Structured Credit Investor interview with David Littlewood
Story date: 2006.8.09
Building on a strong platform This week, David Littlewood, director and one of the founding partners of Cairn Capital, responds to SCI`s questions Q When, how and why did your firm become involved in the structured credit markets? A: Cairn Capital was formed in 2004 by a group of market professionals who had many years of experience across the credit markets, with the aim of focussing that experience from an independent platform for the benefit of investors. We all had successful careers but the attraction for us was creating something that we thought the market needed in an area that we found to be stimulating and enjoyable, and where our backgrounds were totally relevant to what we wanted to do. We haven`t looked back since! The idea was that as a result of the incredible velocity at which the credit markets have evolved in the past few years it is very, very difficult for a firm to fully participate in those markets if it is not an investment bank with all the technology, technical skill-set and so on that that entails. If you are a `normal` investor you are unlikely to be able to invest a huge amount of resource and make credit a core part of your business strategy, so you need to outsource and pay somebody else to do that and manage credit for you. This is where we come in - we are the participant in the credit market that investors can look at as working for them and having the full skill-set on an independent platform that is on a par with that of an investment bank. We made a fundamental decision from day one that we would operate across the credit markets in their broadest sense. What investors want is somebody that they can rely on consistently to be a performer right across the board and someone who can offer many different types of product. Conversely, what investment banks want is clients who are active across the credit markets, who buy up and down the capital structure and participate irrespective of what the current credit cycle is doing. Our success and leverage with the investment banks is driven by how attractive we are as a client to them and that translates into a better service for our investors. What that should mean is that we can deliver good products for them, we can get great execution and we can get great allocations. Q: In your view, what has been the most significant development in the credit markets in recent years? A: For me, first and foremost has been the acceptance of credit as an investment medium across a very, very broad spectrum of investors. The fact that you now have such a wide variety of investors from insurance companies, to hedge funds, to asset managers to family offices involved in this space gives it huge impetus to develop and to continue to do so. Q: How has this affected your business? A: It has been the key driver behind our business, because it`s the developments in the credit markets that have given us the opportunity to participate in this marketplace in the way that we had originally envisaged. It means that there are many different products that we can offer to investors around many different credit asset classes. The growth in the use of the indices and index products, for example, means that we are very comfortable with the liquidity in the market place and a very active trader in the market. At the same time, it has meant that we have also had to keep investing in systems and hiring the right sort of personnel to keep pace with the speed of the development of the market, but the transaction opportunities that we have allow us to do that. Q: What are your key areas of focus today? A: Our key areas of focus today are corporate credit, asset-backed securities and European leveraged loans. We have been very active in doing CDOs, CPPI products and also fund products in all of these areas. We like to run funds businesses in a particular asset class alongside CDO and CPPI because we think the synergies between how you manage a fund and the skill-set you need to have to manage a fund is very relevant to how you have to manage some of the CDO and CPPI products in today`s marketplace. This combination also means that we are constantly active and therefore always in the market flows and know what`s going on. Q: What is your strategy going forward? A: Primarily it is to continue to build a credit institution. We have grown slowly and carefully through building the right infrastructure and hiring the right people, because our intention is that we are here for the long term. In future, we want to build on the deals we have done and we want to increase the number of deals we do, and as we see opportunities arise we will add different activities to the platform. Q: What major developments do you need/expect from the market in the future? A: In terms of needs, I think we are pretty happy with the way the market is currently, but obviously there are always some `nice to haves`. We would like to see the market develop more in the leveraged loan space for credit default swaps - I think more work could be done there. Equally the universal acceptance of an established loan index would be very welcome. As for what to expect, it is probably more a case of continuing to expect the unexpected. We have seen some really quite surprising events over the last couple of years that have turned out to benefit the market. The correlation crisis of last May, for example, was very much a case of taking something that had been theorised about for a long time and then the market actually instilled some discipline into it by showing that it actually doesn`t matter what models you come up with because the market is supply and demand driven and that will always rule. So we expect and hope for a continuation of exciting times and the opportunities that they will bring. About Cairn Capital Cairn Capital Limited and its subsidiary Cairn Financial Products Limited ("Cairn Capital") form a single platform which can deliver services in either a specific area of the credit market, or across the entire spectrum. Those services can be broken down as follows: - Asset management: the management of portfolios of asset backed securities, investment grade and crossover corporate credit and leveraged loans in cash and synthetic form, either directly for clients or as collateral pools for public and private transactions. - Fund products: through a credit opportunities hedge fund. - Structuring advisory: Cairn will undertake third party advisory mandates where it feels it can benefit clients or investors by bringing its structuring skills to bear. Generally, the completed transactions will continue to be managed by Cairn post execution. As at 2 August 2006, Cairn Capital manages portfolios totalling in excess of US$16 billion, employing in excess of US$4.5 billion of investor capital.
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