Tikehau Capital (TKO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for joining us today. We are delighted to welcome you to the first edition of the Tikehau Capital series dedicated to our private credit platform today. I'm very pleased to introduce our speakers who will take you through today's presentation. Maxime Laurent-Bellue, Group Deputy CEO and Co-Head of Credit; and Martino Mauroner, Deputy Head of Private Debt. We'll be taking questions from the webcast during the Q&A session. So please do not hesitate to submit your questions in the box at any time. With that, Maxime and Martino, over to you.

Thanks, Theo, and good afternoon, everyone. Thanks for attending today. Maybe as a quick start, we would start by giving you a short overview of Tikehau Capital. As some of you may know, Tikehau Capital is a global alternative asset management and investment company. It was founded 20 years ago by 2 entrepreneurs, Antoine Flamarion and Mathieu Chabran. And it has grown through an impressive journey from EUR 4 million to today EUR 51 billion total AUM. The group is organized with a dual model with essentially 2 growth engines. First one, which is the asset management business, where we operate and invest in 4 very complementary asset classes: Private credit; real assets; private equity; and capital market strategies. The second one is our balance sheet. Obviously, our model is supported by a very solid equity base, which is invested in a EUR 4.5 billion investment portfolio. And that balance sheet is around 70% exposed to our own funds, which means that we invest alongside our LPs in all of our flagship strategies, essentially evidencing a very strong alignment of interest. So in effect, we are truly a principal as much as we are an asset manager. The platform today is a global platform. We have a global reach with 17 offices on 4 continents and around 700 employees. So in short, we are global and local in the same time. We have a very strong entrepreneurial spirit and DNA and skin in the game, our alignment of interest is at the -- again, at the core of our positioning. Going now into the topic of the day, which is private credit and sort of trying to give you an overview of the credit platform of Tikehau Capital. We'll detail all of our strategies and try to give you insights on the market trends and growth and where we are positioned, where we see value. But maybe starting with an overview of the journey of the platform that we've been building over the past 20 years. First comment I will make is that we are effectively a pioneer in Europe, and the platform grew at an average of 20% per year in terms of AUM. And today, credit -- the credit's business represents around EUR 23 billion of AUM, which is the largest business unit for the firm. We've been enjoying growth, which was a combination of vertical growth and horizontal growth. Vertical growth was essentially launching new vintages, which tend to be larger and larger. And horizontal, we've been expanding from a geographical standpoint, but also launching new products and new strategies along the way. Today, the platform is really multi-strategy spanning from corporate and direct lending to CLOs, credit secondaries and tactical strategies. And as I said, we'll be giving you more details on each of these products. Skin in the game, I was mentioning earlier, our balance sheet is currently EUR 1.2 billion invested in our credit strategies. And that's something we -- again, we praise ourselves for in terms of ability to support our existing strategies, but also the growth of new strategies. So the platform was born on the back of the GFC. And today, we have a very established track record that goes back from the genesis of the asset classes effectively. The asset class in Europe was born quite recently, and we tend to say that our track record is as long as the asset class. And therefore, we've been investing through the cycles, thanks to the support of close to 90 people investment and support teams. We have financed a fairly large number of borrowers, more than 300 over the years, which illustrates the platform's reach and depth. So in short, it's a scaling strategy platform. We have diversified strategies that are very much synergistic and essentially enable us to be a one-stop shop, and this is something we will come back during the presentation. Our industry is very simple in a way. It's all about raising capital, deploying capital and ideally returning capital with a profit to our LPs. A few data points to illustrate the virtuous flywheel effect of our private credit platform over the years. We're starting from the IPO a few years ago, we've been able to raise almost EUR 30 billion of cumulative inflows, including EUR 3 billion over the 9 months of the year. And this is, we think, a testimony of the diversification of our distribution channels and also the relevance of our investment strategies. In terms of deployment, we are very selective and having a disciplined underwriting, we think, is at the essence of our industry. And that's illustrated by the selectivity rate, which is consistently higher than 95% across our various strategies. We always favor downside protection over upside risk, which we think is a proper approach whenever you manage a credit strategy. And obviously, exits are very important. DPI is probably the KPI that is currently under the most scrutiny from LPs around the world and for the right reasons. So since the IPO, we've been able to distribute EUR 9 billion to our LPs and realize EUR 2 billion year-to-date. So despite the environment, the uncertainties that we know and that we see every day, we are enjoying a strong exit momentum across the various strategies that we manage. Maybe a few words on private credit, the merits of the asset class, why this is something that has been growing so fast recently. I think at the roots of the asset class, obviously, and the emergence of the asset class, there was a sort of supply-demand dynamic element that was very important. Post GFC, obviously, traditional lenders and banks, most importantly, retrench for the market -- from the market. And at the same time, large allocators were looking for diversification avenues from traditional fixed income. And so essentially looking for less volatility, higher