Five Questions With Rory O’Neill, Managing Partner and CEO, Castlelake LP

You recently changed the firm’s name, from TPG Credit Management LP to Castlelake LP. What is the significance of the change?

We would be classified in the distressed category, which I have been doing since the RTC days in 1992. In 2005, I started the firm that today we call Castlelake in conjunction with TPG Capital. Think of us as first cousins; TPG is a much bigger cousin. TPG never had any governance rights over our firm, and over time, we felt it would be appropriate to change the name and have less confusion in the marketplace. We still have a relationship with TPG. Same firm, same decision-making, same capital base, same strategy. Just a new name. It seems to have been very well received in the marketplace.

How much of your business is sponsor-backed?

Very little. We focus on smaller transactions. As you get larger investment sizes, you get more competitors, so we focus on niche areas that are less traveled by the competition. That leads us to smaller transactions, because sponsor-backed deals by definition tend to be larger. Most of our work is about helping two groups, one being the banks themselves. We buy a lot of underperforming assets out of the banking system as they seek to improve the performance of their loan books, both in North America and Europe. The other thing we do is to provide capital to markets where the banks have exited. We focus on situations that are smaller than the leveraged loan market would typically care about. Our average transaction size is between $10 million and $50 million.

How do you find market conditions these days? I keep hearing there is too much money facing too few deals.

That is not really an issue for us, in part because of our transaction sizes. Most of what we do is buying existing loans in the secondary market, C&I loans, commercial and industrial, loan pools, commercial real estate. We are one of the most active buyers of non-performing loan pools in Europe. We’re quite active in Germany, Spain and Portugal. The other area where we’re very active is aviation finance.

What is your source of capital?

It is private equity funding. Some people do distressed investing out of a hedge fund format, and some do it out of a private equity format. We raise private equity style funds, distressed private equity. People commit capital with a drawdown period and then a workout period. The investors are pension plans, government plans, pensions and endowments, insurance companies and so on. We have raised two aviation funds and two general purpose funds.

Do you also take a private equity approach to managing these assets, where you engage with the borrowers?

It’s very hands-on. We want to help the borrower rehabilitate. Many times our cost basis is so much lower than the original bank that we can do discounted debt payoffs. It’s not a strategy of liquidating assets; that doesn’t maximize value for anybody. It’s a strategy of helping the borrowers rehabilitate themselves. We can look at it with a fresh set of eyes.