics • Direct vs agented sourcing model • Access to management and owners • Sponsored vs non‐sponsored focus • Investment Returns • Frequency and quality of internal discussions • Breadth and depth of relationships • Default Rates • Recovery Rates
Decision Process Structuring
• Extent of due diligence process • Position in capital structure / cash vs PIK • Committee approval processes coupon • Percentage of transactions approved for • Transaction role and credit terms investment negotiation
27 | CONFIDENTIAL – DO NOT DISTRIBUTE Diligence, Diligence, Diligence
• Due diligence is a critical component of the investment process • Includes assessment of management, business model, industry trends and financial performance • Focus on cash flow stability and downside case scenarios
SAMPLE FOCUS AREAS OF CREDIT DUE DILIGENCE
Past Product Revenue Receivables Distribution Performance Concentration Cyclicality Aging Channels Go‐to‐ Sponsor Segment Market Product Track Record Profitability Strategy Liability Sponsor ESG Management Labor Industry Fund Issues Team Relations Trends Cycle Financial Supplier Forex Analysis Concentration Seasonality Exposure Fixed vs Competitive Barriers Inventory Customer Variable Advantages to Entry Management Retention Demo‐ Costs Working Exit Geographic graphic Capital Strategy Footprint trends Dynamics Competitive Switching Input Cost Employee EBITDA Landscape Costs Management Turnover Adjustments Capex Regulatory Pricing Capacity Requirements Compliance Strategy Utilization
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28 Portfolio Construction
Typical Return Components Portfolio Characteristics
• Interest rate • Diversification by issuer, industry, geography
– Cash vs PIK • Foreign exchange exposure and hedging
– Floating vs fixed • Attachment point, leverage, equity cushions
• Upfront transaction fee • Interest and fixed charge coverage ratios
• Redemption premiums • Transaction role (sole vs lead vs non-lead)
• Equity component (strategy-specific) • Covenant and reporting packages
• Asset-based leverage (strategy-specific)
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29 Credit Terms and Legal Documentation
KEY COVENANTS TO WATCH FOR
Debt Incurrence Asset Liens Acquisitions Change of Jurisdiction Protective Covenants Dividends / Restricted Asset Sales Change of Control Definition of EBITDA Payments
Covenant‐Lite Covenant‐Loose Springing Covenants Maintenance
Important to understand regional regulatory environment and credit protection laws
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30 Benchmarking
• Lack of representative or reliable benchmarks
• Confusion on definition of terms (e.g., unitranche fund)
• Benchmarks should ideally be adjusted for multiple key factors
Private Fund Benchmarks Public Index-Based Benchmarks
Capital Geographic/ Target Structure Industry Company Periodic vs Focus Focus Size Volatility Inception‐To‐ Considerations Date Returns
Sponsored Levered vs vs Unlevered Non‐ Sponsored Public Market Equivalent Vintage Year Strategy Methodology and Pace of Shift Investment
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31 Pitfalls to Avoid
Manager More Focused on AUM Growth Than Constructing Quality Portfolios
High Team Turnover
No Investment Experience During a Full Cycle
Cherry‐Picked Track Records
Off‐Market Claims on Covenants, Pricing, Leverage, etc.
Unrealistic Co‐Investment Promotion
Sourcing Reliant on Agent / Syndication
Aggressive Use of Fund Leverage
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32 IV. Private Credit Investor Outlook
CONFIDENTIAL – DO NOT DISTRIBUTE Private Credit Investor Outlook
Proportion of institutional investors allocating to each alternative asset class
Private debt investors by source of allocation
Source: Preqin
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Investors in private debt by type Investors in private debt by location
Source: Preqin
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Fund types that investors view as presenting the best opportunities for Regions that investors view as presenting the best opportunities for the next 12 months the next 12 months
1
1 Includes commercial real estate senior loans, receivables finance, and multi-strategy credit Source: Preqin
36 | CONFIDENTIAL – DO NOT DISTRIBUTE Private Credit Investor Outlook
Recommended allocations to private debt from consultants (2018) Private debt recommendations for 2018 from consultants by strategy
Source: Preqin
37 | CONFIDENTIAL – DO NOT DISTRIBUTE V. Summary and Q&A
CONFIDENTIAL – DO NOT DISTRIBUTE Summary • Private credit is an attractive asset class given its significant yield premiums, better credit terms and enhanced controls relative to the traditional fixed income markets
• Demand for private credit from borrowers should continue to have strong tailwinds given the growth in global buyout dry powder and declining participation in the loan market by traditional banks
• Successful private credit managers – Have the capacity to source broadly and stay selective
– Stay focused on company’s underlying credit fundamentals – Disciplined in deploying capital during various macro and investment environments
• Investors across the globe are increasingly allocating assets to private credit from various “buckets” (private equity, fixed income, alternatives, etc.), with many creating from a separate private debt allocation.
