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Text on screen: What exactly is flexible capital?
There are two key elements of flexible capital.
Text on screen: TITLE – Two key elements of flexible capital:, BULLETS – Structure is not pre-determined from the outset, Execution certainty trumps lowest cost
The first is that the structure is not predetermined from the outset by a boilerplate term sheet from a sponsor. For example, perhaps a company needs to raise $150 million, and they're not exactly sure of the best way to go about it.
Text on screen: Adam Gubner, Portfolio Manager, Head of U.S. Corporate Special Situations
Maybe it is a senior secured loan facility, or maybe it's a first lien and second lien. Or maybe they need to raise some preferred equity to entice somebody to put in that $150 million. So, there are very different terms offered from different capital providers.
The second is execution certainty – it trumps the lowest cost. These companies are much more focused on getting a deal done. They're open to price. They really have a capital need that they're looking to fill. It’s more important to them to have the right long-term partner for support and future growth vs. just seeking the lowest common denominator of cost.
Text on screen: TITLE – PIMCO’s capital solutions:, BULLETS – For borrowers: senior secured loans, second liens, junior capital, and even preferred equity, As a lender: return may come from cash interest, paid-in-kind (PIK) interest, upfront fees, prepayment fees, exit fees, and often some form of equity
Flexible capital is a hallmark of our opportunistic corporate strategy.
Senior secured loans, Second liens, junior capital, and even preferred equity are all often part of the solution we provide to borrowers. As a lender, we look at it from a total return perspective, with a focus on downside protection. Our return can come from cash interest, paid-in-kind interest, upfront fees, prepayment fees, exit fees, and often some sort of equity participation through warrants or straight equity.
Equity is not something you typically get in a standard direct lending transaction, but can be an important idiosyncratic return enhancer for a capital solutions deal.
Text on screen: What does flexible capital look like in action?
One of our more recent transactions was for a company in the space industry that makes satellites and is in its infancy.
Images on screen: Satellites in orbit
It recently won a very large contract from the Space Development Agency, and so the company needed to raise capital in order to execute on it.
It had two options. One, it could go out and sell equity, which would be highly dilutive.
Or two, it could look for some sort of alternative capital provider and partner.
Images on screen: PIMCO trade floor
This is where PIMCO was able to step in. The company was looking for about a $50 million initial loan. We put together a loan that was senior secured in nature.
It was priced at LIBOR plus 1100 basis points and two points upfront, an exit fee, and 2% of the company's common equity. We also put in covenants, including a minimum liquidity threshold.
FULL PAGE GRAPHIC: TITLE – Significant growth expected in the space industry. A bar chart is shown; the subtitle for the chart is The Global Space Industry is expected to grow from ~$350bn today to ~$1tn+ by 2040. The chart on the left shows the size of the global space industry in 2020 as approximately $350bn. The chart on the right shows the estimated size of the global space industry in 2040 as approximately $1tn+. Which equals a 5% compound annual growth rate.
While $50 million was a small initial size, we also believed that this company would have opportunities to grow. Sure enough, they won a follow-on contract with the government. That was much larger than the first one and again they needed to raise additional capital in order to execute on it. And so we provided them with a further $80 million loan at similar terms as the initial one, but we increased our common equity holdings from 2% to 5.5%.
All in all, we invested about $130 million into the company at a very attractive coupon of LIBOR plus 1100, and currently own 5.5% of the company.
Text on screen: Looking ahead, where does PIMCO see opportunities to commit flexible capital?
FULL PAGE GRAPHIC: TITLE – Current investment themes:, LIST – Growth & Tech Oriented Companies: Technology leaders poised for secular growth, E.g. American satellite manufacturer. Consumer & Residential Services: Consumer/residential services and goods providers with scalable business models, E.g. Residential HVAC (Heating, Ventilation, and Air Conditioning) services provider. Infrastructure-Related: Well positioned infrastructure providers with high barriers to entry, E.g.North American transportation infrastructure provider
Industry-wise, we see opportunities across sectors with strong secular tailwinds, such as consumer & residential services and goods providers with scalable business models, and well-positioned infrastructure providers with high barriers to entry. We think technology and growth-oriented companies are also going to be pretty interesting.
The private debt market is now standing at about $1.2 trillion vs. about $250 billion during the global financial crisis. It’s grown by 50% just since 2019. Private markets have become an important pipeline for companies to find financing solutions that public markets are unable to accommodate.
Text on screen: TITLE – Private capital solutions has become a critical component of financing markets, BULLETS – Direct lending funds & business development companies make up most of the market, Growth in flexible special situation financing has lagged broader growth of private debt – representing opportunity
Direct lending funds/BDCs make up most of the private lending market, and are focused exclusively on senior loans to performing companies – they often can’t provide terms and structures needed to meet acute liquidity needs, business challenges, facilitate high growth, etc. There are few firms capable of providing bespoke, flexible capital to meet the needs of borrowers looking for structured solutions. This less crowded segment of capital solutions is where PIMCO focuses its lending activity and deal sourcing.
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Preqin (GFC as of 31 December 2008, Today as of 31 December 2021). Private market size includes the following geographic focuses: North America, Europe, Africa, Americas, Asia, Australia, Middle East & Israel, and multi-regional.
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