Grishma Parekh - Co-Head of North American Core Senior Lending at HPS

Colbert Cannon: Welcome to season nine of the HPScast. I’m your host Colbert Cannon. If you’re new to the pod, HPS is a global investment firm. We manage just over $100 billion in assets for a broad range of institutional and individual investors. That capital is invested across private credit and public credit strategies. Each week, I sit down with key relationships to, partners of, and friends of the firm to learn from their experience, ask how that experience shapes their current roles and give insights into HPS and how we operate.

So, with that, let’s bring in our guest. This week, we’re sharing a conversation that I had back in the Summer of 2021 with a Managing Director at HPS, who’s a driving force in our direct lending business. She attended NYU’s Stern School of Business before joining JP Morgan to work in their leverage finance and financial sponsors business.

In 2007, she moved over to the Carlisle Group, a large alternative asset manager. During her tenure at Carlisle, she was a founding member of the direct lending platform, served as head of origination for illiquid credit, and was a member of the direct lending investment committee.

After 12 years there, we were fortunate enough to bring her over to HPS where she is now the Co-Head of North American Core Senior Lending. She has the misfortune of sharing an office wall with your podcast host, so she has to listen to me jabber away at full volume all day long. But despite that, I’m honored to call her not just a colleague but a friend, and so, without any further ado, I’m excited to welcome in this week’s HPScast guest, Grishma Parekh, HPS’s Co-Head of North American Core Senior Lending.

Grishma, welcome to the podcast.

Grishma Parekh: Thank you. I’m excited to finally be here. It only took me, sharing a wall with you to get here.

Colbert Cannon: Grishma, let’s begin at the beginning. Where’d you grow up, and where are you from originally?

Grishma Parekh: So, I was born in India, and I immigrated with my family when I was six years old. We moved to Queens, New York, which is a big immigrant hub, and when I was 10, my family relocated us to Jericho, New York, which is in Long island, which is where I really spent my formative years from sixth grade onwards.

Colbert Cannon: So, you decide to go to the Stern School of Business at NYU. Why focus on business undergrad, Grishma?

Grishma Parekh: I actually had no plans to focus on business undergrad. This will not sound surprising, but coming from an Indian household with conservative parents who really left everything, came here with not a lot, in their mind, there was quite literally two careers that offered a tremendous amount of stability. One was medicine, and the other was engineering. And it was really probably the summer before I was going to start at NYU, my father, who is a businessman and an entrepreneur, set me aside and was like, “I don’t know if you should do this medicine thing. I feel like I know you, you’re my daughter, and I think you’d be really good at business.”

Colbert Cannon: Great advice from your father. This is amazing. Alright. So, you graduate, you start at JPMorgan out of school. You ended up in leveraged finance I believe to start. Did you actually end up there, or did you pick that among other options? And, tell us a little bit about the leveraged finance business there.

Grishma Parekh: Sure. I was in sort of the like Chase/JPMorgan ecosystem for several internships before that. So, my sophomore year, I actually interned in Chase Auto Finance, and then my junior year, I moved over into Latin America M&A, which was actually really interesting since I’m actually not a native Spanish or Portuguese speaker. I’m actually not even very good, but it was a tremendous experience for me. And I solicited a lot of advice from people that I trusted and respected. A piece of advice that has always really carried me through my career is you want to find an organization and then within that organization, you want to identify where their strengths are, and then you want to be within the epicenter of their strengths. And so, with JPMorgan, their strength was leveraged finance.

Colbert Cannon: Yeah, that’s interesting, Grishma. I mean, I feel like the “play to the firm’s strength” thing is an interesting one – you know that you’re going to have an interesting experience because it’s literally what they’re best at. So you learned the business, you have this good experience at JP Morgan. It’s 2007, and you decide to move over to Carlisle. This is a transition in your career from the sell side to the buy side, from being an advisor to being an investor, though obviously some of what you do in leveraged finance is investing. But tell me about that transition. How hard of a personal career move was that for you?

Grishma Parekh: It was difficult from my personal perspective just because I had gotten very close to many of the folks who had supported me throughout the years at JPMorgan, but it was absolutely, without a doubt, the right professional decision for me. And most of those people continue to remain dear friends and mentors of mine, which I think is another major theme of my life, which is using a lot of those people to help really guide me in terms of making the right decisions. And then joining the team at Carlisle was actually quite smooth because the credit business within the Carlisle Group was still relatively small. This was a very similar camaraderie-based culture. I

Colbert Cannon: Well, it’s interesting. Grishma because it’s the opposite of your JPMorgan experience, right? It wasn’t the firm’s strength at the time, and I can appreciate that the different experience must have been interesting for you. So, Grishma, when you joined Carlisle, the private credit business, globally, was really in its early days. Tell me what it was like when you joined, and you were there for over a decade, so what was the trajectory and path of that business within Carlisle?

