‘Capital, at the end of the day, is a commodity’: Credit-investing pioneer Ken Kencel on the power of people, passion, and perseverance

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Looking over my notes from this month’s Milken Institute Global Conference — one of the largest annual gatherings of titans of finance, and a barometer of the trends driving the industry — one theme stood above the rest: private credit.

“The golden age of private credit” is how multiple firms, industry analysts, and publications have referred to the recent wave of capital flooding into strategies such as direct lending, distressed debt, non-corporate lending, and junior debt. These lenders sit outside of the banking system, and they typically charge borrowers rates that float with and above benchmark interest rates — an attractive proposition, if done right, in today’s high-rate environment.

Despite its rapid growth of late, the asset class isn’t exactly new. A group of firms and players, especially those who worked for Michael Milken in the 1980s as he pioneered ways to finance companies and acquisitions, have been innovating on those early developments ever since. After the 2008 financial crisis, when new regulations hampered banks’ traditional corporate lending, private-credit firms were off to the races and haven’t slowed since.

One of them, and one of the largest, is Churchill Asset Management , led by Ken Kencel . Last year, the firm was ranked as the most active direct lender in the U.S., and its growth trajectory has only bent upward as a subsidiary of the $1.2 trillion asset manager Nuveen, a TIAA company .

I recently sat down with Kencel, whose career in many ways is the history of the private-credit industry and asset class. I had also known that he had a unique childhood and upbringing, which we discussed and which I quickly recognized as the source of his lifelong principles of grit, passion, and longstanding relationships.

Below are excerpts from our conversation.

What were your early influences in life?

I grew up in Buffalo, New York. I was adopted when I was born, and unfortunately both my dad and my mom died when I was pretty young — my dad when I was 2 and my mom several years later. As fate would have it, my mom’s brother — an immigrant who didn’t graduate from high school, was never married — raised his hand and basically said, “I got this.”

So, I was raised by my uncle, who at the time was nearly 60. He was working in Bethlehem Steel, and we lived in the shadow of that world. His whole philosophy with me was, “We’ve got to get you out of here. You can do better. I can help. We’re going to do this.”

I was sent to an all-boys Jesuit high school — which I’m still involved with on the board today — and the Jesuits kind of adopted me. They ended up sending me to Georgetown University.

Growing up in that environment of uncertainty, without really having a family and with the fear of not meeting my uncle’s expectations and maybe my own, I focused on relationships and creating almost an extended family with friends, classmates, and eventually colleagues. As I think back to my early days, it’s clear that building and maintaining those relationships has played a huge role in my life.

How did you get into finance?

I went to law school, but pretty early on figured out that I didn’t want to be a full-time lawyer for the rest of my career. One of my best friends in college was working at a firm called Drexel Burnham, and he was probably one of the smartest people I knew. He told me I had to get out there to Los Angeles with him and Mike Milken, who he said was brilliant for creating the high-yield market and instilling a culture of entrepreneurialism and upward mobility, with young people getting a ton of responsibility. When I got there, it was eye-opening.

I worked in the M&A group, under Leon Black. His chief lieutenant was Alison Mass , who to this day I remind that we were all in mortal fear of her. What was interesting about that group is it wasn’t that big but it had a huge number of talented people. And the broader Drexel organization was just chock-full of incredibly talented people. Even just in and around my vintage, it was really breathtaking the amount of talent — you had everyone from Marc Rowan to Josh Harris to Rob Katz to Michael Gross to John Hannan to Art Penn to Jonathan Lavine to Rich Gelfond.

You learn a lot when you’re surrounded by folks like that. And of course, weekends were a workday, so you’d go in on Saturday and everybody was there. By the way, back then nobody had a computer on their desk — we all had to go to a room where there were the computers. What was great about it is we all were in that room together doing financial modeling, asking questions, and learning from each other. It was a very intensive and rewarding learning experience.

