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STELLAR PERFORMERS OUR DEBUT RISING STARS RANKING REVEALED

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Senior Editor We identify private debt’s Andy Thomson Tel: +44 20 7566 5435 [email protected] Americas Editor Andrew Hedlund up-and-coming leaders Tel: +1 212 633 2906 [email protected] News Editor “He helped us to gain con- in four European countries John Bakie Tel: +44 20 7566 5442 fidence in the private debt – France, Germany, Ireland [email protected] Reporters asset class.” This was a quote and Italy – as calls are made Adalla Kim Tel: +852 2153 3874 we received from a source at by the Alternative Credit [email protected] a reinsurance firm who cred- Council for the EU to address Rebecca Szkutak Tel: +1 646 795 3270 ited James Wallington of CVC market idiosyncrasies. On p. [email protected] Head of Marketing Solutions Credit Partners with playing 28, meanwhile, we assess the Beth Piercy Tel: +44 20 7566 5464 a vital guiding role when the growing opportunity set in [email protected] organisation made its first- Africa, particularly in the Managing Editor — Production Mike Simlett ever investment in private mezzanine space. And, in our Tel: +44 20 7566 5457 [email protected] debt. It’s the type of testi- analysis section, we reflect on Head of Design Miriam Vysna mony we received frequently the survey that found private Tel: +44 207 566 5433 [email protected] when we reached out to the debt delivering a very healthy Designer market for nominations for return, over both the short Rebecca Worrell Subscriptions our inaugural list of the asset and long term (see p. 7-9). Ian Gallagher (Americas) +1 646 619 8131 [email protected] class’s Rising Stars. Accompanying this issue is our State of the Deal Daniele Lorusso (EMEA) +44 (0)207 566 5432 It was a heartening exercise to discover how Market report in partnership with Proskauer. The [email protected] Sigi Fung (Asia-Pacific) +852 2153 3140 much has already been achieved by those in the report provides insights into, and comprehen- [email protected] industry under the age of 40 on 1 April. Towards sive analysis of, US and European private debt For subscription information visit www.privatedebtinvestor.com the end of last year, we ran our first-ever rank- transactions. In a world where deal terms are Director, Digital Product Development ing of private debt’s Most Influential. This was under intense scrutiny, the report finds that the Amanda Janis [email protected] an equally fascinating undertaking, although our only way for fund managers to cope effectively Editorial Director Philip Borel readers would probably already have been familiar with the erosion of covenants is to participate [email protected] with all the names on the list. Turn to p. 20 and more actively in deals post-completion. Research and Analytics Dan Gunner it’s quite likely you’ll discover individuals you are [email protected] Publishing Director not acquainted with – but who have burst on the Best regards, Paul McLean [email protected] scene in a tremendously impactful way, indicating Chief Executive that the future of the asset class is in safe hands. Tim McLoughlin [email protected] Also in this issue we take a deep dive into Managing Director – Americas Colm Gilmore senior debt (p. 10), and find definition becom- [email protected] ing blurred to the point where investors may Andy Thomson Managing Director – Asia Chris Petersen be deeply confused about what they are back- Senior Editor [email protected] NEW YORK ing. Because of this, Campbell Lutyens’ Jeffrey 130 W 42nd Street, Suite 450,New York, NY 10036 Griffiths calls for standardised terms such as a LONDON 7th Floor, 100 Wood St, London EC2V 7AN “Senior Secured Standard”. By tightening up the HONG KONG 19F On Hing Building, 1 On Hing Terrace, definitions, Griffiths believes investors will gain Central, Hong Kong much more clarity about the risks being taken in © PEI Media Ltd 2019 No statement in this magazine is to be construed as a different deals. Our senior debt coverage includes recommendation to buy or sell securities. Neither this publication nor any part of it may be reproduced or transmitted in any form or items on the lower mid-market, leveraged loans by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, and market conditions. WHAT DO YOU THINK? without the prior permission of the publisher. Whilst every effort has been made to ensure its accuracy, the publisher and HAVE YOUR SAY contributors accept no responsibility for the accuracy of the We also have an article on European regula- content in this magazine. Readers should also be aware that external contributors may represent firms that may have an tion in which we analyse the hurdles lenders face [email protected] interest in companies and/or their securities mentioned in their contributions herein. April 2019 | Private Debt Investor 1 PRIVATE DEBT INVESTOR | APRIL 2019 CONTENTS Success begets success.

TOP FIVE ANALYSIS SENIOR DEBT Closed September 2018 4 The two-minute month 7 The double-figure return 10 Why investors may be What investors and managers are saying that rivals private equity living in ignorance and thinking in the private debt world Comparing long-term performance Terminology around senior loans finds that private debt holdings can has become increasingly obscure – generate superior returns to both fixed consequently, there are calls for it to be OPINION income and equity standardised 1 Editor’s Letter 8 Strong returns and niche 12 No covenant offerings keep private worries here 6 Less harmony, more debt on the radar More attractive deal terms and the * precision – the appeal While leveraged loans and the upper ability to be highly selective are among $876,000,000 to Europe’s rule-makers mid-market possess worrying features, the reasons why investors are tempted compelling opportunities can be found to diversify into the smaller end of the Further pan-European regulation market, says Jaime Prieto of Kartesia of non-bank lending is unnecessary, off the beaten path BroadRiver III, L.P. a new paper argues 9 How direct lending’s 15 Asian investors 36 The Last Word growth is changing spot anomalies in Alex Schmid of ESO Capital talks about returns leveraged lending Insurance-linked the deals being overlooked at a time Jess Larsen of FIRSTavenue charts the Buyers are demanding higher-rated Longevity Assets Fund when caution is rife over the cycle and evolution from ‘idiosyncratic alpha’ to tranches in response to what they see as economy cost-efficientb eta, and the impact this is a lack of liquidity in the leveraged loan having on fees markets RISING STARS REGULATION 16 A lender’s view of a heated market Closed September 2016 Closed January 2017 19 Welcome to the future 26 How the EU should seek Monroe Capital’s Ted Koenig outlines the catalysts that will keep the deal and For the first time, we identify the asset to level the rules credit markets humming in 2019 class’s emerging leaders from the ranks With Brexit and European elections of the young and already successful due to be over in the coming months, legislators will be looking again at the EU’s regulatory agenda DATA 30 Data Room * REGIONAL REPORT Private debt funds in market, sponsor- $367,000,000 $62,000,000 backed public offerings, leveraged loan 28 Lenders eye ‘seismic and covenant data BroadRiver II, L.P. Diamond LS I L.P. (Co-Invest) shift’ in Africa The private credit market in Africa may Insurance-linked Insurance-linked be small but is playing an integral role in filling the gaps left by local banks Longevity Assets Fund Longevity Assets Portfolio