• Crescent is an experienced private credit manager with multiple private credit strategies, a large dedicated team of investment professionals and a 25+ year track record of delivering attractive, risk-adjusted returns
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39 Certain Risk Factors Nature of Debt Securities. Debt and structured equity investments in highly leveraged companies involveahighdegreeofrisk Interest Rate Fluctuations. Interest rate fluctuations may negatively impact Crescent Funds’ investment opportunities and the with no certainty of any return of capital. The debt securities in which Crescent Funds and strategies (“Crescent Funds”) invest rate of return on invested capital. An increase in interest rates would make it more expensive for portfolio companies to may be unsecured and subordinated to substantial amounts of senior debt, all or a portion which may be secured, may not be finance operations and indirectly affect the credit quality of Crescent Funds’ investments. protected by financial covenants or limitations on additional debt, may have limited liquidity and may not be rated by a credit rating agency.
Lack of Diversification and Reliance on Portfolio Company Management. Crescent Funds may invest in a limited number of Competitive Debt Environment. Crescent Funds compete with the public debt and equity markets and with other investors for investments and may be concentrated in only a few industries. Therefore, the aggregate return of Crescent Funds may be suitable investment opportunities. There can be no assurance that Crescent Funds will be able to locate and complete adversely affected by the negative performance of a relatively few investments. The manager monitors portfolio company investments, fully invest its committed capital or satisfy its rate of return objectives. performance; however, it is primarily the responsibility of portfolio company management to operate a portfolio company on a day to day basis and there is no assurance that such management will perform in accordance with Crescent Funds’ expectations. Foreign Investments. Investments in non-U.S. companies involve risks not typically associated with the more developed U.S. capital markets, including risks relating to currency exchange, differences between the U.S. and foreign securities markets, differences in corporate and creditors’ rights laws and economic, and political risks. Dependence Upon Key Personnel. Decisions with respect to the investments and management of Crescent Funds will be made exclusively by the Crescent management team. Investors generally have no right to take part in the management of Crescent Funds and do not have an opportunity to evaluate the specific investments made by mezzanine funds or their Financial Markets. Instability in the securities markets may increase the risk inherent in Crescent Funds’ investments in that the terms. The success of Crescent Funds depends significantly upon the skill and expertise of the principal members of the ability of portfolio companies to refinance or redeem debt and structured equity securities held by Crescent Funds may depend Crescent management team. The departure of any of those principal members could have a material adverse effect on on their ability to sell new securities in the market. mezzanine funds.
No Assurance of Investment Return. There can be no assurance that Crescent Funds will be able to generate returns for its investors or that the returns will be commensurate with the risks of investing in the type of companies and transactions described Conflicts of Interest. Crescent and its affiliates manage multiple funds and accounts. Key personnel will devote some herein. Accordingly, an investment in Crescent Funds should only be considered by persons who can afford a loss of their entire business time to managing those other funds and accounts. Obligations to certain funds and accounts could in certain investment. Past activities or investment return results of investment entities associated with the Crescent management team or circumstances adversely affect the price paid or received for investments by Crescent Funds or the size or the portion of its principal members, including their prior funds, provide no assurance of future success or return results. The fees and investments purchased by other Crescent Funds. expenses charged in connection with an investment in Crescent Funds may be higher than the fees and expenses of other investment alternatives and may offset profits.
No Market for Interests in Crescent Funds and Restrictions on Transfer. Crescent Funds’ interests (“Interests”) have not been registered under the United States Securities Act of 1933, as amended (the “1933 Act”), the securities laws of any state or Use of Leverage. Certain Crescent Funds may leverage the cost of its investments. To the extent Crescent Funds purchases the securities laws of any other jurisdiction, and, therefore, cannot be resold unless they are subsequently registered under securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not the 1933 Act and other applicable securities laws or an exemption from registration is available. It is not contemplated that used. If the interest expense on borrowings were to exceed the net return on the portfolio of securities purchased with borrowed registration of Interests under the 1933 Act or other securities laws will ever be effected. There is no public market for the funds, Crescent Funds’ use of leverage would result in a lower rate of return than if Crescent Funds were not leveraged. Interests, and none is expected to develop. An investor in a Crescent Fund is generally not permitted to assign its Interests Overall, the use of leverage, while providing the opportunity for higher returns, also increases volatility and the risk of loss. without the prior written consent of Crescent, and any such assignment is subject to the terms and conditions of the operative documents of the relevant Crescent Funds . Investors must be prepared to bear the risks of owning their Interests for an extended period of time and the risk of loss of the entire investment.
No Regulatory Approval. The Crescent Funds have not been approved or disapproved by any securities regulatory authority of any state, by the Securities and Exchange Commission, or any similar authority in another jurisdiction.
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