Money manager M&A is often fraught with problems, with talk of synergy as a code word for cost-cutting, high turnover of staff and problems pulling together the technology and infrastructure of platforms.
But Polus Capital Management, born out of $6 billion leveraged finance and structured credit manager Cairn Capital's acquisition of special situations and stressed/distressed credit manager Bybrook Capital in 2021 — feels different.
Cairn was majority-owned by Italy's Mediobanca (which still holds a stake in the combined firm), while Bybrook was formed in 2013 by Robert Dafforn — now CIO at Polus — with the backing of alternatives giant Blackstone. Bybrook had about $2.5 billion in AUM when the merger was announced.
The team identified three things they wanted to accomplish: synergies associated with having performing credit and stressed/distressed credit investment specialists sitting alongside each other; to compete by achieving scale; and to appeal to institutional investors by becoming more relevant to them and their needs.
"It's all played itself out exactly as we would have hoped," said Nicholas Chalmers, CEO at Polus, in an exclusive interview. The firm has shown good performance — although Chalmers declined to comment on numbers.
It runs about $10 billion across three core business lines, with its largest a $5.5 billion leveraged loans unit, the bulk of which is in collateralized loans obligations, and the firm's CLO platform "continues to be one of the most regular issuers in Europe, even in a difficult year for the new issue market" thanks to strong support from equity partners, Chalmers said. Polus also has an about $4 billion special situations business, comprised of absolute return ($3 billion) and long-only, and about $700 million in structured credit.
Now that the integration has happened — with minimal turnover of staff, Chalmers said — business is as usual, but with a few ambitions to realize.
First, the team wants to expand the CLO business globally, expanding the successful European business into the U.S. market. An investor letter seen by Pensions & Investments said the firm's platform priced two new European CLOs in 2023 totaling €800 million ($863 million), in a year that others managers "struggled to come to market." The European CLO captive equity strategy has delivered a 17.6% distribution yield since inception in 2014. The unlevered European senior loan strategy made a net total return of 12.5% in 2023.
Chalmers said in the interview that the European business expects to issue another two to three deals this year.
And building out the U.S. business is a "long-held ambition for us." Polus hired David Kim to lead that business. He said the firm has the capital in place to support the launch of that business.
"In Europe, we have to recognize that the market is capacity-constrained. Even the most prolific issuers are rarely doing more than a handful of deals a year due to the depth and breadth of the market. Those same issuers are doing multiples of that in the U.S. — they have a much deeper market in the U.S. And also (it's investor-driven) — institutional investors are generally more global than that, and very few will look at CLO equity vehicles in a regional context," Chalmers added.
On the special situations side, Chalmers and Dafforn are "mindful … (of) not growing for the sake of growing. To retain the best talent, you have to grow and give people opportunities for career progression," Chalmers said.
"We're mindful that capacity is naturally constrained in that strategy — at some point in the near-to-medium term, we will probably be looking to close fundraising for that strategy. It's not a defined number, but judgment-based relative to" the size of the opportunity set and capital under management, Chalmers said.
That awareness of capacity constraints comes as "we continue to see a lot of opportunity on the long side within that business, gravitating towards more private credit-type structures," which will be the focus over the next year or so, Chalmers added.
And for structured credit — the $700 million unit where Polus' risk transfer/capital relief strategy has delivered a 14.9% net total return for 2023, according to the investor letter — the team has not been actively raising dedicated capital for some time.
"But over the coming quarters, we anticipate coming back to the market given client demand" and building on the team and track record Polus has in place, Chalmers said, although he reiterated that there are "no defined plans except a medium-to-long-term ambition to grow this business."
Dafforn, who founded Bybrook more than a decade ago, has always been focused on the importance of culture in a manager of its type. "Investing is a team sport and requires a lot of different perspectives and skill sets," he said in the same interview.
There has been another happy surprise "if it could be called one: A lot of the things on the synergy side, especially in mergers, live in the theoretical realm and don't always become practical. On our side, it actually has come to fruition," he said. "The reason why we did it (the merger) was that stressed and distressed required feed stock — that comes from stressed and distressed loans, and it is a private market and so access to information is limited. As a stand-alone firm, you have … less access."
The CLO team, however, has insight into the universe of available loans, and that can be an advantage for the stressed and distressed business where those opportunities arise. "We understood in advance that we could have theoretical horsepower for our business: that has become practical horsepower," Dafforn said.
Polus' leadership has also seen a "subtle shift" in mindset among investors in private markets and credit — and Dafforn believes it may also explain why the firm has already achieved top ratings from certain investment consultants post-merger.
"We view the world (through) a slightly more all-weather, robustness framework, where we can excel through the cycle. In a way, we are investing in those things where we feel very confident we can get investors' money back in a worst-case scenario. The subtle shift you notice from investors is they have more anxiety than historically about the ... deployment part of investing — that's not us. We don't get involved in fads," Dafforn said.
That attitude has seen Polus' units maintain the infrastructure to invest in stressed and distressed situations over the last decade "where there hasn't been a lot of distress," Dafforn added. And now, he's seeing a "transition from the heady days of QE — which was really capital deployment in (terms of) who can deploy the most quickly; to more QT — who can deploy in the safest manner and be all-weather to the cycle."
But it hasn't all been smooth-sailing — coming up with the name for the merged firm was tough. The team tried different names out, but to no avail. While Greek mythology has been a "well-trodden path" for money managers in terms of names, the firm went through a process with its press agency Greenbrook and settled on Polus — a name that represents "an inquisitive mind, resolve and foresight," which resonated with Chalmers and Dafforn as the attributes of the firm's core values, Chalmers said.
Polus is also the inspiration for Rodin's The Thinker sculpture, Dafforn added, which is the derivation of the firm's logo.
And the leadership wanted a new identity for the merger. "People form opinions about things quickly, and it takes a long time to change them. Putting the rebrand together … (we) needed to do that under a fresh coat of paint — to engage and get them (investors and consultants) to listen. Otherwise people default to what they think, (and it's) hard to readjust perceptions unless you go about something that's new," Chalmers said.