Grishma Parekh: So, private credit or direct lending, as an asset class that we know of today, didn’t exist in 2007. You had two types of lenders: you had senior lenders, and you had junior lenders. And senior lenders were groups that were either middle market commercial banks or the GE Capitals of the world. And on the junior side, you had one or two scaled junior capital investors, and then the balance were focused on the middle market. And at Carlisle, I had joined what was called Carlisle Mezzanine Partners at the time that they were raising their second fund. The focus was middle market mainly because of the average hold sizes. And we wanted to be in a position where we would be leading the tranches and it largely focused on sponsored finance. And we did that from 2007 until late 2011.

Instead of just going out and raising a third mezzanine fund, we wanted to actually create a vehicle that would allow us to be able to deploy capital up and down the capital structure, have more flexibility and be a solution provider to our clients. And so, we really started on a blank sheet of paper, and we designed what was going to be Carlisle’s direct lending program, which was their first foray into private credit at the time. And we chose a Business Development Company as the primary vehicle in which we were going to raise the capital and then deploy the capital.

Colbert Cannon: You just said the words Business Development Company, referred to commonly as a BDC. What is that? What is a BDC structure?

Grishma Parekh: A BDC is a 40 Act vehicle. It is regulated by the SEC, and it was designed, originally, to provide middle market companies with access to financing, because there was a period of time that continued into the Global Financial Crisis and then really propelled thereafter where the large banks, who were the primary money center institutions that were lending money to small and medium sized businesses, were pivoting their business models to focus on much larger businesses where they can generate more efficiencies. And so, there was a real void in the marketplace for lending to these size companies. And so, the SEC created tax benefits and other structural enhancements in order to be able to create products that would allow for small and medium sized businesses to get access to capital.

Colbert Cannon: Got it. Okay. So, you’ve grown this business. Carlisle has become a serious player, obviously, in private credit over your decade plus there. You’re in a great seat at a great firm. When you sat down with the Head of Direct Lending at HPS and former HPScast guest, Mike Patterson, what was the pitch, and why was it compelling?

Grishma Parekh: It is funny. Maybe Mike is brilliant at this, but it never really feels like a pitch. I’ve known Mike and Scott for a dozen years or so, and I’ve also known many of the other folks, including my Co-Head Michael Fenstermacher – he and I were analysts together at JPMorgan. And I had gotten to a stage in my career where that culture piece of it was almost equally as important as the success of the firm. And wouldn’t it be perfect if I could find a place that actually married both – a culture that I knew I would thrive in with a group of people that I had a tremendous amount of respect for, and I had known for a long time – it just felt like a natural time in my career and where HPS was in its evolution to come together.

Colbert Cannon: Okay, so, we mentioned your title as Co-Head of Core Senior Lending. What does that mean? What is Core Senior Lending at HPS?

Grishma Parekh: So, Core Senior Lending is first lien investments into very high quality, market leading franchises in growing sectors. These are industries that are defensive in nature, and they are backed by private equity sponsors, or they are private or public businesses.

Colbert Cannon: So, so tell me this. So you’ve been doing private credit, really, since 2007, which is to say you’ve been part of the modern evolution of direct lending as a business and asset class. Sitting here now in the summer of 2022, how has that changed? How has the market evolved, and how do you think about that over the last 15 years or so?

Grishma Parekh: Yeah, I mean, it’s a truly institutional global asset class in a way that, in 2007, you certainly couldn’t imagine. You know, two or three years ago, I don’t think that you could have imagined the sheer size of the asset class or its growth. It’s $1.2 trillion today, and according to Preqin, it’s expected to double over the next five years, eclipsing the leveraged loan market and potentially even the high yield market. But more than that, the type of companies that would actually be relevant to, and what I mean by that is the asset class started as being a solution provider to middle market companies. These were companies that were generating earnings of $20 million to $60 or $75 million and thereafter. Most companies would sort of “graduate” into an institutional market, the institutional public credit markets, where they were able to get more liquidity, better terms, better pricing, so on and so forth.

What has happened over the course of the last two years is the private credit market is truly disintermediating the public credit markets in a meaningful way. The size of deals that we are able to finance is several billion dollars and really grows with a passage of every quarter or two. And that’s something that I certainly could never have predicted over the last several years would occur with this asset class.

Colbert Cannon: Yeah. So, clearly it’s gotten materially bigger. And it’s funny, I was doing an investor meeting the other day, so I had these numbers at my fingertips. If you actually look at since you joined the direct lending business in 2007, levered loans, broadly syndicated bank led syndications have grown at about a 7% annual growth rate over that period of time, from 2007 to today. Private credit has grown at about a 21% annual growth rate. So, you have two roughly, directly competitive products, and one’s grown at 3X the growth rate. Why? Why is the market gravitating towards this offering versus the broadly syndicated offering?