INDEX

ABL Life Insurance 4 CVC Credit Partners 25 Mercury Capital Advisors 22 African Private Equity and Venture Capital CVI 23 MetLife Investments 5, 15 Association 28 Deutsche Bank 15 Missouri Department of Transportation and Highway Alaska Permanent Fund Corporation 21 Eaton Partners 8 Patrol Employees Retirement System 22 Allen & Overy 6 Employees Retirement System of Texas 4 Monroe Capital 16 Alternative Credit Council 4, 26 ESO Capital 36 NBK Capital Partners 20 Anbang Insurance Group 4 FIRSTavenue 9, 11 NexPoint Advisors 5 Angel Island Capital 22 Goodwin Procter 24 Norinchuchin Bank 5 Ares Management 25 Hercules Capital 5 Owl Rock Capital Partners 22 Lead Global Placement Agent Ashurst 4 Idinvest Partners 23 Parliament Capital Management 24 AXA Investment Managers - Real Assets 24 Infrared NF Investment Advisers 21 Paul Hastings 21 BlackRock 23 Kartesia 12 Pennsylvania School Employees Retirement System 22 Cambridge Associates 4, 7 Kirkland & Ellis 20 Permira Debt Managers 20 Campbell Lutyens 10 KKR 23 S&P Global Ratings 15 Capzanine 23 Lazard 25 Sierra Income Corporation 5 Denning & Company, LLC | www.denningandcompany.com Carlyle Group 21 LendInvest 24 Stroock & Stroock & Lavan 21 CDC Group 29 Linklaters 11 Tikehau Capital 11 Certior Capital 10 M&G Investments 15 TLG Capital 28 CR Capital Advisory 22 Marathon Asset Management 5 Vantage Capital 28 Member FINRA Crayhill Capital 25 Mariner Investment Group 25 Varagon Capital Partners 24 This announcement appears as a matter of record only Credit Suisse Private Funds Group 23 Medley Capital Corporation 5 *Total commitment amounts pertaining to the limited partnerships mentioned above includes the sum of capital commitments to the main fund and those of its affiliates/parallel funds. 2 Private Debt Investor | April 2019 Success begets success.

Closed September 2018

$876,000,000* BroadRiver III, L.P.

Insurance-linked Longevity Assets Fund

Closed September 2016 Closed January 2017

$367,000,000* $62,000,000 BroadRiver II, L.P. Diamond LS I L.P. (Co-Invest)

Insurance-linked Insurance-linked Longevity Assets Fund Longevity Assets Portfolio

Lead Global Placement Agent

Denning & Company, LLC | www.denningandcompany.com

Member FINRA This announcement appears as a matter of record only *Total commitment amounts pertaining to the limited partnerships mentioned above includes the sum of capital commitments to the main fund and those of its affiliates/parallel funds. TWO MINUTE MONTH TOP 5 LEADING THEMES FROM A MONTH IN PRIVATE DEBT

1. More than half of investors have deployed SAID AND DONE money into Chinese NPLs – report “WE’VE BEEN IN A BULL China is set to be one of the biggest non- changes which give greater legal certainty. MARKET FOR BONDS performing loan markets outside of Europe, Lastly, the Chinese government has according to a report from law firm Ashurst. been testing initiatives to facilitate offshore FOR A LONG TIME. THE A study of NPL investment trends, titled investments in NPLs, including a pilot MACROECONOMICS, A Global NPL Perspective, found China has been programme launched in June 2017 to enable WITH LOW INTEREST the most popular country outside of Europe cross-border NPL disposals via Shenzhen. RATES, REDUCTIONS IN for investors over the past two years and will In May 2018, the government extended QUANTITATIVE EASING continue to see significant investments in the and enhanced the programme to allow GLOBALLY, IT’S CREATING A coming years. commercial banks and asset management VERY BAD ENVIRONMENT A survey of investors found 57 percent companies to engage in private sales of NPLs FOR BONDS” have invested in NPLs in China over the past to bypass court-administered processes. n two years, well ahead of other countries, with Cambridge Associates managing director Tod Trabocco on why private credit India the second most popular destination OPPORTUNITY IN returned 10.3 percent for the 12 months on 27 percent. LATEST CHINA CRISIS ending 30 September, while bonds China is now in its second NPL cycle. Investors: In which emerging countries/ posted a 1.37 percent loss The first round between 2001 and 2008 regions has your organisation already saw limited success for offshore investors invested in NPLs over the past two years?* “THERE IS AN IMPROVING due to China’s opaque legal system, political China 57 ATTITUDE TOWARDS and strategic issues, currency controls and India 27 ALTERNATIVE CREDIT reluctance in courts to enable foreign owner Thailand 20 restructurings. AMONG POLICYMAKERS. Brazil 20 However, structural reforms mean the BUT ... WE STILL NEED TO Middle East 20 second cycle is taking off with foreign NPL DO MORE TO EDUCATE Indonesia 14 investors. These include an additional 50 PEOPLE ABOUT THE Argentina 2 regional managers capable of selling loans, 0 20 40 60 INDUSTRY” improved auction infrastructure, OTC trades % Jiri Krol, deputy chief executive of and securitisation projects. The country * Investors could choose more than one country Alternative Credit Council, on EU has also embarked on legal and structural Source: A Global NPL Perspective, by Ashurst and Debtwire regulators and their understanding of private credit

2. Regulations force credit enhancement “YOU NEED TO ... HAVE issues on Korean insurers DIFFERENT PEOPLE IN THE ROOM RATHER New capital standards that will be in place member of China-based Anbang Insurance THAN YOU WITH A in South Korea within two years are causing Group, said that risk charges are the main insurance firms in the country to search for factor for his team when considering TEAM WITH SIMILAR new yield and credit enhancement methods. investment decisions across assets. BACKGROUNDS ... WHEN The first guidelines, drafted by the He told a conference in Hong Kong that if PEOPLE ARE ABLE TO country’s Financial Supervisory Service in GPs invest in assets with risk charges of 3-6 DO THIS, THEY’RE BEING 2018, indicated that insurers’ investments percent, LPs may require returns of up to 8 COMPETITIVE” may be subject to greater regulatory scrutiny percent. “We really need GPs to discuss with Sharmila Kassam, deputy chief invest- in order to reveal associated risk factors. us to find a solution to enhance the credit and ment officer at Employees’ Retirement Jiroo Eoh, head of infrastructure and real find ways to deduct the risk-based charges System of Texas, on gender diversity asset investments at ABL Life Insurance, a plus enhance the returns,” said Eoh. n