That was a pivotal first place to work. I saw firsthand the importance of creating a dynamic organization that rewarded talent. It was a pure meritocracy. It didn’t matter if you were a poor kid who grew up in Buffalo or a rich kid who went to Wharton. It was all about whether you were really good, really smart, and prepared to roll up your sleeves and prove yourself. And you were surrounded by people like that.

Drexel, of course, ended up collapsing in 1990. What did that mean for you and your colleagues?

Those of us who were doing high yield suddenly didn’t have anything to do. Then in the early ’90s, the banks started getting into the game, seeing the opportunity to be a distributor of loans. A lot of us went to the banks, and I went to Chase, where I helped launch the high-yield business.

Chase had a great culture, really fostering a collegial environment and approach. They had a group that, unlike a lot of the other big banks, was more of a merchant-banking business. They weren’t chasing a lot of the big, huge syndicated loans that Jimmy Lee and Chemical Bank were doing. They were doing more of the mid-market deals, and they had a group that did senior lending, that did mezzanine investing, that co-invested, and was an investor in the funds. I saw that model and thought it was really interesting — you get the lending side but you also get to invest as a true one-stop partner. It was one of the only banks that really did that.

I thought the model would be interesting to ramp up. The other place that was ramping it up at the time was GE Capital. So, after a few years at Chase, I took the cultural element from Chase and its model and joined a number of my Drexel colleagues, who had seen the GE Capital model and what Chase was doing, and we started a firm called Indosuez Capital. We had about 50 people and were focused on mid-market, private equity-backed companies, up and down the capital structure.

We unfortunately ended up disbanding in 2006, and I launched Churchill. The goal from the beginning was to build a world-class private-credit investment platform that took advantage of the fact that the banks were basically exiting this business at an accelerated pace so that they could do bigger deals. What I tried to do was take the entrepreneurialism of Drexel, the business model of Chase, and the cultural dynamics of the small team from Indosuez and bring that to Churchill.

Five years later, in 2011, 凯雷投资集团 was going public and we were presented with an opportunity to be the direct-lending arm of Carlyle, which we did for about three years. It was a tough decision to then part ways with Carlyle, but I wanted to find a partner where I could build my own firm again, where we could be owners of the firm, where we could have economics and incentives based on the performance of our investments, and where I could have direct influence on the culture, team, and organization.

We talked to a bunch of folks, and I was introduced by my good friend Michael Castine to Robert Leary , who was CEO of TIAA Asset Management, and Roger W. Ferguson, Jr. , who was CEO of TIAA.

TIAA had just bought Nuveen, and ultimately my path led to Jose Minaya , who at the time was in charge of building affiliate teams in various asset classes and was looking for a private-credit affiliate. It was a perfect match.

More from Human Capital: ‘That’s when I got fixated’: Jose Minaya was told he wouldn’t make it on Wall Street — and now he oversees $1.1 trillion

People are calling today the golden age of private credit. What’s the reality?

The market has evolved quite dramatically in the past 10 or 15 years, such that the firms that have been there for a long period of time, that have longstanding track records of investing through the cycles, are really the ones that can attract institutional money. And then that institutional track record has been critical to translating into the retail channels with a definable brand within the wealth-management market. So, while there have been new entrants, the reality today is that if you look at the firms that have built scale and relationships over a period of decades, those are the firms today that are very much on the front lines of raising new capital, growing their platforms, and attracting the best people.

In private equity, you can have three or four folks who are really good at investing, who spin out of one of the big firms, and it’s fairly straightforward. They raise a fund, $300 million or $500 million or maybe $1 billion, and they start doing smaller deals. They do five to 10 deals in that fund.

But in credit today, it’s all about selectivity, differentiated sourcing, and ultimately about having the scale and the platform to be able to deliver the full solution. Today, if you want to be relevant in the traditional middle market, you need the ability to commit to and hold $250 million, $500 million, $1 billion in one deal. If you’re a brand-new fund, if you’re a brand-new entrant, there’s no way that you’re going to put your entire new fund in one deal. Even just five to 10 years ago, the largest direct lenders could only hold $50 million, $75 million, even $100 million, because we were still scaling ourselves. The private-equity firms needed us and clubbed us up, and together a few of us could hold $200 million or $250 million. Today, when we get that same phone call, it’s very different — they need, and we can deliver, say, $400 million in a deal. If you can’t deliver that full solution, you’re out.