returns with the same sort of core credit component, i.e., diversification, recurring cash yield and yielding strategies, but coming with a premium and also, to some extent, with a structure element, which is in search, again, for private credit, which is underlined by usually senior positioning in the capital structure, strong equity cushion and mostly a covenant protection in the documentation that we structure. So big focus on downside protection. And again, for any investors allocating to the space, a need and a target to generate a recurring cash yield. The asset class has been enjoying, as you can see here, phenomenal growth over the past years. We estimate the market currently to be around $1.5 trillion. That's a multiple the size it was post GFC. And we think there are a few very structural long-term tailwinds that will keep supporting the growth of the asset class in the long term. First one, obviously, is the dry powder that's been piling up by PE. There are a substantial amount of dry powder in the market that will need to be deployed, and that will create a substantial financial needs that alternative lenders will contribute to fill. Secondly, Europe is still lagging behind as it usually is behind the U.S. in terms of penetration from the alternative lending segment. So we think there will be some catch-up effect and Europe will probably grow at a faster pace than the U.S. in the years to come. Thirdly, we expect the asset class to continue to expand. And by expanding, we think essentially some strategic sectors that are positioned at the core of Europe's need for sovereignty will benefit from that, but also new adjacencies. So defense, digital infrastructure and also real estate or real estate credit are all areas where we expect significant allocation and to contribute to drive further the growth of the asset class. overall, these tailwinds will translate into additional growth over the next 4 to 5 years for the asset class, where, again, estimations, but we think the potential is to grow to $2.6 trillion up to 2029. So in short, it's a growing market. It's a healthy market that we think is here to stay and has become a strategic component of any allocation exercise today. So how do we capture the opportunity? I think at Tikehau Capital, we are essentially ideally positioned to capture this growth and the market tailwinds. First one, we've been building a comprehensive platform. As I said, it's a multi-strat platform. It's a global one today. which means that we are offering solutions to all sorts of needs, all sorts of context with also internal synergies and benefits across strategies from origination, intel underwriting standpoint. Secondly, we have a long and established track record. We've been navigating multiple cycles. And we've been doing that always maintaining a very high level of discipline in the underwriting. And as I said, we are truly a pioneer in the European market, which provides key origination edge. In short, these trends create a very relevant model for us in investing in the asset class, which is relying on strong origination capabilities, flexibility in the way we structure deals and also very much downside protected minded in the way we build our portfolio, but also underwrite the deals we do. Going into more details on the platform, as I was saying -- so today, it's a fairly powerful platform in a sense that we are tackling several products and strategies. During the growth, we've been focusing on 2 core engines during the growth journey of the firm. Today, again, as I said, more than EUR 23 billion AUM. The 2 core engines were direct and corporate lending on the one end and CLOs on the other end. Today, these 2 businesses represent around slightly less than EUR 10 billion each, and they've been the most scalable and the key drivers of the growth of the asset class and the business for us, but also for the firm in terms of profitability. Around that, we've been adding new adjacencies, new products. We've been innovating over the years, which is, again, one of the core DNA of the firm. And so we've been stepping in, in more niche strategies. So tactical strategies is a good example where we provide a capital solution to more complex situations. And we've also stepped in real estate credit recently. And so here, the returns targets are usually higher. And same applies for credit secondaries, which is a market where we think there is a huge potential simply because it has to reflect the overall asset class growth and in which we've been, again, very much at the forefront of innovation, launching a first vintage 4 or 5 years ago and already investing our second vintage. So overall, as I said, we manage very different strategies that answers to very different needs and overall, providing to our LPs and clients a very different risk-reward investment propositions from 3% to 4% if you look at CLOs on the senior tranches, for instance, or corporate or direct lending, where we are a mid- to high single-digit target return to more double-digit types of strategies with tactical strategies and credit secondaries. A few words on the team to wrap up the platform presentation, but we've been building a very strong and sizable team over the years. Currently, our investment teams are located in 9 different offices, so which means that we have a multi-local presence, ensuring very strong local market intel and allowing to originate, structure and execute the transactions, we think, more effectively. I mean private markets are truly local markets. So the firm has taken a view very early in our development that we needed to be local. At the time 10 or 12 years ago when we opened our first office, it was -- I think it was a constrained move because most of our competitors were operating out of London. Today, it's more fashionable, but we -- I think we have a first-mover advantage in that respect in a sense that if you look at our core Western European markets, we have always local origination and execution teams, which provide an edge in building the ecosystem, building the relationships locally. And that's been making a huge difference in the way we've been deploying our funds over the past years. On that, I'll hand over to Martino to deep dive the direct lending strategy in more details.