4 Private Debt Investor | April 2019 5. The BDC merger 3. Asian investors spot anomalies that’s become a in leveraged lending marathon Japan’s Norinchuchin Bank has bought the enough liquidity. “The double-B tranches The battle over the fate of Medley top tranches of every European CLO raised underperformed compared with single-B Capital Corporation (MCC) and Medley in the first six weeks of 2019, the Financial (lower credit ratings), which is an anomaly,” Management (MDLY) continues, and a Times has reported, adding that the bank she said. MetLife Investment Management fresh face means yet another choice for has increased its holding of collateralised has $588 billion in assets, of which balance shareholders. loan obligation securities which are triple sheet assets constituted $420 billion as of Marathon Asset Management made A-rated. A source confirmed to PDI that September 2018. Lo said Asian insurance an 11th-hour bid for MCC, which comes the bank has been looking at the US private firms and their institutional clients have after NexPoint Advisors made an offer to debt market since last year. asked her team about this deviation. counter the MCC management-backed Lesley Lo, a director of MetLife Although it is not clear if certain types proposal that would fold MCC into Sierra Investments’ institutional client group, of securities, including cashflow-based Income Corporation (SIC) and make MDLY noted there was a correction in the US CLOs, market value-based CLOs, and a subsidiary of SIC. (Thanks for hanging with market during Q4 2018, which saw ABS CDOs, have seen this anomaly, the us through the alphabet soup that is US mid- tranches with higher ratings sold by implication of the deviation is critical to market lending.) mutual funds and exchange-traded funds some institutions in Asia as they tend to While we aren’t taking a side on any given because lower quality loans did not have ‘buy and hold’ these structured products. n offer, it is good to see a contest after MCC failed to receive any binding offers when it shopped the investment vehicles through a 4. Hercules CEO steps down amid scandal process ending in the middle of last year. With NexPoint and Marathon bids on the Manuel Henriquez has voluntarily stepped Foundation, which was allegedly a front table, shareholders have credible options for aside from his duties at Hercules Capital for the payments involved in the scandal, those aggrieved by the management-backed (HTGC) after he and his wife were among according to the complaint. Henriquez also internalisation transaction, particularly after the 33 parents charged over their alleged allegedly used his status as an alumnus at multiple quarters of declining net asset roles in a college admissions bribery and Northeastern University to help another value per share, losses and a double-digit money laundering scam dubbed “Varsity student involved in the conspiracy get into percentage of loans on non-accrual at cost. Blues” by the FBI. the Boston-based school in exchange for The latest offer would see MCC and Henriquez, HTGC’s founder, chief one of his daughter’s test sessions. n SIC, which didn’t respond to requests for executive and chairman, and his wife comment, sever their advisory relationship allegedly paid to have private proctors assist PLUNGING FORTUNES with MDLY and join forces with Marathon. their two daughters during their ACT and The share price of Hercules Capital The bidder plans to lower the BDCs’ SAT exams to secure higher scores on four fell as much as 10% on the day the management fees to 1.25 percent rather separate occasions, and bribed the tennis allegations surfaced than the 1.75 percent it currently charges coach at Georgetown University to accept 15 and cut performance fees from 20 percent to their eldest daughter as a recruit for a sport 14 17.5 percent. In addition, Marathon proposes she hadn’t played competitively in years. buying back 3 percent of outstanding shares The Henriquez family are alleged to 13 at book value, which would be distributed to have paid a minimum of $425,000 for these 12 shareholders as a special dividend. NexPoint services to the Edge College and Career price ($) Share said its offer will save or create $225 million Network, known as the Key, the organisation 11 in value for MCC shareholders, through at the centre of the FBI’s allegations. The 10 cutting fees, a cash payment and share 12 Mar 12 Jun 12 Sep 12 Dec 12 Mar family made these payments directly and 2018 2019 purchases, among other measures. MCC through “donations” to the Key Worldwide Source: Yahoo Finance calls these claims inaccurate. n

April 2019 | Private Debt Investor 5 OPINION REGULATION Less harmony, more precision – the appeal to Europe’s rule-makers Further pan-regional regulation of non-bank lending is unnecessary, a new paper argues. It’s time to look at the “BETTER…TO ADOPT A smaller picture within member states. By Andy Thomson BOTTOM-UP APPROACH THAT CONCENTRATES There’s no time like the present. In May, non-bank lending (if they’re seeking to ON ADDRESSING THE elections to the European Parliament take be)? Instinctively, Europe may look to IDIOSYNCRASIES WITHIN place. Getting in ahead of this possible bring about regional harmonisation of rules INDIVIDUAL MARKETS” influx of new rule-makers, the non-bank – seeking to create a level playing field from lending (NBL) industry has stated its case the top down. That, after all, fits with the for better regulation – in the form of a aspirations of the Capital Markets Union. white paper from the Alternative Credit The paper’s authors advise against this. Council and law firm Allen & Overy. Aside from the existing role of AIFMD, they Note: better, not necessarily more, believe that pan-European goals tend to be regulation. The white paper – Non-Bank implemented slowly – largely because you Lending in the European Union – argues suffer pushback from member states irked there are already enough pan-European that things are moving too quickly in their rules for private debt in the form of the view, and which may consequently find Alternative Investment Fund Managers ways to frustrate progress. “Pan-European Directive. When it comes to aspects such harmonisation takes a lot of time and effort,” NOTHING TO SEE HERE as sourcing, underwriting, sufficient staffing, says Jiri Krol, ACC’s deputy chief executive. There appear to be few concerns about risk management and reporting, the Better, he thinks, to adopt a bottom-up the amount of leverage being used by direct lenders at the fund level authors of the paper argue that NBL firms approach that concentrates on addressing are subject to as much necessary oversight the idiosyncrasies within individual markets.

100 as anyone else at the regional level. Among the quirks are that some European

90 This argument, the authors admit, runs countries regulate SPVs in the same way

80 contrary to a perception that non-bank as funds; others don’t. Likewise, in some

70 lending is the new Wild West. That label countries, such as Germany, it’s relatively

60 may perhaps be applied with a little more easy to make cross-border loans. But in Italy,

% 50 justification to the leveraged loan market. for example, any fund making a cross-border

40 The authors are keen to make clear the loan into the country must be subject to

30 distinction between that part of the market equivalent regulation as a domestic Italian

20 and the smaller end, where borrowers loan. Krol says there are a “mosaic of issues”

10 remain grateful for the liquidity provided such as these that could be tidied up to make

0 by NBLs in the wake of the global financial life easier within individual markets.

