2024 is the first full year in which Man Varagon is operating entirely within Man Group. The former's CEO, Walter Owens, sat down to talk with Insurance Asset Risk after the firm won private debt manager of the year about what sets it apart

Most of our readers will be aware of Man Group, but can you tell me how Man Varagon now fits into that organization, along with a little about the firm's history?

Man Group acquired Man Varagon in 2023 in order to bolster the firm's credit capabilities, particularly in the US direct lending space. Man Varagon was initially founded back in 2014, with the support of large insurance companies as day one strategic partners. Given the long-standing partnership with insurance companies, Man Varagon's strategy has remained true to core middle market lending, centered around risk-adjusted return and transparency, two important driving principles that have been in the firm's DNA since its founding.

What is Man Varagon's mission?

Man Varagon's mission is to be a best-in-class direct lending platform in the core middle market in the US. Man Varagon focuses on a single strategy that can be scaled to a considerable size and our team has significant expertise in the market. We believe our investment and portfolio construction strategy is built for long term stability, capital preservation and outperformance during periods of economic dislocation.

Now, as part of Man Group, Man Varagon is the 2.0 version where our domain expertise is backed by the reach and resources of a global asset manager with a strong presence with global investors. We are benefitting from the strength of Man Group's infrastructure and technology, and we've got access to a large sales and marketing team, including a group dedicated to insurers. It's an exciting step in our growth strategy. We think of it as a true partnership that will enable us to continue to expand on our ability to innovate and serve the needs of insurance companies.

How does private debt aid insurers in their investment portfolios?

Insurers are sophisticated investors and their use of all forms of private credit continues to increase. Direct lending has proven to be an important part of insurers portfolios due to a number of factors including the longer duration of the asset class and consistent income generation which matches well with most insurers liability profiles. Importantly, we believe the downside protection of senior secured lending with tight covenants and robust documentation, combined with the benefits of portfolio diversification and the incremental yield pickup associated with the illiquidity premium of direct lending make this a key asset class for insurers. Given our roots with long term insurance partners, we understand intimately just how important these are to insurance investors across the globe.

Why does Man Varagon focus on the core middle market and how is that scalable vs. other segments of the private credit universe?

There's a couple of reasons. What we believe sets Man Varagon apart is the firm's disciplined approach focusing on the core middle market and our consistent risk management. Many of our peers have gone up to larger loans and larger borrowers, and we are confident that our focus in an area with few dedicated players and fewer players with the sourcing and underwriting expertise puts greater relevance on our business model in the future.

The US middle market is a sizable market – the National Center for Middle Market estimates that there are more than 200,000 middle market businesses in the US, they represent a third of the private sector GDP and employ more than 44 million people. With the recent mini-banking crisis in US commercial banking and the expectation of continued regulatory pressure on banks, we expect to see the continued pattern of banks pulling away from lending to middle market businesses. This presents a growing opportunity set for direct lending. When you're a lender, the key to having consistent deployment is being in the right place at the right time for the right borrowers. Banks tend to have large sales teams, both regionally and nationally, to cover borrowers. That is very expensive when you're trying to originate credit opportunistically in the non-sponsored space and why it's been difficult to scale asset-based and non-sponsored lending in comparison to sponsored lending.

What have your successes been over the last year?

First, we have had a seamless integration into Man Group, this view is shared both from the Man Group perspective and from the Man Varagon perspective. We met with the board last week, one year in, and everyone feels terrific about the acquisition. In particularly, we have been very effective integrating with the sales and marketing teams within Man Group—that's over 100 senior salespeople around the global with whom we've had the chance to sit down and work out a strategy so they can bring our capabilities to their clients. And behind that has been significant product development initiatives across various global jurisdictions. Given the continued evolution of the insurance industry and regulatory needs, Man Varagon has formed various vehicles which have historically captured attractive yield pick-up and return for our insurance clients while optimizing on risk-based capital. Outside of the integration, the most important win has been successfully navigating a rising-rate environment.

That's certainly been an issue for everyone. How has direct lending fared in this environment?

History shows us that direct lending can perform and provide relatively stable returns through cycles, even if the drivers differ. We've seen, in recent years, higher interest rates, supply chain issues, and many companies going through destocking. Direct loans to core middle market companies came into the cycle with strong interest and fixed charge coverage, which provided significant cushion against higher interest expense. For select borrowers, the ability to pass through much or all of the inflation in wages and input costs has also been beneficial – more than two-thirds of our borrowers continue to see growth in revenue and more than 60% see growth in earnings. Some of the strong metrics are driven by our focus on recession resilient sectors, i.e., sectors which had less than 10% top line decline during a recession, such as the 2008 Global Financial Crisis.

That's a lot in such a short amount of time. What has this shown you about Man Varagon?

What we've found is that investors are realising that the selection of a manager is quite important. In the last ten years, we have seen most managers have had good portfolio performance, but the last twenty-four months we have started to see a real separation in portfolio performance across the manager spectrum. We believe people see Man Varagon as a firm that aims to deliver consistent alpha to its investors, while keeping losses and defaults lower through the cycle. It's not just the brand that matters, but the managers ability within that brand. It has been many years since we have seen a test case because the environment has been so friendly. The last two years have shown us that that is no longer the case.

Any final, last words you'd like to share with our readers?

The most-interesting market dynamic right now is that this is the first true cycle since the Covid pandemic, which was relatively short in duration. We expect managers to start experiencing defaults and losses. We haven't seen that since private credit markets became a major asset class in 2009 and 2010 so it will be interesting to see how manager differentiating develops. That's the most interesting thing—to see how investors react to a typical cycle of commercial lending.