Thank you, Max. Good morning, and good afternoon to everyone. I'm going to provide you a description of our biggest strategy within our credit platform, which is corporate and direct lending. As you can see from this slide, the strategy has been growing almost 20% CAGR since 2015 and it's approximately EUR 10.6 billion AUM as of September '25. We closed our fifth vintage in '22 at approximately EUR 3.3 billion, and we plan to close the sixth one at the end of this year, and we are well on track with the original target fundraising between EUR 4 billion and EUR 5 billion. Our focus on this strategy is on sponsor financing. So essentially, this means that we support international sponsor for their buyouts and M&A growth. We focus mainly on core mid-market, which means a range in terms of EBITDA between EUR 20 million and EUR 40 million. And we focus here because we believe -- we truly believe that this is the best positioning in terms of mix between returns and downside protection. In terms of ticket range, it's quite large between EUR 10 million and EUR 300 million with a focus -- a sweet spot in the middle between EUR 100 million and EUR 200. We have a very solid and strong track record. We have executed 180 deals. And I think it's very interesting to note that for approximately half of them, we have already exited and with a very successful returns. In terms of sector, we -- our approach is sector agnostic, but we have identified 4 sectors for which we see very important megatrends that will drive deployment and will create market opportunities. And these sectors are namely digital transformation, health care and demography, defense and energy transition. Our funds are highly diversified. On average, we have approximately 60 borrowers per vintage. And this is very important because it gives an average concentration between 1% and 2% per borrower. And finally, in terms of seniority, most of our deals are senior. And indeed, between 80% and 85% of our deals are senior secured. I will now provide you an overview of how we source deals and how we select them. We have a very large pool of sponsors of partners with whom we have transacted in the past. We cover actively more than 130 financial sponsor, and we have, thanks to the multiple offices that we have, we have several entry points that are -- can allow us to strengthen the relationship with our partners. With most of them, we have transacted several times. For 56% of the deals we have transacted with repeating sponsors. And I think it's very important also to highlight that for most of the cases, we are the sole and lead arranger of the deals. This is very important because in this industry, we think it's fundamental to be in the driving seat, and this also represents a strong barrier to entry and a competitive advantage that Tikehau has in a competitive environment like private credit. And moving to the right part of the slide, this leads into a very high selectivity rate. We have, on average, 3% conversion. It means that out of the almost 5,000 opportunities that we have reviewed, we have converted only 3% of them. I think this is a very important slide that explains how we are disciplined in our approach. Our priority is always to maintain a very strong downside protection while at the same time, delivering consistent returns for our LPs. If we look at the left part of the slide, we have shown a comparison between 2020 and '25 in terms of approach to leverage and returns. With regards to leverage, we -- the weighted-average of our deal has decreased to 3.9x in '25, which is a testimony of our prudent underwriting, also if we consider that on average, more than 60% of the capital structure is financed by equity provided by financial sponsor, which is a very important indicator of the quality of the asset and the skin in the game of our partners in the deals. And with regards to the returns, despite the margin compression that we are observing on the market, we have been able to generate higher returns. And I believe that this is a key difference between the European and U.S. market, whereby in Europe, we have higher margin that can offset a lower base rate. And this normally coupled with a lower leverage in the structure. If we focus on the quality of our assets, we believe that are highly performing. We -- on average, our portfolio companies post double-digit revenue growth and 25% of average EBITDA margin. As we were saying before, we strongly believe in the importance of the documentation protection. Indeed, 100% of our deals have maintenance covenant. And as I was saying before, lever in terms of leverage and ICR, our structuring, our underwriting is very conservative. On average, 3.9x average leverage and 2.8x average ICR, which translate at the end in a very low default rate lower than 1.5% on an annualized basis and less than 0.1% in terms of loss rate. Now we give you a couple of case studies that are quite different. In one case, it's a highly performing deal. In the other case, it's an underperforming situation, which is a good testimony, a good evidence of how we can generate returns also in complex environment. Starting from Dedalus, Dedalus is an Italian company, which is one of the European leader in health care software. We have been supporting Ardian in their buyout and also in their M&A story. We invested in 2020, EUR 180 million, of which EUR 155 million from our direct lending strategies and EUR 25 million from the balance sheet. And it's a good illustration of value creation through both our funds and our balance sheet. And upon refinancing in summer of this year, we have been able to deliver very good returns, more than 1.9 multiple of money and more than 14% IRR. Terrates is a geotechnical engineering solution provider for large international projects. We supported initially buyout in 2017. After a couple of years of good performance, the company started to underperform after COVID, namely for delayed projects and the liquidity issues. Initially, we provided support. We capitalized interest, but then we decided to enforce our security package in '23 by appropriating the shares of the U.S. entity, which was the most performing one within the group. And after completing the restructuring, we launched the sale process, and we were able to exit the investment less than 16 months from the enforcement. So at the end, we recovered 100% of our exposure, and we were able to generate return 1.3x multiple of money. So I think here, the 3 main messages that I would like to convey are, first, the importance of a disciplined approach and having a very strong documentation protection; second, being proactive and very thorough in monitoring our investments; and third, having a clear method and a hands-on approach when issues arise. Now a quick overview of our track record since 2012. I will not go through all the lines, but just 3 main elements. First, EUR 7.3 billion deployed since 2012. In terms of return, 9% gross IRR on average and 7.3% net IRR. And finally, DPI, as we were mentioning before, one of the most important indicator for our LPs. I think it's important to highlight that for TDL IV, we have recently overcome 1x of returned capital, which I think it's a very important indicator since this fund terminated the investment period in 2020. And with regards to TDL V, we stand at 0.35x. And for this vintage, we ended the investment period last year.