How much financial leverage (borrowing against crisis. They have been, according to the The aim of the white paper, says Krol, is portfolio assets) does your most levered private credit defence case, a force for good – and deserve to “sharpen minds within the policy-making fund employ (debt: equity)? to be recognised as such by those drawing community”. To our eyes, it looks a useful ■ None ■ 0-0.49x ■ 0.5-0.99x ■ 1-1.49x ■ 1.5-1.99x ■ 2 or greater up the rules of engagement. contribution to the debate about the scale Source: Non-Bank Lending White Paper, ACC/Allen & Overy So how can regulators be helpful to and nature of regulation in the NBL field. n

6 Private Debt Investor | April 2019 ANALYSIS INVESTOR SPOTLIGHT The double-figure return that rivals private equity Comparing long-term performance finds that private debt holdings can generate superior returns to both fixed income and equity. John Bakie reports

rivate credit strategies are deliv- allocations into private debt. Trabocco says ering returns far ahead of public “MANY INSTITUTIONS there are many barriers for institutions. Pbonds, which should prompt insti- LACK THE MANDATE OR “Investors want liquidity and they value tutional investors to rethink the way they FLEXIBILITY TO MOVE it,” he explains. “The other problem is many allocate their portfolios. THEIR EXISTING BOND institutions lack the mandate or flexibility Research by Cambridge Associates ALLOCATIONS INTO to move their existing bond allocations into found that, in the year to 30 September PRIVATE CREDIT” private credit.” 2018, private credit funds returned an Tod Trabocco However, he says investors that cannot average of 10.3 percent across all strategies. invest in private debt from their fixed By comparison, the Bloomberg Barclays income pools may benefit from allocating Government/Credit Bond Index saw while unlevered senior debt can return 6 capital from their alternatives sleeves. returns of -1.37 percent over the same percent to 8 percent.” Hedge fund performance has been weak period, meaning private debt returns are This means the average return is recently and is an obvious area which could currently in a completely different ballpark. supported by a core of senior debt be reallocated. However, Trabocco believes Tod Trabocco, managing director at investment, which is much lower on the risk there could also be a case for reallocating Cambridge Associates, says the gulf in spectrum and explains the relative stability private equity money as well. “We’re doing performance between bonds and private of returns that Cambridge Associates has some research right now on the differences credit has been driven by particularly recorded over the past two decades. Over between private credit and private equity difficult conditions in bond markets. the last five years, average returns were 8.75 returns and the extent to which they “We’ve been in a bull market for bonds for percent per annum, and over 20 years they deviate, and private credit returns are a long time,” he says. “The macro economics, reach 10.42 percent per annum. surprisingly close to private equity,” he says. with low interest rates, reductions in With such a wide return disparity According to Cambridge Associates, quantitative easing globally, it’s creating a between public bonds and private credit, private credit has returned an annual average very bad environment for bonds.” the question arises of why investors of about 12 percent since 1988 with a As an average, 10.3 percent seems would not be shifting their fixed income standard deviation of 14 percent. Private high, but one would expect that in an equity returns are also approximately 12 asset class as diverse as private debt, that percent, but with a 19 percent deviation. average could be skewed by some of the RETURNS REVOLUTION This poses some questions for investors. higher-yielding strategies falling under the Average annual return to 30 September While private equity can deliver outsized 2018, bonds vs private credit private debt umbrella. Senior debt should returns in good years, and some private deliver a relatively low-risk and low-return 10 equity managers have much better track investment, while mezzanine, distressed or 8 record performance than the average, for niche asset classes like aircraft leasing would 6 Private credit those institutions holding PE investments 10.3% be expected to deliver much higher returns, % 4 providing underwhelming performance, approaching equity levels. 2 it might make sense to reallocate some of

However, Trabocco says senior debt 0 their private equity pool into private credit. Bonds -1.37% returns are actually much higher than many -2 They could see similar rates of return with expect: “Senior debt funds can often return Source: Cambridge Associates & Bloomberg Barclays dependable yields, a lower rate of deviation 10 percent to 12 percent if they’re levered, Government/Credit Bond Index and a better risk-return profile.n

April 2019 | Private Debt Investor 7 ANALYSIS TERMSHEET Strong returns and niche offerings keep private debt on the radar While leveraged loans and the upper mid-market possess worrying features, there remain compelling opportunities off the beaten path, finds Andrew Hedlund

rivate debt investors plan to con- direct lending’s upper mid-market – understandable: research by Cambridge tinue pouring money into the asset though that’s not meant to imply all is rosy Associates found that for the last 12 Pclass despite the existing influx of with core or lower mid-market businesses. months ending 30 September, private capital, according to PDI data. Speciality finance continues to be a credit funds, across disparate strategies, According to PDI Perspectives, our comparatively less-crowded space and returned 10.3 percent, compared with annual LP survey, plenty of investors plan a place for investors to find compelling the 1.37 percent loss that public bonds to expand the number of general partners performance in an era of compressing delivered. in their private credit portfolios – with direct lending returns. That 10.3 percent figure includes 42.9 percent stating this aim – compared While our LP survey found a higher-returning strategies that rival the with 32.1 percent planning to keep the preference for direct lending over other private equity index Cambridge Associates number of GPs constant, 2.4 percent who strategies, advisory firm Eaton Partners keeps. For the year ending 30 September, plan to trim the number of managers in found that approximately 90 percent of the three- and five-year returns for that their book and 22.6 percent unsure. the 75 investors they polled planned to were 14.58 percent and 13.62 percent, This is predictable given how solid commit to asset-based lending, while respectively. The 10-year return was 12.04 returns have been, even considering slightly less than 70 percent anticipated percent. concerning market trends. Much has allocating to direct lending. The fact remains that private debt still been made of the influx of capital, its represents one of the most compelling effects on the deterioration on credit EXPLOSIVE GROWTH investment opportunities in private documentation and the flourishing of Allocations to alternative assets have taken markets, even when accounting for covenant-lite deals. off post-global financial crisis, as investors deficiencies in covenants, EBITDA But while those are certainly reasons search for returns at a time when public addbacks and the like – and even if you for concern, and no one should assume markets have often had little to offer and view alternative assets with a sceptical eye that shoddy underwriting won’t come encountered periodic patches of volatility, in an era of late-cycle exuberance. back to haunt some credit managers, the and much of this explosive growth has It represents the safest investment – in reality is that many of those problems gone into private debt. any restructuring scenario, debt will of reside in the leveraged loan market and The rush to the asset class is course get paid before equity. That’s not to say recoveries will be stellar. But at least lenders will get something. NOT TURNING THEIR BACKS However, investors need to look closely The proportion of LPs wanting to reduce their private debt relationships is lower than for other comparable asset classes at investment committee memos and other similar materials to get an idea of Private equity 52.6 29.9 11.3 6.2 how any given credit manager approaches Private debt 42.9 32.1 2.4 22.6 deals.

