Q&A: Sankaty Advisors' Jonathan Lavine

Q: Sankaty started with direct lending, then went into structured credit, bank loans and distress. What was behind this evolution?

A: The product evolution we have has really been focused on where we think the best returns are for our money and our partners' money. We ask ourselves, does it leverage what we know how to do? Is the opportunity itself scalable? Is it an investment or a trade? And can do something differentiated and deliver to our investors the opportunity and exposure to an asset class that enhances their portfolios?

Q: To what extent could your direct lending activities be classified as shadow banking?

The opportunities now are much more nuanced and in many ways more interesting. They are different by geography, different by industry, and you must work a lot more at unearthing them

A: Most institutions with funds that do direct lending, or registered funds, they are not in any way secretive or in the shadows. They are in fact fulfilling a very important role, because in general, and particularly for mid-size companies, you are not seeing banks lending any more. At best they are doing arranging, maybe providing some revolvers. Funds have stepped in and in many ways done a really good thing because they are principal investors generally, they are seeking where capital is needed, and providing important capital. It is not like there are secret trades going on and so the expression "shadow banking" always throws me off. I think it is a private market and it barely scratches the surface of what the need is.

Q: Where do you see the best opportunities for buying loan portfolios from banks?

A: Bank loan portfolios come out for a variety of reasons. The most obvious is that banks need to shed assets. Second, banks are retrenching geographically, so you see some really good portfolios that do not fit in the geographic footprint that the institution now wishes to have. Third, there is a lot more pressure on return on equity - banks' capital has become increasingly dear and so they are strategically exiting products. We are seeing those sorts of opportunities all over the world - to a lesser extent in the US, although we have bought a portfolio in the US where a bank was exiting a product. In Europe, there are banks under pressure to sell assets as well as people retrenching back to their home geographies. And then in Asia and Australia we have seen a mix, but largely people pulling back on the geography - non-local banks that don't want far flung operations so they are selling portfolios.

Q: Will distressed investment opportunities follow similar geographical patterns?

A: Distressed opportunities are going to follow a series of patterns. Some are a function of the fact that there has been a lot of issuance recently, and when that happens, 18-20 months later you see a distress cycle. Secondly, there are industries in transition and industries that have fallen out of bed, particularly in commodities, where you see distress on a global basis. Thirdly, there is distress caused by economic problems. We are seeing that largely in Europe but there are pockets of it across Asia as well. What will be interesting is the fourth category, which is distress as a result of growth happening too quickly. A lot of people talk about that in Asia, a lot of people are waiting to see it happen, but as a practical matter you haven't seen a lot of it yet.

Q: What differences do you see between the current credit cycle and the previous one?

A: The last cycle was really a function of everything going down and generally everything then coming back up. The level of correlation among assets was unprecedented. The opportunities now are much more nuanced and in many ways more interesting. They are different by geography, different by industry, and you must work a lot more at unearthing them. It is not as simple as buying bank loans that are all trading down. So, the diversity and global nature of the opportunity today - and the fact they aren't mega distressed assets like in 2008 when we had Lehman Brothers and General Motors - I think that allows thoughtful funds to look for opportunities patiently and find the ones they really like and can put some effort behind.

Q: How important was the purchase of the loan portfolio from J.P. Morgan to building out Sankaty's global business?

A: The acquisition of J.P. Morgan's Global Special Opportunities Group was important to us for several reasons. First and foremost, we think it was a really good, differentiated investment opportunity. Secondly, we brought on 10 people who added to the experience of our 125 existing investment professionals. Thirdly, it gave us a little bit more mass in Hong Kong in particular and that helps us attack the Asian markets with a pretty seasoned portfolio and with people who have been doing business there for several years. It also gives us an opportunity to both do distress and private lending, for which the Asian opportunity really will present itself over the next few years.

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• Topics
• North America
• Investments
• Financing
• Credit/Special Situations
• Sankaty Advisors
• USA
• Europe
• Asia
• Structured finance
• Distress