So we'll be now giving you a short illustration on our second large -- very large credit business, which is the CLO business. As I said, it's the second core engine of our credit platform. And CLOs are fundamentally a credit strategy with more financial engineering than traditional ones, let's say. As you can see, we are operating again in a fast-growing industry. The market has almost disappeared during the GFC because it was under a lot of scrutiny. And finally, CLO 2.0 starting in 2010, evidence a very -- have been evidencing a very strong growth, characterized by, I think, some catalysts, which were a more stringent regulation and less risky strategies. So here, it's a market where it's about building and managing a highly diversified portfolio of liquid loans that are usually syndicated by investment banks on the asset side. And on the liability side, investors usually buy different tranches of risk and return from the safer senior tranches to higher-yielding mezzanine and equity tranches. So overall, it's a very different product and strategy than direct lending that Martino just presented on pretty much all aspects, risk, reward, end markets, investors, ability to differentiate and value creation levers. Everything is very different, although it's still, again, at the end of the day, a credit instrument with coupon margin maturity. But we're talking about much larger companies. As I said, the loans that we buy are usually underwritten and arranged by investment banks. Company size for the loans to be liquid are usually a minimum of EUR 100 million EBITDA and sometimes significantly more. In terms of the skills that are required, it's essentially asset selection, which is more important than origination that Martino illustrates recently. It's all about asset selection. Liquid names enable active portfolio management. So it's also about having an active portfolio management to be able to exit situations when we think there is an issue down the line, be very proactive. It's also about liability management. Obviously, the liabilities, as I said, are tranched. And you have -- when you're managing a CLO, you have the ability to take advantage of potentially more supportive market windows to reset your liabilities and benefit from a much lower cost of capital, which ultimately will flow into the equity returns. So it's obviously, again, a very different product. Why do we invest in the space? I think there is, for sure, an element of scalability, which is very important for us as a firm. We have a big focus on strategies that we think are very profitable, very scalable, ideally both of them, but certainly not neither of these. The equity returns that are illustrated by the product are also very much in line with our balance sheet cost of capital. We're talking about, I would say, for a bad vintage, probably 10% to 12% and for a good vintage, 15% and above. And lastly, the investor base that we address through the CLO industry is very, very different, much broader to some extent. And this is something that we think is also very interesting for us as a franchise. So the journey, as you can see here, has been, again, a fast growth journey. We launched the business 10 years ago when we issued our first European CLO. To that extent, we've been -- once more, we've been contrarian. Usually, asset managers and players start with a U.S. strategy and then they expand in Europe. We did it the other way around and first launched in Europe to then expand in the U.S. in '21. So today, we have currently EUR 8.7 billion in AUM, but should be closer to EUR 10 billion actually very soon. We have issued 14 CLOs in Europe and 7 in the U.S., but have currently also a couple of warehouses currently open. So overall, it was a 41% CAGR in terms of AUM growth. And we've been turning the franchise into a proper global franchise, where obviously, there is also a very large exposure to Tikehau balance sheet. We normally retain a large portion of the equity of any CLO that we issue, which means that currently, our balance sheet is exposed around EUR 500 million to our own equity CLO. As I said, we very much appreciate the returns target, but also the distribution profile with a strong velocity of cash income and distributions across the various vehicles. Today, we are among the most active and established players in Europe. Our U.S. operations are more recent and currently still scaling up. But I would say that after the sort of Chapter 1 of the business journey, which was us being an emerging European player between '14 and '21, we are now -- we are about to close Chapter 2 where we became a very much established European player. We've launched a U.S. presence. So we are a global platform. And we've been significantly increasing the issuance space of the strategy, as you can see directly in the AUM increase over the recent years. So we are about to enter Chapter 3, which I think will be about consolidating our existing positions, continue to accelerate the issuance space and also trying to lower the reliance on our own balance sheet down the line going forward. In terms of KPIs, there are all sorts of KPIs you can look at in