The new entrants, then, have only two places to go. One is very small deals, which are inherently, in my view, riskier — lending to small companies, $3 million in EBITDA or $6 million in EBITDA. Not only are they riskier, in my view, but now you have every new entrant chasing them. So, the lower end of the market is being inundated by new participants, and I think it’s a pretty dangerous place to be. The other way to get that capital invested is to really be a buyer of some of the large, almost syndicated, transactions. You’re really not originating transactions. That’s a little bit of a sleight of hand in my view, because those firms are generally telling investors that they’re giving them private credit.

When you look at the firms that are truly originating and leading transactions, there is a group of, I would say, 10 to 15 firms. They have decades-long track records, relationships, differentiated sourcing, and scale. Track records beget capital-raising, which begets scale. Of the 300 deals we did last year, probably 80% had one or more of those firms involved, either competing to win it or ultimately partnering up with us in the deal.

So, I would say that increasingly the private-credit space is segmenting into the lower-middle-market firms, the traditional middle-market firms, and then there are several firms that have raised massive scale, primarily on the wealth-management side, and they view that level of scale as a competitive advantage.

What have you learned about management and leadership over your career?

The lesson that I took away from the various firms I worked at early in my career, and from the way we’ve built Churchill through its iterations, is that it’s all about the people. If you can attract the best people — the hardest-working, most entrepreneurial, most passionate people — and if you can mentor them, challenge them, develop them, and ultimately reward them, then you can build an amazing business. But you have to stay focused on the people.

I view my role as CEO to be a servant leader to our people. If you attract, mentor, train, and reward the best people and empower them to really succeed, it’s amazing what can happen. Then, in many respects, I step back and let them run. More than anything else, that has been the key to success in my career.

What do you look for when hiring?

Identifying, recruiting, and ultimately mentoring people is probably the hardest part of my job. As a result, we want anyone we hire to be assessed and reviewed by at least a dozen of our people. That’s for everyone’s benefit, including the candidate who at the same time is assessing us and our culture.

Because of that, there’s no question in my mind that the first 20 people we hired turned out to be the absolute most important hires — because those 20 people turned around and hired the next 20 people. Then it compounds to 40 high-quality people, then 80, then 160, and so on.

We have certain values that we look for: somebody who’s collaborative; somebody who’s relationship-oriented; somebody who sees themselves as part of a broader team and organization; somebody who operates with integrity. On top of that, I look for a couple things in particular that really matter to me. I want people who, it’s very clear when I meet with them, are extremely passionate about what they do — whether that’s investing, whether that’s technology, whether that’s marketing, or any of our functions. The second thing is grit. It’s a tenacity and a willingness to recognize that you might fail, you might get smacked around a little bit, you might get discouraged, but you have a long-term view and approach that lets none of those things stop you. You might have messed something up on Tuesday, but that doesn’t stop you from coming back on Wednesday, getting it right, and committing to yourself that you won’t make the same mistake again.

I say this to my kids and I say this to people at our firm: You have to recognize that no matter what field you’re in — whether you’re in sports, whether you’re in finance, whether you’re a scientist — you will fail. There will be failure coupled with success. A lot of young people today will fail at something and then think they can’t do it again or they won’t be good at it.

If you look at the most successful people, there’s a common thread of that tenacity, that grit, that passion. It’s a combination that defines the best in any business.

What final words would you offer to those starting their careers today?

Capital, at the end of the day, is a commodity.

Success in this business is all about building relationships over your career. Do not lose sight of the fact that the people you’re working with today may very well turn out to be the people you’re working with — or for — 20 years from now. It’s all about people.

Join the conversation with your own take on these topics in the comments below.