Listen: Private Markets 360° | Episode 14: Exploring the Versatility of Private Credit

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Presenters

ATTENDEES

Chris Sparenberg
Head of Private Markets Commercial Strategy
S&P Global

Jocelyn Lewis
Head of Private Debt Commercial Strategy
S&P Global

Robert Stark
CEO, Nomura Capital Management

Presentation

Jocelyn Lewis

Hello, and welcome back to Private Markets 360, S&P Global's podcast dedicated to enlightening and educating our listeners about the world of private markets from vast vantage points. Your private markets, 360 cohosts, both sit within Market Intelligence. I'll start off with introductions. I'm Jocelyn Lewis, Head of Private Debt Commercial Strategy.

Chris Sparenberg

And I'm Joslin's cohost, Chris Sparenberg, Head of Private Markets Commercial Strategy. I'm a super fan of our corner of the investment industry. We're thrilled to bring our listeners exciting guests every month for discussions about industry trends and other topics of interest here on the podcast.

Jocelyn Lewis

You sure are, Chris. If you're interested in regular private markets content, hit subscribe and tune-in ready to introduce our guests, Chris?

Chris Sparenberg

Let's do it. Today, we're joined by Robert Stark. CEO of Nomura Capital Management to discuss a hot topic across banking, finding ways for banks to collaborate with and generate revenue from their private credit relationships.

Robert will provide insight into the newly formed division that he oversees, which nice Nomura Group's public and private credit offerings under one entity to create value across global credit and markets products suited for institutional and intermediary clients. We're delighted to have Robert join us on Private Markets 360. Robert, welcome to Private Markets 360. We're thrilled to have you on today's episode. How are you?

Robert Stark

I'm great. Thank you so much, Chris and Joslin for having me. I'm excited to be here today.

Question and Answer

Jocelyn Lewis

We are excited to have you, too, Robert. So to kick things off, could you please just provide an overview of Nomura. I believe the company is coming up on a big milestone. Is that right?

Robert Stark

Yes, that's correct. In fact, next year, we are going to celebrate our 100th anniversary. The firm was founded in 1925, deeply embedded in serving individual clients in Japan. It's a Japanese-based institution, and we have 3 businesses. So if you think about Nomura, the first business, and that's what we were built upon almost 100 years ago is the wealth management business in Japan.

A shift from brokerage to advisory, trading commissions are dropping significantly, holistic financial planning is obviously significantly increasing. Alternatives become a bigger portion of clients' portfolios, so all that good stuff. That's around 30% of the firm.

The second business is what we call wholesale. That's the equivalent of corporate investment banking. That is a truly global business and by far, the largest of the firm. That's around 60% of the firm's revenue base and asset management, also a global business represents about 10% of the firm's revenues. It's around $600 billion in AUM. The vast majority of that, again, is in Japan, but we manage over $35 billion in both public and private credit here in the U.S.

The U.S. market, in particular, is one of the most important growth markets for the firm. And as it relates to our asset manager activities, it's the second largest market that we serve, the largest one being Japan. And given that we are amongst the top 3 asset managers and wealth managers in Japan, for us, growth definitely comes outside of Japan and the U.S. market is the most important one from that perspective.

Chris Sparenberg

Speaking of your continued growth and the evolution of the business, can you take us through what led you to look outside of your original high-yield credit focus and grow this private credit business for Nomura?

Robert Stark

So first and foremost, the high-yield business was also founded from within Nomura over 30 years ago. So that has purely organically grown to now a $35 billion franchise. Now what we also noticed separate from that is the private credit market is very attractive to us and is growing for a number of reasons.

Number one, really, it's competitiveness for capital if you compare it to the bank loan or high-yield markets. Number two, you have a continuous retrenchment of the banks here in the U.S. due to both regulatory pressure, but also balance sheet impairments. Number three, the demand for higher returns from investors in the face of rising interest rates and probably higher for longer on the public fixed income side.