the CLO industry. Again, these vehicles are very, very specific in the way you raise and manage them. You need to invest through the cycle, no doubt. You cannot afford to not being invested. You cannot afford to manage cash. And so usually, you have to invest on speed. What does it mean is that you have to rely on a very strong and very disciplined credit underwriting. And that's why we are relying on our global research team, which is based of -- which is composed of analysts in the U.S., in Europe and in Asia. They are all sector-based analysts with very strong sector intel and knowledge and that are on a daily basis, identifying the best sectors, the one we want to be overweight, the one we want to be underweight and within each sector, obviously, the best credit and the one we want to avoid. So it's about managing very actively the portfolios. It's about being able to be proactive and exiting positions that are starting to underperform or where we think there will be underperformance. And the result of that is obviously to avoid default as much as possible. Default is your worst enemy, considering that even if you have a crystallized loss, you are always able to recover from that with, again, active portfolio management and creating value by potentially buying loans with a discount. So the KPI we think is worth highlighting here is our average default rate, both sides in Europe and in the U.S., which is well below market average. And again, no secret sauce apart a very strong credit research team and disciplined credit underwriting and selection.

Thank you, Max. We'll give you a quick overview of this fast-growing strategy that we manage with our dedicated team based in New York. Credit secondaries is meant to deliver attractive risk-adjusted returns by essentially acquiring LP interest in private credit portfolios at discount. We started this strategy in 2019 by establishing the team in New York. We seeded the first vintage with our balance sheet and we started by leveraging our unique network with GPs, LPs and advisers. At the time, we were one of the first teams and funds ever set up, but we strongly believe in the market opportunity that was present and for the future. We have chosen to be focused on LP-led transaction mainly because we think that they represent a better mix in terms of risk-adjusted returns. As you can see, we have reviewed more than 600 opportunities since the beginning. We have invested in 30 for approximately $1.4 billion deployed with a selectivity rate that stands below 5%. And in short, I would say that the key benefits for our clients in -- by being invested in the strategy are, first, the recurring cash distribution that can be provided by the assets, considering that in most of the cases, we are invested in senior secured loans. Second, the downside protection that is provided by acquiring a discount. And third, the significant diversification, thanks to being exposed to multiple underlying funds. This is a picture that I think represents well the opportunity, where we started and where we are now and where the opportunity is. Secondaries are -- essentially, we can see them as a portion of the global private credit industry. As of today, we stand at about close to 2% of the private credit industry, and this compares to 0.3% when we started. For the future, we expect further acceleration, and we think this will be driven by essentially 2 factors. First, of course, the growth of the private credit industry, but this will be also boosted by stronger demand and stronger liquidity needs for our investor following an active portfolio management that they are following. So in essence, we think that the market present very attractive conditions for buyers to be exposed to good portfolios with very interesting upside potential, thanks to the discount. We will mainly -- we will remain mainly focused in the U.S. because we believe that in the U.S., there is a better mix in terms of liquidity and market opportunity. Here, we can show you the performance and the track record of the 2 vintages that we currently manage. You can see how fast we are growing here. The first vintage was slightly more than $400 million. And the second is approximately at $800 million. So we are very close to double the size of the first vintage, and we are well on track to close the fundraising by the end of this year close to our target of $1 billion. Also here in terms of DPI and returns, we think that we are delivering very strong results, 0.7 DPI for the first vintage with approximately 13% net IRR. While for the second vintage, which is, of course, more recent, we started to invest in '23, we stand at 0.35x with a net IRR of 22%, which, of course, will normalize as we continue deploying the fund. If we look at the composition of our funds on a look-through basis, we have invested in 85 funds, partnered with 25 GPs for approximately 4,000 underlying borrowers, which represents the diversification of our exposure. And as I was saying, we prefer to be exposed on senior secured assets. And on average, our NAV discount at closing stands between 10% and 15%. I hand over to Max for tactical strategy.

