Q&A: ADM Capital’s Chris Botsford

Q: When did you start offering ESG-integrated (environment, social, governance) private credit?

A: It has really picked up over the last five years. There are two main considerations. First, are investors interested? Second, are borrowers willing to move down this path where we think they can improve what they are doing? Increasingly, it’s becoming a win-win situation. For example, in the Philippines, we got involved with a company that was developing a call centre. We said we wanted the building to be LEED-certified [a green building certification] and they were reluctant because it cost more money. We ended up providing more debt, they completed the project, and it became perhaps the greenest call centre in the country. A high-quality international tenant took out a lease on it, and because of this, the developer sold it at a premium rate. This enabled us to get our money back in a more reliable fashion, they received a premium, and the environment benefited from the building’s lower energy consumption. The developer became an advocate for this approach in the Philippines, which led to others asking about doing the same thing.

Q: How do these products compare to ESG-linked credit facilities that now feature in LBO financing?

A: We are more direct. There is an event of default and a penalty if you don’t meet the ESAPs [environmental and social action plans] we put in on the sustainability side. We also work closely with the borrower to help them establish these ESAPs, calculate their carbon footprint, and so on. Plenty of funds and banks offer interest rate discounts for doing the right thing. I don’t see many others doing what we are doing and providing technical assistance for bespoke environmental and social (E&S) plans. Private credit is still relatively nascent in Asia. The region accounts for well over 50% of global GDP, in terms of purchasing power parity, and it is only 7% of global private credit. Then there is the format of the market. Bigger deals tend to get syndicated out through investment banks, whereas around 90% of what we do is bilateral. We are an advisor to a company first – unpaid and informal – and a lender second. We can go in and say, ‘Wouldn’t it be a great thing if you took your company in this direction?’

Q: What do rising interest rates mean for private credit providers?

A: Rising interest rates mean credit is in shorter supply, so we can ask for more collateral. As a result, our risk comes down because the margin against what we perceive as the highest rate we can charge comes down. People are willing to stay in the ground longer, so the relative premium we charge over regular banks and other sources of finance isn’t huge. We address that by asking for more equity upside in the form of warrants, so the return on risk hasn’t adjusted much. At the same time, private credit is a very defensive strategy. We average approximately 1.5x senior secured collateral across the loans we make, so if there is a further downturn, we aren’t going to be carried out when someone else forecloses. Defensive is good in this environment, and we see strong interest, especially out of the Middle East. Asia isn’t the easiest market, but people still want to come.

Q: What is the nature of your LP base?

A: We are evenly balanced between Asia – primarily Australia – and the US. Following the global financial crisis, we started moving from LP-GP structures to SMAs [separately managed accounts]. When we are looking at specific things, we might raise funds, but the beauty of SMAs is if you have a good relationship with LPs you can call up and ask for more money. It’s extremely efficient. Under the LP-GP model, every two years you do a roadshow. Our average contractual duration is a little less than three years, which means we would be recycling a lot to get to the same kind of endpoint as private equity. We are currently about two-thirds SMAs, one-third funds. I think we will move back closer to a 50-50 balance in the near term. It’s important to have a diversified LP base and we see demand for LP-GP structures.

Q: Where do most deals tend to come from?

A: Banks tend to be regulated entities with standard loan formats. Private credit providers can have a bilateral discussion and come up with something that’s totally flexible. It’s a big advantage and people are happy to pay more for that. The biggest source of deal flow continues to be more complicated transactions driven by M&A and cross-border issues, or where there is a need for a creative solution. We did a deal in India for a fintech company that was growing so quickly it couldn’t get regular bank finance. Raising equity wasn’t attractive because it’s expensive – if their share price doubles over the course of a year, that’s a 100% cost of finance. Historically, this company had lent mainly to students, 85% of them male. We put in a gender balance E&S target. There was a bit of resistance but ultimately, they were delighted because their loss rate went down and the ESG work encouraged other lenders to come in.

Q: Are there specific pockets of opportunity in Asia right now?

A: Korea is attractive because it’s a tight credit market. There are situations where companies need money to finish something – for example, a plant that is three-quarters complete, but there is no cash flow and no one will refinance it. We help them finish and they fall back into the regular banking system. We are always looking for gaps like that. Elsewhere in Asia, there are always cases where someone has fallen out of favour. Maybe they have overleveraged or there is an urgent need. We have a lot of repeat clients. Because we know them and have done all the due diligence, we can move quickly. Companies that are cash flow-light but heavy on collateral generally aren’t favoured by banks. And companies often don’t like borrowing from banks because most bank loans are amortising and therefore a drain on future cash flow. But no one can sustain the rates we charge for a long time. We aren’t looking to do 10-year loans; we are there to bridge the gap to the point where a company has good cash flow and can go into the regular banking system.

Q: How about China?

A: We are reasonably active, but we focus on specific areas. For example, we like the senior living space. China has a massive ageing population problem – the country’s average age recently surpassed that of the US, and you have 4-2-1 situations with four grandparents, two parents, and one child – so I think this one will run and run. It’s not getting the focus it should, so if you are helping solve the problem, that’s the right place to be in China. We can do onshore and offshore. We try to get pools of non-correlated collateral, both inside and outside of China. We are happy with enforcement – you must be aware of your collateral, how long it might take, and how the system works in different cities and provinces.

Q: What does this need for fleetness of foot between different markets mean in terms of local resources?

A: We have 45 people, about one-third of them are support staff. We have a managing director focused on each geography, and five satellite teams that feed in transactions and conduct on-the-ground due diligence. That hub-and-spoke structure works for us. There are plusses and minuses to setting up regionally focused offices like our alternative investment fund (AIF) in India.

Q: Last year, you introduced a dedicated climate strategy. What’s the thinking behind that?

A: In 2018, we did a transaction – the first sustainability bond issued through Singapore – involving Barito Pacific and Michelin that planted sustainable rubber in Central Sumatra. It helped reduce deforestation and brought a lot of people out of poverty. We are now scaling up that business. Indonesia has the largest tract of rainforest in Asia. We’ve operated in the country for a long time, and there’s a gap in the market for lending to landscape-based projects. The US Development Finance Corporation (DFC) has provided a USD 100m guarantee facility to our proposed new fund, so we are looking to raise a USD 200m fund for Indonesia. It’s a small part of what ADM Capital does, but it is a crossover between research conducted by our foundation and what we’ve been doing on the financial side.

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• Topics
• GPs
• Credit
• Credit/Special Situations
• North Asia
• South Asia
• Southeast Asia
• ADM Capital
• private debt
• Asia