Grishma Parekh: Several reasons. So, these are the two most recent reasons. The first is provide companies with access to committed financing, typically in the form of delay draw term loans. And what that means is we specify a leverage level that they need to be at proforma for drawing the debt. We also specify a very specific use of proceeds to which they can draw the debt, but if they meet those handful of requirements, the company’s performing so on and so forth, then they have access to this. And in an environment where that amount of certainty in order to be able to effectuate a company’s growth strategy is incredibly important. They value that particular element of private credit.

The second is ratings. I think borrowers have found the ratings agencies to be, at times, unpredictable. And if you get ratings downgrades, or if you get outlook downgrades, it really impacts the way that your public debt trades, because you have investors in the public credit markets that have to move or have very limited buckets for CCCs. And so, the agencies, again – depending on sector specific issues, depending on macro issues – may penalize borrowers irrespective of the performance of that company. And I think a lot of companies didn’t want to operate their businesses tied to just their ratings.

And then there are a few other reasons. Confidentiality is one. You would be talking to four to six of the largest, most scaled private credit managers, and you will have full confidentiality around your financing.

Another element is this word that I’ve used over and over again: certainty. A company knows exactly what they’re going to have in terms of the economic arrangement, the documentation, the structure, the basket, so on and so forth, in their credit agreement when they’re negotiating with us. When they do a public offering, it’s underwritten by a handful of banks who have flex provisions such that, depending on market conditions, they can end up with a financing package that is wildly different than they thought they would have when they first entered into negotiations with the bank.

Colbert Cannon: So it’s interesting. Grishma. Those last two in particular, functionally, what that is, is cutting out the middle man, right? So a bank advises and says, “We think we can execute at X, but if we can’t execute at X, and it needs to be more expensive, we’ll protect you, but it’s going to be way more expensive.” If you go direct to your lender, they can just say, we’ll execute at X or maybe even a little bit outside of X, but you know exactly where you’re going to be.

The discretion is the exact same point, right? You can go to a single party to offer you a billion dollar loan these days as opposed to going out to a hundred. And if you have a family-owned business, you’re sensitive to confidentiality. The second you go out to a hundred people it’s in the Wall Street Journal the next day. That’s just the way the math works.

Now, both of those, though, imply that this is competitive with, and as you said, potentially disintermediating the banks. How does the relationship with a bank work for direct lenders? We’re a competitor, but we’re also still a valuable counterparty, so how does that practically all play out?

Grishma Parekh: Yeah, sure. So obviously, the rhetoric is, private credit, as an asset class, fully disintermediated the banks. In one dimension, that’s true. In another dimension, it’s the banks that actually made a concerted effort to pivot their business models toward a certain size threshold of companies. And so, they said companies below X amount of revenue or Y amount of EBITDA probably don’t make sense for us to cover, but they actually like this asset class. And so, the banks have chosen that the more efficient way to get access to this asset class – middle market and upper middle market, large cap lending – is actually to be lenders to the private credit managers.

Colbert Cannon: Interesting. Okay. Helpful. So Grishma, in 2021, HPS launched its first private BDC called HLEND. Tell our listeners what HLEND is and how a private BDC works.

Grishma Parekh: So, HPS’s inaugural product that provides access to our private credit investing program, is for non-institutional investors. So, it is a non-traded BDC, and what that means is it’s not expected to be listed on any of the major exchanges.

It has a more simplified tax reporting structure in that our investors are receiving a 1099 versus a K1. And then, there’s an increased amount of investor transparency in

Colbert Cannon: So, you mentioned size and the ability to tackle large deals as part of the evolution of direct lending, and we’ve seen this acceleration of these mega direct lending deals – so, north of a billion dollars being clubbed up by a handful of lenders. Is that a “moment in time” phenomenon, or do you think that will be a continuing trend?

Grishma Parekh: The latter. Absolutely. There have been various moments in time that have occurred over the last two years that have allowed for borrowers to be able to see the size and the power and the stability and the consistency of the private credit markets, and they can now appreciate that a deal of $3 billion, $4 billion, $5 billion in size is readily consummated in the private markets. And they are at terms, while at face value, are wider than what they could get done, assuming a white, hot, very open, very robust, leveraged loan or high yield market. The reality is that’s not always the case. In fact, we’re living in an environment right now where the public credit markets are incredibly uncertain, very opaque, really unclear and frankly not really open for anybody except the best, biggest and most seasoned and known borrowers in that market. And so, they don’t really know if there’s going to be actually a premium that they’re going to be paying in the private credit markets.

Colbert Cannon: Yeah, it’s interesting. All the merits of private credit you articulated at the beginning are true in a benign economic environment, but they’re really true in a volatile economic environment, and that is the logical consequence I think that has created some of these large direct lending deals that we’ve seen.