Then last but not least, the structural growth of private equity, all of which have significantly contributed to the fact that we felt private credit is an attractive area that we want to deep dive into. Just to put things into perspective, so private equity is like a little bit over $5 trillion today direct lending, which is only one element of private credit is already at $1.7 trillion.

If you go back in time, in 2010, PE, so private equity was around $1.4 trillion, and that has gone to $5 trillion. And direct lending at the time wasn't even $0.5 trillion and now it's closer to $2 trillion. So significant growth, obviously, in private equity, but also in private credit.

If you extrapolate that growth on the private credit side and you assume similar growth rates over the next 10-plus years to what happened on the private equity side of things, and that's just the direct lending side of things, so this doesn't even include markets such as real estate or asset-based lending, which are even larger than the direct lending markets today.

So while not everything in those markets may be necessarily prime for prioritization or private debt instruments, even if you assume 10% of these markets, which are huge, like multitrillion dollars in size, we believe there is additional $1 trillion to $2 trillion of demand available to private lenders like us over the next couple of years.

The last one I'm going to leave you with is, if you think about the private equity secondaries market is a good indicator of the growth of the primary private equity markets. So private equity secondaries today is close to $0.5 trillion in size.

Now private credit secondaries is not even 10% of that. It's around $30 billion. So with the continuous growth in private credit, those markets are going to get deeper and deeper and so private credit secondaries should be a natural beneficiary of that. So we believe the attractiveness definitely warrants to really go much deeper into this space.

Jocelyn Lewis

Yes, I agree with your point on private equity secondaries being an indicator of where things are headed. I do think there will be more private credit secondaries because there's always going to be requirements to balance portfolios over time. So I can see where that would come in the future, even though you hear about it now, but it's definitely not as robust as private equities secondary market by any means.

So Robert, how do you expect to grow your private credit business within Nomura? Since Nomura is a bank, but the entity that you represent and that you're a CEO of is Nomura Capital Management. So are you exempt from capital charge and the Basel III regulations that are driving that shift that you mentioned away from the syndicated loan business to private credit?

Robert Stark

Here in the U.S., Nomura is not a bank holding company, so we don't take deposits. So we're not regulated by the Fed or the OCC for example. Our main regulatory body, amongst others, is the SEC. So that comes with certain benefits. We obviously have our own internal capital charges, for example, if we use balance sheet on the banking side of things or if we use balance sheet for seed capital purposes to seed new funds.

But those are more like internally driven charges. Separate from that, we have a pretty sizable origination business within our Global Markets business, so our securitized products business is really a very large and significantly growing business of our firm. There's a lot of origination that is happening there, however, we are also capital constrained. Our model typically is underwrite to distribute.

One opportunity that we see is we can tap into those highly specialized origination opportunities and tap into a vast array of paper that we can source from our colleagues on the broker-dealer side, in addition to other broker dealers and banks that we could source from, but there's a very bespoke opportunity that we have as a firm that we are in the process of exploring.

Separate from that, we typically either we originate deals ourselves or we partner with other managers. It can easily happen that we have a deal that we originated, but it's probably a little bit above our bite size, so we find and partner with other managers to bring into the deal and vice versa that we tap into some of the managers that we partner with and co-invest alongside them.

We believe that is a big opportunity of how we can grow this business. Number one, partnering internally and number two, continue to further expand our network of managers, family offices, large registered investment advisers for co-investment opportunities.

Chris Sparenberg

That's great. Could you elaborate on how you partner with the global markets business versus competing with them for some of these deals?

Robert Stark

Yes, we're not competing with them. They are so much larger than we are, and their focus is slightly different also. So there's no competition here. I view this rather as a big opportunity for us as a firm to collaborate. That collaboration, paired with a high desire for entrepreneurial activities, that is something that I find truly unique about Nomura.

We are in various discussions with our partners on the global market side to identify areas where we can tap into their origination capabilities and make those available through fund structures to both institutional, but also intermediary clients further down the road.

Think about NAV loans, for example, where the classic buy of those loans originated by our global markets, CMR insurance companies, some of which may or may not want to hold those loans directly on their balance sheet and may prefer a fund solution. We're exploring ways of how we can partner with our colleagues on the global market side to make something like that a reality.

