Debt Service Coverage in Private Markets Is Improving, Actually | Nicholas Brooks

**Jack Farley** (0:00)
Over the past year, there's been some very bad press on private credit, including on this channel, where recent guest Nick Nemeth said that he thinks it's almost inevitable that the next financial crisis will be caused by private credit. Today, I'm seeking out a very different perspective. I'm speaking to the head of research at a private asset management firm that has over $100 billion in assets under management. He has lots of data on individual companies in terms of their debt levels and EBITDA growth. He argues actually that the debt levels he's seeing are sustainable and that corporate balance sheets are healthy, and that actually the financial risk that he's most worried about is coming from another source entirely. We also talk about AI and the US dollar, and after the interview, I'll share my thoughts. Today, I'm joined by Nick Brooks, head of Economic and Investment Research at Intermediate Capital Group, or ICG, which manages over $126 billion in private equity secondaries credit across the spectrum. Nick, good to see you. Welcome to Monetary Matters.

**Nicholas Brooks** (0:56)
Thank you very much. It's great to be here.

**Jack Farley** (0:58)
What is on your mind? When you're talking to clients, what are some of the messes that you're trying to get through?

**Nicholas Brooks** (1:04)
There's a lot of noise. There's a huge amount of noise. So we had everything from, you know, the terrorist wing, the Russian invasion of Ukraine, and the implications for Europe and commodity prices. More recently, of course, the war in the Middle East and its implications for energy prices and supply chains. But having said that, so we have all of these things going on plus a lot more that I didn't mention, software and other things which we can go there later on, AI, is markets have continued to power ahead, you know, both in terms of equities on the credit side as well.
And underlying economies have actually generally held up pretty well through all of this volatility in commodity markets and also all these very negative headlines. So I think that really is the key topic. And this is what I try to focus on. I think one of the key purposes of research, what I try to do, and I think many others in my type of role try to do, is try to look through this noise and try to understand what those underlying fundamentals are telling us so that we can make intelligent investment decisions.

**Jack Farley** (2:14)
So the huge amount of headwinds, the Iran War, the price of oil, tariffs, valuations, geopolitics, fiscal deficits, why are markets doing so well? Why are markets so resilient?

**Nicholas Brooks** (2:30)
So far, the disruptions caused by all the geopolitical noise, it's more the noise, it's reality, it's wars, it's higher commodity prices. So far, the impact on economies has been quite manageable. So we've seen a bit of a dip in growth in some sectors, in some countries. We've obviously seen interest rate expectations change. So there have been real impacts on areas that will affect financial markets.
But really at the heart of it is earnings growth. If you look at EPS growth in the public markets, or if you look in the private markets where we tend to operate and where I tend to track fundamentals, EBITDA growth has held up very well over the past couple of years. So underlying company fundamentals are strong and have been resilient to all of this noise and these shocks. And I think that is at the heart of why markets have continued to perform well.

**Jack Farley** (3:36)
I want to get into credit and balance sheets, but just talking about private company EBITDA growth, you've got this chart from this proprietary database that you have showing US EBITDA growth for private companies and European EBITDA growth. And for European, it's hovering about at 8% and at US maybe a little bit lower, like 6%.
And it's interesting to me that European EBITDA growth has been higher over the past three to four years than American EBITDA growth. The narrative that we encounter, and I think it's true, is that Europe has been impacted far more, hurt far more by the higher energy prices. So what is going on? Why is European private companies growing faster EBITDA than America?

**Nicholas Brooks** (4:26)
In our industry, so private equity, private debt and the private markets, we tend to be much more focused on the mid-market companies. It has to do with sector weights. So in my database or our database, we can look at various sector performance and sub-sector performance, and we can look at weights. And weighting it based on company count, what we found was that in the US, there was not a huge amount, but a decent amount more invested in the healthcare sector than in Europe. So in our industry, healthcare still has a pretty high weighting both in Europe and in the US.