Private real estate 37.1 37.1 5.6 20.2 Track record can only go so far when we are approaching a decade since the last Infrastructure 28.4 37.5 5.7 28.4 downturn. Even a relatively new manager’s 0 10 20 30 40 50 60 70 80 90 100 % five- or seven-year track record probably ■ Increase ■ Maintain ■ Decrease ■ Unsure looks good when the economy hums along Source: PDI Perspectives and there are few corporate defaults. n

8 Private Debt Investor | April 2019 ANALYSIS RETURNS How direct lending’s growth is changing returns Jess Larsen of FIRSTavenue charts the evolution from ‘idiosyncratic alpha’ to cost-efficient beta, and the impact this is having on fees

rivate credit continues to grow to average historical default rates of 3-4 strongly. Surveys show private percent (compared with 1.5-2 percent Pdebt will hit $1.4 trillion by 2023, now) – a reasonable base case scenario. passing real estate to become the third- Given the potential for greater return largest alternative investment asset class volatility, we believe LPs will gravitate after hedge funds and private equity. This towards larger and more established man- growth is coinciding with LPs broadening agers that provide scale, longer track records their focus beyond direct lending to credit and brand recognition. We expect this flight opportunities and asset-backed lending. to safety to tighten direct lending spreads It’s vital to realise what’s driving this. and reduce risk-adjusted returns. In sum, A good example is provided by how the further compression of the performance dif- private equity market grew via allocations ferentials among top-quartile and median- from public equity portfolios. With private “INVESTORS WILL quartile funds is expected. credit, we are still in the early stages of a INCREASINGLY PERCEIVE All this makes it likely that investors will much bigger allocation out of public fixed DIRECT LENDING RETURNS increasingly perceive direct lending returns income portfolios. TO BE A BETA PLAY, to be a beta play, further pressuring fees. Unsurprisingly, rising capital flows FURTHER PRESSURING This will impact other areas. We think have coincided with an influx of new FEES” Jess Larsen consultants and LPs will prioritise track managers. Yet it is apparent the industry’s records extending over multiple cycles. long expansion is beginning to change credit industry’s competitive dynamic as The preference for low loss rates over an the dynamic of how investment returns lenders increasingly become price takers outperforming track record will enhance are generated. Simply, private credit is rather than value-adding packagers of the tendency towards uniform performance. moving from a period when returns were complex negotiated loans in the sponsored The investment outcome will be a more a product of idiosyncratic ‘alpha’ to an era sector. In fact, GPs’ underwriting skills cost-efficient and predictable direct lending characterised by a more cost-efficient direct are becoming more critical than their beta-type performance stream. lending beta-type performance stream. structuring skills. The result is a more price Yet, even though direct lending and private sensitive and efficient, but less customised, credit performance will be increasingly BIGGER AND BOLDER market where GPs produce ‘alpha by comprised of beta characteristics, investors What is driving this transformation is avoidance’. will still need to choose how much risk they straightforward. Despite the emergence This is putting persistent pressure on want to take and what level of diversification of hundreds of new debt managers, capital fees. Management fees have moved to a levy will be needed to ensure this. The upshot inflows have disproportionately benefited on invested capital, not committed funds. of alpha being pushed to the margin as the the largest GPs. In 2017, for example, the The preferred rate has also inched up to 7 private credit asset class matures is likely top 10 private debt firms received nearly percent from 6 percent. Origination fees to be greater competition among GPs and one-third of the new capital deployed – are now either shared or fully passed on. sophistication among LPs in selection of debt leaving over 600 managers to share the rest. An added challenge is tightening instruments with varying risk profiles.n Inflows of capital to private credit monetary policy beginning to impose itself continue to rise even though growth is on the credit cycle. First Avenue expects the Jess Larsen is partner, head of the Americas, at global moderating. This is altering the private current default rate to rise with a reversion advisory and capital placement business FIRSTAvenue

April 2019 | Private Debt Investor 9 SENIOR DEBT SENIOR DEBT DEFINITION Why investors may be living in ignorance

Terminology around senior loans has become increasingly obscure. Consequently, there are calls for it to be standardised, finds David Turner

e have probably all been in stretched so much that they risk becoming the mezzanine level can no longer be as meetings where we had no meaningless. sure as before about what they are get- Widea what was being discussed “Some terminology is thrown out in this ting into. but were eager to hide our ignorance. The market today that doesn’t mean that much,” Griffiths returns to the term “covenant- more obscure and exotic the jargon, the says Jeffrey Griffiths, principal at Campbell lite”. “Calling a loan covenant-lite generally more feverishly we nodded our heads to Lutyens, the placement agent, in London, means it has fewer covenants than the tra- feign comprehension. who sees this as a problem relating specifi- ditional full four, but as an investor you The private credit market must have cally to sponsored core mid-market deals. don’t really have much knowledge about seen its fair share of these meetings, given He thinks, for example, that the term what that means, unless you’re actually in the number of different terms used to “covenant-lite” has become rather nebulous, there reading the agreement, which is a describe different forms of debt, and the but so too has “senior loan”. It typically used pretty cumbersome thing to do for an entire different protections on that debt. to mean a senior secured loan of no more portfolio.” In private credit, however, there is a than three to four times EBITDA, but can Griffiths has a potential solution: for particularly sorry twist to this tale: the these days be used for a unitranche loan of the industry to standardise terms, to give experts in the room may not understand six times EBITDA. investors a much better knowledge of the what the terms signify either. This is not These considerations are highly rel- relative risk of different deals. The market their fault: they once understood them, but evant to limited partners, because those could create, for example, a “Senior Secured critics complain that some terms are being wanting to make investments in debt above Standard”, to be set at a maximum of four times debt to EBITDA and include a minimum of three covenants. Those covenants SENIOR SLOWDOWN would need to establish a minimum level of Fundraising for senior debt strategies declined last year. strictness on issues such as headroom. This Are investors confused by what they are backing? standard should also include limitations on