At the end of the day, it's really driven by our capabilities on the one hand and the client demand that we see on the other hand, really starts there. Finding the perfect match here requires intensive research and conversations on both sides with the potential clients as well as with our partners. That is just one example of many that we're currently exploring.

Jocelyn Lewis

I find that really interesting, how you're working with the global capital markets team in order to tap into the origination engine that they have because you're right. It all depends on the way that a lot of these loans are structured and the way that they're structured. I think that will determine whether or not an institution like an insurance company wants to participate or actually can participate based on the way that they're structured and their regulations as well.

Having these more creative solutions for them, I think, is really interesting and something that private credit offers that you can't do on the public credit side, which I find really akin to the value of private credit.

But another thing I want to get your thoughts on, Robert, is to date, there have been about 14 partnerships between major banks in North America and Europe and private credit firms. So is Nomura Capital Management considering any external partnerships similar to this trend, maybe the first kind of Asia Pacific-based banking entity to consider a similar partnership from the Nomura side?

Robert Stark

Yes. I mean, first and foremost, I think the first partner that we can pick up is our own colleagues on the global market side and that's what we're extensively looking into. There are a few examples out there, so you mentioned partnerships between banks and asset managers. They can come in numerous ways. They can come from bank and asset manager being part of the same institution. We would fall into that category, and that's what we're really going deeper on.

It can be a bank that no longer has an asset manager that is partnering with a third-party asset manager, that's definitely another form that you see in the market or a third idea is you build a merchant bank type capability and make usage of both your in-house capabilities as well as external capabilities.

We do some of that, but I really find that we have a unique opportunity to partner with our own Global Markets colleagues because the deal flow and the origination we see there is pretty unique. I find it's going to be very appealing to our client base, both the institutional side but also the intermediary side.

Chris Sparenberg

Continuing on that vein and maybe thinking about product innovation. Could you comment on the products, the investment vehicles, fund structures and the like that are enabling private markets access to accredited and retail investors? When we build Nomura Capital Management, we basically combined the public and the private credit businesses.

But we also combined the institutional distribution, serving large corporate public pension plans, other like large firms, things like insurance companies, endowments foundations with our intermediary channel, where we have a particular focus on the RA market, so that's independent fee-based advisers, so registered investment advisers, some bank trust companies and family offices.

Now the thing is, if you are an accredited investor and that means your annual income is somewhere between $200,000 to $300,000 and/or your investable assets are $1 million, you do not have access to the next, like GPLP drawdown funds because those funds, the suitability standard is that of a qualified purchaser, which means you have to have $5 million of investable assets.

For the accredited investor sector, there have been numerous fund structures that have become quite favorable over the last couple of years. But it is also important to note that the fund structures have been around for several decades. They just haven't found the right sort of usage and that has largely been driven by the fact that the traditional alternative managers have mostly focused on their institutional clients.

Those traditional managers that have sold to the retail channels mostly had traditional products, mutual funds, separate managed accounts and ETFs. So while the structures have been around, whether it's a BDC, a REIT, tender of a fund or interval funds have been around for a while, only over the last, I want to say, 10 years, and quite frankly, in particular, over the last 3 to 5 years, have gained significant traction.

It's really important to note that you don't start with the actual structure. You start with what is the strategy? What is the investment strategy? What is the client base and the client needs that we're trying to solve for? Once you figure that out, the structure simply follows the strategy and the client needs, but it really comes at the end of the process.

In our case, we have an interval fund and the reason why it's an interval fund is because it's who's the end client? It's an accredited investor. What do we want to achieve? We want to achieve diversification. Last but not least, what is really important from an investment strategy perspective? To achieve what we want to achieve inside the fund strategy.

If you add it all up, the outcome is an interval fund is the best suitable structure to make sure that the clients have access in the most convenient way and that we, as the manager can do exactly what we need to do to have the vast majority of the assets in illiquid securities, but it's a process. It's very important to note that this process should involve the end client or the client that you are selling to from day 1.