So yes, so tactical strategies is, again, one of the more recent strategies that we've been operating in the credit space. And here, it's all about addressing more complex situations in the credit world, usually targeting double-digit returns. The strategy was set up in '16 when we launched our first special situation vehicle. And today, we have 2 core strategies, one is European special seat or special opportunities and the other one, which is real estate credit. Having said that, these, let's say, flexible or more opportunistic strategies are really at the core DNA of the firm again. We established our credit business just after the GFC. And among the first deals we ever did were actually private credit situations where we were moving into the special seat world and typically offloading significant positions from bank's balance sheet. So this is something we've always done in a way, but we've decided to really scale up the strategy back in '16. The common features of these strategies is, again, it's credit, no doubt, but it's centered around usually a broader investment scope. So more flexibility in the mandate that we manage. First, ability and willingness to navigate across the capital structure systematically. Secondly, and lastly, a strong versatility of the deal flow. So in essence, we provide financings anywhere in the cap stack from super senior all the way to deeply subordinated. Super senior usually more in underperforming context, and we go junior in the capital structure whenever there is a growth or performing situation. So we actually address both performing and underperforming or stressy types of situations. And we obviously target the relevant point in the cap stack where we want to be, depending on the context. We can look at any sort of situations or transactions. Right now, the most active underwriting or investment themes for us have probably been around acquisition or M&A financing. First, development loans and complex refinancing. So typically, complex refinancing is a big theme. And here, we are essentially addressing the large inventory of legacy loans that have been provided in the past few years where financing was very much available and very much cheap, right? Unfortunately, it's less broadly available, and it's not as cheap as it used to be. So sometimes creating some complex situations that needs to be addressed whenever a given borrower hasn't delevered as it should. In terms of underlying asset classes, again, we have a fairly broad investment scope, but we essentially look at a pure corporate type of financings, whether a sponsor-backed or sponsor less. We look at real estate, obviously, real estate and asset-backed lending. And more recently, we've been also very active in the digital infrastructure space. We've been one of the most active lenders in Europe, where we've been deploying close to EUR 500 million over the past 3 to 4 years. The -- If you look more closely into the 2 strategies, the essence of tactical strategies is really to be positioned at the intersection of all the Tikehau Capital expertise. We touch on all the asset class in which the firm invests, but we usually do it with a broader, more flexible mandate, as I said. So it means in a way that any deal coming to our PE or direct lending or real estate colleagues that cannot find a home in their strategy usually can potentially find a home with us. So we greatly benefit from the firm's reach and capabilities and Intel at every step of our investment process. That's one of the key things for tactical strategies. Again. We are very, very much synergistic and complementary with everything we do at Tikehau. And from a sourcing, due diligence underwriting standpoint, all the way until investment decision, where we have senior people from pretty much everywhere in the firm sitting at our IC, we benefit from that platform effect. Special situations is a very good example. As you can see, we invest in -- we have the ability to invest in liquid credit when there is a dislocation. So whenever it happens, we work very closely with our research team globally to essentially make sure we don't start from scratch, and we are very quick in identifying the right sectors and the right issuers in each sector. For real estate, it's another very obvious example, but whenever we look at an asset-backed situation, we have very strong input from our equity real estate colleagues, which makes a huge difference in the way we appreciate the risk and structure our deals. More recently, we launched real estate credit as a strategy. We've been investing in the space for more than a decade. We used to invest through our balance sheet and through our special opportunities strategies. And I guess there was a dual catalyst for us to decide to step in with a dedicated strategy. The first point was the environment, which dramatically changed over the last 2 to 3 years, creating a funding gap we want to address. And the second one was the partnership we were able to cement with Altarea, which is one of the largest real estate investment group in Europe, and that is investing alongside us in the strategy. So as a conclusion, yes, very much synergetic strategies where we benefit considerably from our internal insights and local teams in everything we do. The track record is, I would say, less -- it's not as long as our direct lending business, for instance, but we -- it goes back around 10 years. We are currently investing the third vintage of special opportunities and the first vintage of our real estate credit business. what's interesting here is to see the scale-up of the strategy along the years. The first fund was obviously small and to some extent, subscaled. It also took us a bit of time to find the exact right strategy. And the second and third vintage is much larger, and we think at the right size to address the European opportunity. Overall, currently, we are about 1x DPI on the first vintage. We think we'll get to 1x for the second one somewhere in '26. We've been -- as I said before, we've been enjoying a very strong momentum on exits recently, and that's expected to continue. And overall, we expect the first vintage to land below target, while the second should be more or less on target. And the third vintage is starting very -- with a very strong momentum, enjoying a very active deal flow and also a decent underwriting environment. So we expect it to be above target. Handing over to Martino to discuss a bit the platform synergies.