250 structural subordination. A deal not meet- ing these criteria could be termed “Senior 200 Secured Non-Standard”. However, Griffiths does not think it 150 likely that such a standardisation of terms $bn 100 will happen until the credit market has suf- fered a downturn, revealing that manag- 50 ers with stronger contractual protection on deals suffer fewer losses on loans than 0 2012 2013 2014 2015 2016 2017 2018 those with weaker protection. ■ Subordinated / mezzanine debt ■ Senior debt ■ Distressed ■ CLO ■ Other Ari Jauho, chairman of Certior Capi- Source: PDI tal, the fund of funds manager, in Helsinki,

10 Private Debt Investor | April 2019 SENIOR DEBT SENIOR DEBT

agrees that the terms have become rather risks they are taking on. Consider Agree- shapeless. “I’m not so concerned about ments Among Lenders. Danelle Le Cren, whether it’s unitranche, senior, first-out, partner at Linklaters, the law firm, in New last-out or whatever – the definitions are York, says: “There are still no published not really clear,” he says. “We’d rather look opinions of any court that establish as a at the details than at the label: the credit matter of law either that an AAL is a form metrics, the returns, and so on.” of subordination agreement to be recog- Another development in the senior nised under the bankruptcy code, or that a debt market is the creation of debt terms dispute involving an AAL to which a debtor in contracts that offer little legal clarity – a was not a party would be a ‘core proceeding’ phenomenon that usually only becomes a in a bankruptcy.” problem when the financial situation of a This would mean that it was definitively particular company worsens. within the scope of the bankruptcy court’s One area of legal uncertainty is whether jurisdiction. “Perhaps it will take a down- the US courts would recognise side agree- turn and some bankruptcies to see if the ments between unitranche lenders to the Chabran: accepted tighter cash spreads structure really holds up,” she adds. This is same company: in the US, lenders often sign not a cheery thought for first-out lenders, an agreement with a borrower on identical consultants, who advised limited partners should the courts not recognise their right terms, and then agree between themselves to select specific types of debt to suit their to priority. to give each other higher or lower priority risk appetite, whether just senior, just mez- For limited partners that have concerns in the event of default. This is known as an zanine or just unitranche.” about how much risk they are taking on, the Agreement Among Lenders. It does not end there: he says that a safest option is to choose managers drawing number of fund managers specifically offer a line at minimum standards of deal docu- MORE CHOICE first-out or last-out unitranche debt, within mentation, and showing caution about how Observers say that both the increasing segregated accounts. much leverage they are prepared to accept. frequency of unitranche, and the ability to Chishti says the extra yield to be earned This is the approach embraced by Tike- segment within unitranche, increase choice from unitranche second lien comes at the hau Capital, the alternative investment for the investor. price of greater risk. “It raises the question: manager headquartered in Paris. Mathieu “The unitranche market did start off as at what point are you stretching too far and Chabran, co-founder, says the firm has one tranche,” says Haroon Chishti, director drifting into subordinated or mezzanine accepted tighter cash spreads – down by and specialist in private credit at FIRSTave- debt? Over time, if leverage does increase, perhaps 10 percent over the past three nue, the placement agent, in NewYork. “But last-out unitranche debt could take on a very years, so that a deal that might have priced it has changed over time so that many deals different risk profile, and drift further away at LIBOR plus 750 basis points might now effectively consist of first lien and second from what it was originally intended to do.” price at LIBOR plus 675 basis points. How- lien, which are priced differently and are Investors may also be running into the ever, it has not ceded much ground on deal attractive for different investor bases.” problem of not knowing precisely what terms. Tikehau still insists on two covenants. Investors in this second lien – often Moreover, Chabran notes that the total known as last-out, with the first lien known portfolio leverage on its Tikehau Direct as first-out – earn a premium determined “OVER TIME, IF LEVERAGE Lending IV flagship fund, which started by the Agreement Among Lenders, he says. DOES INCREASE, LAST-OUT investing last year primarily in senior debt, This practice is much rarer in Europe. UNITRANCHE DEBT COULD is around four. This is very similar to TDL III, His colleague Jess Larsen, head of the TAKE ON A VERY DIFFERENT which began investing three years before. To Americas at FIRSTavenue, says limited RISK PROFILE, AND DRIFT illustrate Tikehau’s “discipline” on deal terms, partners are becoming increasingly adept FURTHER AWAY FROM he cites the example of a unitranche deal on at finding the particular debt structure that WHAT IT WAS ORIGINALLY which the firm lost out in February because suits them: “About 12 to 18 months ago INTENDED TO DO” it declined to offer leverage at 5.25. The deal there was a rapid change in the market, was closed by a consortium of Tikehau rivals, Haroon Chishti driven by some quite sophisticated with leverage at 6.2. n