So for our interval fund, we interviewed 50 CIOs of smaller and larger RAs to get a better sense of how they were thinking about allocating to private credit and we gave them different choices along the way and that feedback became an important ingredient into how we structured and set up the fund.

I would go thus far to say that, when you look at our fund today, the feedback from the client is fully visible inside the fund and the way it's structured, and that's an important piece.

Jocelyn Lewis

Absolutely good market validation, understanding your client needs and then building products that meet those needs and then also help you achieve yours.

Robert Stark

Exactly.

Chris Sparenberg

Let's talk a little bit about global footprint. Could you comment about whether NCM is investing in private credit outside of the U.S., possibly in your home base in Asia Pacific, really interested to learn more about that.

Robert Stark

Yes. With regards to Nomura Capital Management, our focus is here in the U.S. for now, for sure and that's going to be the case for longer. We are going to further expand our investment and distribution capabilities over the next couple of years, likely more inorganic than organic in the years to come. We do in Japan, we have actually a small private credit investment business, there is a strong partnership with our investment bank there. But other than that, the main focus is here in the U.S.

As I said at the beginning, you have to think of us as in -- it's different than your traditional U.S.-based firm where 80%, 90% of the firm's revenues are in the U.S. and then, yes, we're a global firm, but we are mostly U.S.-centric. For us, it's the exact opposite. Japan is our home market, but if you are a top 3 player across the various buckets in your home market, growth has to come from other countries and the U.S., by far, is not only the largest opportunity set, but it's also the largest footprint we have outside of Japan.

You will see a lot of further growth to come in our businesses here and the investment management business is one of the top 3 priorities of the firm. You should expect a lot more growth to come here in the U.S., and it's going to stay a focal point from a future growth perspective for us as a firm globally.

Chris Sparenberg

That will be exciting to follow up.

Jocelyn Lewis

Robert, that's really an exciting journey. Before we close out here, just summarize that journey, what's next? Where do you go from here?

Robert Stark

It definitely has been a very exciting journey over the last couple of years. The way I would describe it is there's 3 phases. Phase 1 was built organically a private credit business with a particular emphasis on the RA market. That's included hiring 25 people across investments, distribution and operations. That was Phase 1 with the first initial product out in the market right now.

Phase 2 was integrate that private credit business with the existing public credit business, such that in totality, and that is what Nomura Capital Management is, it's a multicredit investment business, focusing on both public and private credit, serving both institutional and intermediary clients with our own compliance team, marketing team, and so that was Phase 2.

Phase 3 is now grow the entire franchise. We have now built the foundation for future growth. We can now look into inorganic opportunities that we can integrate into the foundation we have built. From here onwards, a lot of the growth is going to come from expanding our footprint here in the U.S., growing the products that we have seeded, and adding additional capabilities, most likely through inorganic ways to increase the investment activity spectrum, anything between public and private credit, sourcing bank loans, CLOs, structured credit, asset-based lending, real estate lending. Those are all interesting areas for us to further extend our investment capability set and to have more broader and deeper conversations with our clients.

Jocelyn Lewis

Thank you for that summary, Robert. Really appreciate it. While what a terrific conversation about investing in private credit and all the considerations that the strategy entails really sounds like NCM is in the early stages of venturing into private credit with a somewhat differentiated backing and the significant backing of the Nomura brand. We wish you all the success and we'll be excited to watch the growth trajectory within private credit.

Robert Stark

Thank you so much to both of you, Joslin and Chris. I enjoyed the conversation, and I appreciate you taking the time and having me here on the show.

Chris Sparenberg

Thank you, Robert.

Jocelyn Lewis

Thank you.

Chris Sparenberg

Thank you again to our wonderful guest for a great chat today. I really appreciate everyone listening in. If you're looking for more private markets content, hit subscribed to catch future episodes and listen to our earlier episodes wherever you listen to podcasts. Cheers, everyone.

Jocelyn Lewis

Thank you so much. You can also subscribe to our monthly Private Markets 360 newsletter. The link is in each episode of bio or connect with us on LinkedIn. Have a great day.