Thank you, Max, again. So I think this is one of the topic that we discuss more frequently. So we try always to improve our integration, our go-to-market. And I think that the main synergies that we can identify, thanks to our multi-office and multi-strategy approach are 5. First, starting from the left, the sponsor coverage. Our setup allows for multiple entry points at different levels with the financial sponsor, and this allows us to continuously improve our relationship with our key partners. This leads to deal sourcing. Again, our local setup allows for a better, faster and stronger origination, thanks to our network. We are a one-stop shop provider. We are able to cover basically the entire spectrum of financing solutions. We always have a solution for our clients. Third item is we spoke about it, our credit research team. We have a dedicated team of 18 professionals who are industry experts covering BSL and the high-yield market, and they constantly provide dedicated and focused analysis per sector with very relevant and important industry insights and intel sharing. Fund operation is another very important area of synergies and efficiency between especially our fund operation teams and client service as we have -- we will see later, but we have our investor are most of the time repeating investor in different strategies. And this allows for material synergies and sharing of the best practices. And finally, another important point is the pooling of our resources. We have the flexibility to allocate junior and mid-level professional where it's more appropriate. And this leads to make a very efficient use of the time. This is a transition to our client overview. I think here, we have 2 main message. First, that we have a very large and diversified base of international clients. The top 20 clients in our credit platform represent EUR 15 billion of -- and of this EUR 15 billion, 55% are non-French client, which is another testimony of our international and global setup. The second point is the -- as I was mentioning before, the fact that most of our clients are repeating investor, and we are really grateful and proud of this. If you consider that 55% of our top 20 clients are invested in 2 or more credit strategy. So again, in a nutshell, we have clear synergies in the platform that allows our clients to be exposed to a very wide and comprehensive range of strategies that offer different risk-adjusted returns based on the appetite of our clients. Back to you, Max.

So yes, maybe before wrapping things up, we wanted to also highlight a few elements on where we think our priorities are, let's say, looking forward. And obviously, wealth and retail is a big thing currently in credit. It's one of the growth avenues that's been identified and we think will fuel future growth for the asset class. So interesting to see that. First, we are convinced that private credit is a very compelling product for private clients. It allows an access to private markets, which is more and more [ in search ] from private investors. Also a way to finance the real economy, which is what we do on a daily basis and gaining exposure to mid-market lending, for instance, which is normally historically was more reserved for larger institutions. we see and we hear that private clients are more and more convinced of the relevance to have downside protection and also benefit from a recurring and resilient income stream in their portfolio. So this is clearly a big avenue of growth. And we've been tackling that opportunity for quite some time now. We are obviously very constructive about the wealth opportunity in the market. And as you can see, we currently manage more than EUR 3 billion on behalf of private clients within our Private Credit platform. So essentially, it's 14% of our AUM in the space that has grown at almost 40% average over the past few years. We've been very, I think, very early and innovative in a way we wanted to position to be able to offer a solution to private investors. And we are operating currently with a multichannel approach, which is usually partnering up with distribution partners. So we've been having very successful unit-linked products with insurance companies, as you can see, some very large French insurance and pension groups where we currently manage more than EUR 1.5 billion. We've been also working with private banks, and to that extent, we have several partnerships, but one which is probably worth bringing up with an Italian private bank, Fideuram, where we've been raising more than EUR 400 million with more than 3,000 clients in Italy to be allocated across various strategies. And finally, we've recently launched a semi-liquid fund to invest in Europe and to also provide access to private investors to our direct lending business and special ops business essentially. We are, again, fully aware of the trend. We're trying to be very careful on asset and liability management, obviously, because there is a potential mismatch here, obviously. We don't leverage the fund that we manage in the space. And we think there is, again, huge merits to be very transparent in the way you market these strategies in order to avoid surprises or anything unpleasant if there was a potential downturn. But again, it's a space where we've been enjoying very good traction recently. We see that as a key component of the future growth, and we think we are very well positioned with these different channels and multichannel approach. A few words on one of our also main priority here, which is about scaling up our flagship strategies. It's something where we've been actually quite successful recently. And you can see 3 examples, which are European direct lending, credit secondaries and special ops. We leave CLOs aside for that part because obviously, CLOs are, in essence, very scalable. But so for these 3 strategies, you can see that vintages after vintages, we've been able to significantly increase the size of the funds, thanks to a very -- I think, a very strong upgrade and improvement that we've been doing on the capital formation side. Our reach is now really global. And in terms of geographies and type of clients, we are now able to address a much, much broader range of institutions around the world. Obviously, performance is also a big driver for us to be able to scale. But as you can see here, the trend is really good across these 3 strategies. We think this is something we will be able to maintain over the years. We really want to focus on the strategies that are in demand on which we think we are relevant, and we have a good team, good track record, good positioning. And also our strong European positioning is also something that we see as a big enabler in the years to come. We benefit a lot from the digitalization trade that we hear about. And for instance, we have huge demand from Asia, from Asian investors in all of our strategies. We've recently reached the EUR 1 billion mark for commitments in South Korea, for instance, essentially allocated to our direct lending strategies. Even more recently, we had the largest ever commitment -- single commitment from institution coming to a direct lending fund as well from Germany. So our ability to address large global allocators is increasing every day. And that's the way forward for us as a firm. And that's why we are building this platform with 17 offices and people everywhere trying to raise capital and deploy capital. A few words to wrap up before taking questions. I'm conscious of time. And so maybe I think the key messages are, first, we've been building a very large and comprehensive platform in the credit space over the past almost 20 years. We have very different and diversified strategies, all characterized by a very strong element of interest, EUR 1.2 billion of our own balance sheet currently invested in all of our strategies. We've also built a very strong origination capabilities, as we've discussed, with a presence in all the markets in which we want to deploy capital and ensuring that we have the right ecosystem and we see the right deals in time, and that's the key edge in the market in which we operate. We -- finally, we will remain very agile in the way we see the opportunities because we want to grow, keep growing and to grow smart. So I think it's fair to say that we are very, again, very happy of the successful platform we've been building, but we constantly look forward for innovation, for improvements. And so in that effect, we will probably consider potential partnerships, potential new adjacencies, new products, new strategies to make sure that we are ahead of the curve and we systematically upgrade and improve the platform that we build every day. On that, I'm very happy to open for any potential questions. Theo will tell us and we'll try to answer if there are any questions coming in.