April 2019 | Private Debt Investor 11 SENIOR DEBT LOWER MID-MARKET

I think the first element to consider is how the markets are structured. In the larger No covenant and mid-markets, opportunities generally come through intermediation networks and differentiating yourself is very difficult. On top of that, at the larger end it’s more competitive, there is less alpha and worries here the risk-adjusted return is lower. There is a lot of capital coming from direct lend- THE MISSING PIECE More attractive deal terms and the ability to be highly ing but also from CLOs, the high-yield selective are among the reasons why investors are market and banks. THAT COMPLETES increasingly tempted to diversify into the smaller end of the It’s also the case that the reference market, maintains Jaime Prieto of Kartesia lenders at the upper end of the market are investment banks rather than the YOUR FINANCIAL traditional lenders and they will nor- What explains the attractiveness of senior mally syndicate. They are not obliged to STRATEGY. Qstrategies in the lower mid-market? have full covenant packages and will take The first element is the sheer size of judgments on how to calculate EBITDA the market. We look at companies with figures. Loose legal documents are more EBITDA of €5 million to €20 million and commonly found at the higher end of the that is clearly the largest segment of the market. market in Europe. Visibility of deals is very The high-yield and CLO players have significant. You are in a position to be selec- increasingly moved into the mid-market tive and to build a well-diversified portfolio. and in the US you even find looser terms The return potential is also strong. In at the lower end. But Europe is still mainly the lower mid-market there are only two reliant on the banks, so you don’t feel the traditional liquidity options for sponsor- pinch as much. At the lower end, compa- less companies – bank finance, which is nies can be less stable and the argument standardised and constrained, or private is made that this makes them riskier. equity companies, which want majority But because it’s a less intermediated and control. In between the two, you have diverse universe, you can apply selectivity direct lenders that can offer bespoke solu- in building your portfolio and that allows tions with more flexibility than the banks “IT’S NOT REALLY A SHIFT you to deviate from the average. and without the need to take majority con- IN STRATEGY BUT By using that selectivity, you can com- trol. When it comes to returns, you are A NATURAL EVOLUTION... pensate for a slightly higher loss rate. paid for the flexibility you can offer as you WE’RE NOT BECOMING According to Fitch, the recovery rate of are the only alternative to the traditional A CHALLENGER BANK” defaulted deals in the US is around 66 sources of capital. percent in covenanted deals and 54 per- Jaime Prieto From a risk point of view this part of cent in covenant-lite deals where you only the market is favourable because the banks learn about the problem when capital is are the reference source of capital and they urgently needed. There are a bunch of still require full covenant packages and deals with CLO investors where no one have a traditional definition of EBITDA. is in a position to take active ownership WWW.KARTESIA.COM of any problem and implement a solu- BRUSSELS • FRANKFURT • LONDON • LUXEMBOURG • MADRID • PARIS How does the upper and mid-cap end of tion. So the larger end may have more Qthe market compare and contrast with stable companies but the recovery rate the lower mid-market? is typically lower. Creditflux Manager Awards 2018 12 Private Debt Investor | April 2019 Investment of the Year 2018 Lower Mid-Market Lender of the Year, Europe follow us on

PDI Ad 022019.indd 1 14-Mar-19 12:13:55 THE MISSING PIECE THAT COMPLETES YOUR FINANCIAL STRATEGY.

WWW.KARTESIA.COM BRUSSELS • FRANKFURT • LONDON • LUXEMBOURG • MADRID • PARIS

Creditflux

Investment of the Year Manager Awards 2018

2018 Lower Mid-Market Lender of the Year, Europe follow us on

PDI Ad 022019.indd 1 14-Mar-19 12:13:55 SENIOR DEBT LOWER MID-MARKET

“TO SOME LPs IT DOESN’T MATTER WHETHER THEY GET 6.5 PERCENT OR 8 PERCENT; WHAT THEY WANT ABOVE ALL IS RESILIENCE IN A DOWNTURN” Jaime Prieto

Germany: traditionally conservative investors seeking better returns

How is it possible to build an effective the deal-building stage. Another important know that you have the know-how and Qdeal sourcing network to cover the factor is extending your network as widely resources to restructure businesses across smaller end? as possible, as you can’t rely on any single Europe rather than in just one country. It’s a much more fragmented market and sponsor. In our case, 50 percent of our many firms don’t have the resources to deals are sponsorless and we expect that Why does there appear to be a particu- find opportunities in particular industry to grow even further in the future. Qlarly strong appetite for senior debt segments. You need to be closer to frag- from German investors at present? mented markets as they are less inter- What are investors looking for now, and It comes down to German investors being mediated. Being local is key. We’re in six Qwhat might they want in the future? traditionally more conservative and also to countries and that means a big investment I think over the last six years LPs have been triggers in the financial system. Pension in building the firm’s infrastructure that looking to get acquainted with private debt funds have been given more flexibility to you simply have to make. and have deployed a lot of capital to obtain invest and have been increasing their expo- You also need to trust all the elements beta from larger managers. Over the last sure to private debt in recent years. Now in the organisation. For five years, we had year or two, that beta has diminished due it’s the turn of insurance companies, which all our directors in London and Brussels to the level of competition and some inves- have been given better risk treatment from and, at the end of those five years, they tors now want to complement their core the regulators and can now go out and seek went out and filled the spots in the local exposures through more active niche players better returns. For these types of investors markets. It ensured that we had the same looking at particular markets, or which focus recurrent income of 6.5 percent with little DNA everywhere in terms of our risk on asset-backed lending or sponsorless deals. volatility and strong diversification is very evaluation and deal-doing processes, which Today, there is a big concern around appealing in today’s market environment. made our approach effective and coherent. downside protection. To some LPs it They can get very little yield elsewhere. n As mentioned earlier, the lower end doesn’t matter whether they get 6.5 per- is less homogenous and there are fewer cent or 8 percent; what they want above all Jaime Prieto is a founding partner of Kar- intermediaries, so you need to spend a lot is resilience in a downturn. They want you tesia, a provider of credit solutions to small of time getting to know companies and to be adept at financial restructuring and and mid-cap companies in Europe building deals from scratch. You need to corporate governance and be able to work limit the downside and capture the upside through a downturn before eventually cap- Sponsored by KARTESIA and all this requires skill and experience at turing the upcycle. They are also keen to

14 Private Debt Investor | April 2019 SENIOR DEBT LEVERAGED LOANS Asian investors spot anomalies in leveraged lending Buyers are demanding higher-rated tranches in response to what they see as a lack of liquidity in the leveraged loan markets, reports Adalla Kim

everaged loan investors are demand- the deviation is critical to some institutions participants comprised banks, asset managing higher-rated tranches due to what in Asia as they tend to ‘buy and hold’ these ers, insurance firms and hedge funds. Banks Lthey see as a lack of liquidity in sub- structured products. purchased triple-A tranches, accounting for standard loan markets. Lesley Lo, a direc- A CIO at an Asian institution says his 59 percent of the total investor base of the tor of MetLife Investments’ institutional peers tend to not trade CLOs, but hold them top tranches, while mezzanine and equity client group, notes a correction in the US till they mature, though there are occasional tranches were preferred by asset manag- market during Q4 2018, which saw tranches pre-redemptions and refinancing cases. ers, insurers and hedge funds, according to with higher ratings sold by mutual funds His organisation invested in CLOs issued Deutsche Bank Research on the US CLO and exchange-traded funds because lower in Europe a few years ago, to achieve a investor base as of November 2018. quality loans did not have enough liquidity. minimum 4 percent return, typically In Europe, leveraged loan issuance “The double-B tranches underperformed with a five-year holding period. For Asian decreased on a yearly basis, to €22 billion compared with single-B (lower credit institutions, leveraged lending exposure in Q4 2018 from €65.9 billion in Q4 2017, ratings), which is an anomaly,” she says, adding comes from the US and Europe. a 66.7 percent decrease, according to that “it also creates buying opportunities for Association for Financial Markets in Europe. long-term investors [like us]”. RISK TRANSFER The issuance includes first lien, second lien MetLife Investment Management has In the US, the Board of Governors of the and mezzanine financing. Notably, most of $588 billion in assets, of which balance Federal Reserve has followed the leveraged the European leveraged loans issued in Q4 sheet assets constituted $420 billion as of lending market via its Shared National 2018 were first lien loans. September 2018. Lo says Asian insurance Credit Program. It recognises that non-bank Fiona Hagdrup, leveraged finance fund firms and their institutional clients have entities have increased commitments in the manager, M&G Investments, tells PDI that asked her team about this deviation. leveraged lending market through purchases given the late credit cycle, her team is Although it is not clear if certain types of of loans, direct underwriting, and syndica- lending only at 4x EBITDA, on average, with securities, including cashflow-based CLOs, tion. The latest report concludes: “More security, to companies whose enterprise market value-based CLOs, and ABS CDOs, leveraged lending risk is being transferred valuation should remain in excess of that have seen this anomaly, the implication of to these non-bank entities.” CLO market multiple. Eurozone companies have benefited LOW RATES, HIGH DEMAND from low-interest rates and therefore amassed cheap loans from banks. The Low interest rates fuelled loan demand in most eurozone countries last year European Central Bank’s latest report shows General level of interest rates 18 12 that the low general level of interest rates Fixed investments 12 12 has supported net loan demand in major Inventories & working capital 10 8 European countries. Other fianancing needs 8 6

