From €4m to €40bn of Assets - The Tikehau Capital Story & Strategy
Starting with €4 million of capital he co-founded Tikehau Capital, which today oversees approximately €40 billion in assets. Tikehau invests across four key asset classes (private credit, private equity, real assets and capital markets).
Creating the Business
Chabran explains that Tikehau’s first significant transaction was to purchase the flea market in Paris. He states that this in essence was a real estate transaction with a private equity component, and that the financing was done by raising capital from co-investors. Ultimately, Tikehau capped the deal and sold it to the Grosvenor family. Chabran states that to this day this remains one of Tikehau’s iconic transactions, with a great financial multiple and a story that he can tell 20 years later!
Chabran further mentions that the key differentiator of Tikehau is ‘the different spin created by the skin in the game we have in our own platform.’ Chabran refers to this as the partnership approach, creating a sense of solidarity with their business allies.
“Many people in this industry, are prepared to make money with someone else money, but less so are prepared to make money with their kids' money, which is, I guess, the definition of an entrepreneur.”
Chabran explains that ‘at this stage of Tikehau’s development the industry has changed structurally’. And that thus what Tikehau does is that it ‘provides capital and flexible capital to any given situation’. Chabran notes Tikehau is at ‘a tipping point, in Europe, to create, for the next 10 years, what will be the winning platform in this alternative, quote unquote, "manager landscape" because we'll be able to make a difference for the years to come.’
Weighing Up Investment Opportunities and Capital Market Strategies
Chabran notes that ‘when looking at the structure of our firm the starting point is being publicly traded’. Chabran explains that in his view they have relatively oversized balanced sheet relative to their AUM ‘roughly €5 billion for the €40 billion we manage’ and further highlights that ‘we will never put capital for the sake of making it appealing. We'll put capital because we've got a very strong conviction in the strategy. That's step one.’
Chabran refers to step two as following fiduciary duties and states that the way Tikehau allocates capital ‘is to generate low to mid-teens type of return on equity’. To achieve this, Chabran explains, they allocate their capital in a way that generates blended return (through, for example, a combination of leverage loans and special ops) that ‘in turn will compound your balance sheet at this 10-15%’.
“So, the allocation is from private credit, real assets, private equity, even our capital market strategies is effectively an allocation where we're always trying to go for a real conviction on the strategy that will generate on the standalones or on a blended basis, this type of a return on capital.”
Chabran explains that what they call capital markets strategies ‘is very much our securities business, so bonds and equities’. In particular, Chabran highlights their bond investment strategy.
“So we started very much on the bond side, high yield, crossover, subordinated financials. That's been a terrific opportunity over the past 15 years. When you think about what has happened in the banking landscape, starting with the GFC all the way to, if I may say, the Credit Suisse saga a few weeks ago, playing the capital of a bank balance sheet has been an extremely interesting place.”
Chabran puts across the point that their growth was mainly fuelled by private investors and family offices. He further emphasises that later Tikehau ‘got into the more financial and institutional landscape; insurance companies, retirement plans in Europe and then in Asia, more recently, in North America and the Middle East. And then, came five/six years ago, some opportunities to team up with corporates.’
He states the example of the energy transition as a wave in which Tikehau was fairly early ‘in 2017, ’18’. Chabran notes that in this area Tikehau teamed up with Total Energies as one example of many successful partnerships explored in the episode.
“We [Total & Tikehau] started together an energy transition fund, a decarbonisation fund focusing on profitable, mid-market, growing company who needed some capital in to scale the solution they had. We raised a billion too for a first-time strategy, first-time fund, first-time partnership. And the partnership with them, what they bring at the corporate, beyond the capital, the reach, as you can imagine, of this platform has been a real game changer.”
The episode further discusses Tikehau’s equity partners. On their equity partners, Chabran emphasises, ‘I guess, we're giving them access to investment opportunities, once again, they wouldn't see otherwise because the way they organise will be only focusing on one geography, one asset class, when they're covered, obviously, by the private banks, they would see only part of the deal flow’.
He further explains that Tikehau’s focus on the European market ‘with local presence in every single one European market’ gave Tikehau the expertise of being local which provides Tikehau with an edge in ‘giving access to a deal flow that people wouldn't see otherwise’
“You would not find, within the Tikehau story, one, big flagship transaction, multi-billions that we made the cover page of the Journal, it’s getting access to alternative private markets that are all bespoke, all manufactured, it’s handmade and I guess, they’re certainly valuing that.”
Chabran also explains that crucial to the Tikehau story is a partnership structure in which ‘the team owns 57% of the publicly traded company”. In Chabran’s words ‘I think it's a second to none skin in the game in Europe and maybe in North America where each time we use a hundred from the balance sheet is 57% coming from the partners and the team.’ Chabran highlights this as another differentiating factor in the Tikehau’s story.
On the advantages and disadvantages of public listing, Chabran discusses that being a publicly company means full transparency in front of LPs and that crucially the industry benefits from this transparency.
Chabran summarises that ‘since going public, we tapped twice the equity capital market in '17 and '19. We see that €1.5 billion, which was roughly our book value. We raised since then roughly €1.5 billion today it's a €4 billion change market cap.’ He states the main benefit of public listing as having ‘this evergreen, discretionary, very flexible and patient pool of capital as an enabler...to fuel your business.’
“If you create a full alignment of interest, which is I raise capital, I invest into my strategies, I go and raise third party capital...and by the way, I don't have any carried interest, Antoine [Co-founder of Tikehau] doesn't have any carried interest, none of our partners have carried interest because that's what creates a little bit of the asymmetry when you are publicly traded. So, we are fully aligned with the public shareholders, but also the LPs given the amount of capital we invest side-by-side with them in a fund format.”
Lastly, Chabran emphasises that ‘if we double click on the Tikehau organisation, it's not a two-man show, it's 80 Partners who are all, as I said, heavily invested and committing into the business who all have their own dedicated team within this integrated platform.’. Thus, Chabran identifies having partners who are not only interested in their respective business within Tikehau but, importantly, are an effective contributor to the whole as a key feature of Tikehau’s success.
“So, I don't know if it's 'Merchant Banking 2.0', but what I know for sure is that when you got your capital at stake and that you've convinced your partners, that's normally the best risk management you can have.”
Investing in Europe
On investing in Europe, Chabran explains that there is a big difference between top-down perceptions and bottom-up developments. Chabran says ‘The reality is that Europe, France in particular, but Europe as a whole has become a real entrepreneur's playground.’ However, he, explains that if companies in Europe are looking for capital, either debt or equity, they have less options than in the US. For instance, Chabran states, that 'if a company is trying to scale a €25m, €50m, even a €100m EBITDA business, there is a lower number of alternatives.'
“In the US, asset managers have been a key component of the financial market industry for a long time. They've got BDCs, business development companies, non-banking institutions providing credit. Here in Europe, we don't have that.”
Thus, Chabran argues that in Europe there is no shortage of ‘good entrepreneurs, good companies [and] good ideas.’ However, he says that the key to investing in Europe is having local presence with local teams on the ground. He underlines the importance of the bedrock of entrepreneurs within Europe; ‘I mean, we're talking about aerospace, we're talking about energy transition, cybersecurity, which is one of big threat and opportunity here. But for that, you have to be prepared to make the investment!'
“I'm bullish on Europe.”
By Jan Ptacin, who has completed work experience at the Money Maze Podcast. Jan is currently a third-year student at Durham University, studying PPE. Outside of his degree Jan is interested in investing, having been a team leader of a team which reached a global final of an investment competition organised by KWHS in high school. He also enjoys art, hiking and fine wine as hobbies.
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