So thank you. Thank you, Max, and thank you, Martino. We actually have received several questions, and please do not hesitate to continue submitting your questions in the Q&A box. So if I start with the first question, given the recent shock waves within the private credit space, how do you see the global backdrop and environment now? Are there any pockets of the market that you see is pressured? Do you have any kind of concerns? Do you see these U.S. bankruptcies as idiosyncratic issues? Or are there wider asset quality concerns?

Should I take it?

Yes.

Yes. So it's obviously something which is very topical. I'm surprised you're not bringing up cockroaches, which is something we've been hearing a lot about recently. So yes, some statements, punch lines recently and a lot of noise in the asset class. I think I would answer in 2 parts. I think, first, no doubt that there are more underperforming situations than 3 or 4, 5 years ago. And that's probably true across all asset classes. And so credit is one of them. We keep saying as a firm that we think dispersion is a key theme, and we see that every day. We see an increasing dispersion between sectors, sectors which are more resilient, sectors which are less resilient. And within each sector, there are winners and losers essentially. So it's not a big surprise, I would say. We are late cycle in a way. So yes, there is more underperforming situations. Having said that, we think the noise recently was probably -- has created a bit of confusion and certainly some misunderstanding as well. And typically, the big failures or bankruptcies that have been raised in the U.S., we think are pretty far from what we do. I would first state that as a firm, we're lucky and we praise ourselves for not having any exposure to these names, whether directly or indirectly. But more importantly, these were usually linked to fraud first and to off-balance sheet receivable financing secondly. So it's quite far from what we do on a daily basis, which is providing on-balance sheet acquisition finance or refinancings, mostly centered in the mid-market space. Again, these names were names that were arranged by investment banks, ultimately broadly syndicated loans that has little to do with private credit. I think that's the key point. So there was a bit of a shortcut that was made. And the second point I would make is that -- we think it's definitely not systemic. We think it's certainly idiosyncratic, but we don't see that as a major threat for the industry. But for sure, in the current environment, late cycle, we need to be very selective, probably more than ever and disciplined in the underwriting.

Perfect. Thank you, Max. So we have received several questions on European direct lending. Maybe regrouping some of them. First question on, can you explain what the doubling of the PIK margin suggests and what explains this? Should this be interpreted as lower cash flow returns on your direct lending strategies compared to 2020 levels? And the second question on European direct lending is the average leverage ratio has decreased from 5.2x to 3.9x over the last 5 years. Could you please explain why? Is it a market practice of TKO or a global thing that you have seen on the market?

Yes. Sure. So starting from the first question, yes, for sure, in the market, we have been observing a trend of allowing for partial [ protocols ] also on senior financing, which was something that I would say, especially after the COVID crisis has emerged as a consequence of certain borrowers being not always able to meet the deadlines. So this has been -- is something that we can see more and more in terms of requests from our sponsor and our borrowers. We -- despite this trend, we continue to remain very diligent. And we, for instance, allow for a very limited number of toggle options. So this part of the diligent approach and being very, I would say, conservative in the construction of our deals. And with regards to the second question about leverage, I would say this is interesting because, first, it's something that we have been positively observing. So after the start of the interest increase in '22 and '23, of course, we have been observing average multiples on the market in terms of valuation stabilizing. As a consequence, leverage has been slightly decreasing, which is a positive. And we have seen sponsors providing more equity in the structure. In this context, we remain very, very conservative. And I would say that it's a consequence of how diligent we remain in constructing our portfolio.