Grishma, my last question on HPS. You mentioned at the beginning, part of the appeal coming here was the culture, and I think you’ve been lucky to work at a, a number of institutions with strong corporate cultures. How do you define the HPS culture, and what makes HPS HPS?

Grishma Parekh: It’s very straightforward. And what I mean by that is, because here we really enjoy the business of investing and credit investing in particular – that’s what we do – it really simplifies so many of what sometimes otherwise are complicated corporate dynamics. It’s a group of people that are incredibly talented but no ego, which is also rare to find in our industry and at firms of this caliber. And I think everybody is excited to help one another, and there’s an element of teamwork and camaraderie, both on the investing side and across the organization in areas that support the investing side of the business.

Colbert Cannon: I second, that, Grishma. Well said. Alright. Well, with that, we’re excited about what you’re doing and what you’re up to and continuing to grow the business. It’s all exciting stuff.

With that, let’s move to the last segment of the podcast. This is something we like to call “Best Ideas.” We’ll offer up something that’s added value in our lives recently. It’s called “Best Ideas” because our goal, as investors, is always to maximize exposure to our best ideas. Grishma, as our guest, I’m going to ask you to go first. What’s your best idea this week?

Grishma Parekh: My best idea, outside of finance or work, is actually I really encourage folks to find a personal project. And I say “project” because I’m project-minded, but people also might call it hobbies. I think it’s really important to use that as the channel in which you can be a little bit more of a creative.

There’s so many interesting benefits to our industry, and it’s super dynamic with incredibly talented, hardworking people, and as much as we think we’re being super creative in our structures and in our understanding of these businesses, we are not creatives I do believe.

Colbert Cannon: I mean, first of all, how dare you Grishma!

Grishma Parekh:  I think having an outlet to explore, to find, to tap into your creative side is really important. I tend to move often, like every three or four years – move, apartments, houses and so forth – and I explore. Why do I like to do that? I think it is because it creates projects for me, right? There’s a project about organizing or purging. That allows me to tap into my OCD side, but it also gives me a chance to have this blank sheet of paper every time that I’m entering a new house that I get to think about in terms of design and color and paint and all of that stuff. And it’s a project. It’s an extreme project, and I really like that, and it also gravitates me to the home. Our jobs can be all-consuming, and there’s times when that is what the job requires. But there’s also these situations where these projects get created, at least in my mind, that force me to turn off that part of my brain for a second and focus on something else. So that is my idea of the week.

Colbert Cannon: I love it. And I will say too, part of what I love about that is anybody’s job can be all consuming and also never ending, There’s specific moments, like when you fund a deal, you close a deal, you get repaid in a deal, whatever, but there’s always the next thing.

And part of what I like about having some sort of project, as you called it, is it’s got to start and end. You know what I mean? Like, it’s got a finite path, and that’s actually psychically I think good for people to just be like, okay, well I accomplished X. Whereas, I have a, a to-do list that has a million things added to it and a million things taken off each day, right? So, good stuff.

Well Grishma. So, my best idea to offer, as listeners know, is always inspired by the guests of the week. So, Grishma started her career at JPMorgan, as she mentioned – a firm that used to own HPS back in the day. And so, in honor of that shared JPMorgan heritage, my best idea this week is I wanted to recommend the 1999 classic book, “The House of Morgan” by Ron Chernow.

Now, Chernow now is probably better known now for his remarkable biography of Alexander Hamilton, which was such an amazing piece that literally Lin-Manuel Miranda read it on vacation and then was inspired to create his Broadway smash hit “Hamilton.” But 15 years before that, Chernow wrote what I think is the definitive biography of John Pierpont Morgan and the bank that he built. And while of course it’s a story of a bank and a founder and their evolution, it’s also a history of global finance literally told from the 1930s up to the market crash of 1987. And like all of Chernow’s works, it’s exhaustively researched and stunningly informative, but he has this crazy gift where he can make true stories read like novels. So, it’s entertaining despite how weighty of a tone it is.

So, in honor of Grishma and her formative years of JPMorgan, my best idea this week is the fantastic book “The House of Morgan by the legendary Ron Chernow.

Grishma, have you ever read that one?

Grishma Parekh: I have not. Shame on me.

Colbert Cannon: Well, that’s your summer beach reading then. You of all people will appreciate it.

Well, with that Grishma, it’s time to say goodbye for the week. Thank you so much for the time. Appreciate you coming on and all of your thoughts on the private credit market.

Grishma Parekh: Thanks Colbert. This is almost like therapy, so I appreciate it.

Colbert Cannon: We’re here for you. Have a good week.

Colbert Cannon: Thanks again to our guest, Grishma Parekh. Check out our show notes to learn more about Grishma and her work with HPS. You’ll also find a link to my “Best Idea,” the book “The House of Morgan” by Ron Chernow.