ESG is good business for private debt, says Park Square

[NEW YORK] Robin Doumar, co-founder of independent debt provider Park Square Capital, sees a growing investor appetite for private credit deals that meet environmental, social and governance (ESG) criteria - and is steering clear of investments that fall short.

Mr Doumar also says the recent trend toward bigger equity checks is making credit an appealing place to invest.

Park Square, one of the biggest non-bank lenders to private equity in Europe and the US, provides senior and junior debt along with mid-market direct loan and has about US$10 billion in assets under management, according to its website.

Earlier this year Park Square signed the United Nations-supported Principles for Responsible Investing (PRI).

Mr Doumar spoke with Bloomberg on Sept 27. His comments below have been edited and condensed.

- Why did Park Square formalise its ESG policy?

Mr Doumar: "It's a couple of different things. It just reflects good business governance and a sensible perspective in investing in general. It is an issue that a number of our LPs are very focused on and for those two reasons it made a lot of sense for us to make the announcement and to follow through with joining PRI."

- What investments have you turned down due to ESG concerns?

Mr Doumar: "Frankly, for us ESG factors have always really been embedded through our investments, and it's always been a component of what we looked at. For us there's limited upside and potentially a lot of downside if there are ESG issues when we're investing. We think about an ESG risk if it really has the ability of impacting the performance or the value of the business. Given our credit focus, the key decision point for us is really at initial investment.

"Some examples of areas where we have recently identified things as having a material risk from an ESG perspective, include companies that we passed on that were engaged in weapons manufacturing. A second one is companies that we perceived are engaging in price gouging activities, and also companies with potential links to corruption or bribery due to high risk activity or geography."

- What investments are appealing to Park Square now?

Mr Doumar: "The industries that we tend to like are business services, health care and software as well as investments that are infrastructure related. For us, we tend to invest in low beta businesses where we think the business is not particularly volatile, and in those businesses good governance and sound ESG policies is something we obviously focus on."

- How would you describe the private credit environment currently?

Mr Doumar: "We continue to see strong performance across a lot of sponsored transactions. The deal quality is very high, but the purchase prices of the transactions is also historically high and that's particularly true for high quality businesses. The average purchase price multiple in 2015 in our book was 11.9 times Ebitda and the equity check was 37 per cent of the capital structure. If you look at our internal numbers in 2018, the average PE multiple was 15 times and 54 per cent of the capital structure was invested in equity.

"Those statistics tell a lot about where we are. As I look at the industry broadly for private equity (PE) and debt, for these PE deals if you go in at 15.5 times Ebitda and half the capital structure is equity, I think it's hard to generate outsized returns. So what you're likely to see is a compression of equity returns. And so on a risk adjusted basis, both senior debt, but particularly junior debt on a relative basis are very attractive."

BLOOMBERG