Use of alternative finance -2 -2 However, Anthony Flintoff, a Melbourne-

-5 0 5 10 15 20 25 30 based analyst at S&P Global Ratings, asks if % ■ Q3 2018 ■ Q4 2018 market liquidity will reduce materially in difficult conditions. “This was observed Source: European Central Bank, as of 22 January 2019 A positive net percentage signifies a factor that contributed to higher demand; a negative net percentage signifies a factor that in the previous downturn, and there is no contributed to lower demand. Other financing needs is the unweighted average of “debt refinancing/restructuring and renegotiation” and “regulatory and fiscal regime of housing markets”; Use of alternative finance is the unweighted average of “internal finance of house evidence in Europe that the situation will be purchase out of savings/down payment”, “loans from other banks” and “other sources of external finance”. any different in the next downturn,” he says. n

April 2019 | Private Debt Investor 15 SENIOR DEBT MARKET CONDITIONS A lender’s view of a heated market Monroe Capital’s Ted Koenig outlines the catalysts that will keep the deal and credit markets humming in 2019 LEADER IN MIDDLE MARKET PRIVATE CREDIT

onroe Capital president and day-to-day operations. The World Economic chief executive Ted Koenig Forum predicted that by 2050, there will Mexplains why deal activity be a $400 trillion funding gap, underscor- Monroe Capital LLC is a private credit asset management firm specializing should remain robust this year, while ing the scope of the challenge facing global focusing on areas he’s tracking that could pensions. Given this kind of demand for in direct lending and opportunistic private credit investing. Since 2004, foreshadow a slowdown in the event that yield and coupled with the appealing risk/ conditions change. Monroe has over $7 bil- return profile of private debt, this asset class the firm has provided private credit solutions to borrowers in the U.S. lion of assets under management – across has been among the fastest growing of all several private credit funds and managed institutional investment categories in recent and Canada. Monroe’s middle market lending platform provides debt accounts, a public BDC and CLOs. years and should continue to grow. financing to businesses, special situation borrowers, and private equity The credit markets, along with the rest of You mentioned the M&A market as a sponsors. Investment types include cash flow, enterprise value and asset- Qthe economy, seem to defy gravity. How Qdriver on the demand side. Do you see are you viewing the market and what are the anything on the horizon that could alter the based loans; unitranche financings; and equity co-investments. Monroe is catalysts that have been supporting activity level of deal activity or slow it down? over the last few years? “GEOPOLITICAL RISKS ARE Not really; at least, not in the near term. committed to being a value-added and user-friendly partner to business Debt is the fuel that drives M&A, so when- CERTAINLY PRESENT AND, Geopolitical risks are certainly present and, ever the M&A market is this hot, you can AS INTEREST RATES HAVE as interest rates have climbed, we’ve seen owners, senior management, and private equity and independent sponsors. probably assume that there’s also a lot of CLIMBED, WE’VE SEEN THE the public markets become more volatile. liquidity in the credit markets. PUBLIC MARKETS BECOME But the M&A environment is arguably as The persistence and strength of the MORE VOLATILE” dynamic as it has ever been over the last few credit cycle, though, is due to a number economic cycles. Purchase price multiples Ted Koenig of factors. From the “supply” side, we’ve are at all-time highs; credit is readily avail- seen a rush of new capital enter the private able at borrower-friendly terms; and private debt space over the past few years as well equity dry powder exceeds $1 trillion. as increasing allocations to this sector from activity, which has driven performance in The game-changer has been the re- large pension funds and other institutional public equities and also driven prices of real emergence of the corporate acquirer. Much Creditﬂux investors. The primary reason for this is that assets to all-time highs. But, at the same of this stems from the 2017 tax legislation Manager Awards 2018 against a backdrop of easy monetary policy time, low rates have made yield tough to in the US, which cut the “headline” corpo- Lower Mid-Market Lender of the Year, Americas and aggressive quantitative easing (QE) pro- find for institutional investors. rate tax rate from 35 percent to 21 percent 2018 BEST U.S. DIRECT LENDING 2018 SMALL MIDDLE MARKETS 2018 LOWER MID-MARKET 2016 LENDER FIRM 2015 SMALL BUSINESS INVESTMENT grammes globally, institutional investors This can create some real challenges. and included provisions around accelerated FUND of the YEAR LENDER of the YEAR, AMERICAS LENDER of the YEAR, AMERICAS of the YEAR COMPANY of the YEAR have struggled to find yield. Pervasive and Pensions, for instance, need current yield depreciation. The net effect of these tax lasting low interest rates, or even negative to fund employee health and welfare ben- changes was increased net cashflow to US Chicago • Atlanta • Boston • Los Angeles • New York • San Francisco interest rates in some parts of the world, efits, whereas endowments, foundations corporates. As a result, corporate strate- To learn more about Monroe Capital, visit monroecap.com have certainly helped stimulate business and universities depend on it to fund their gic buyers are sitting on record amounts

Monroe Capital LLC is a private credit asset management firm specializing in direct lending and opportunistic private credit investing. Since 2004, the firm has provided private credit solutions to borrowers in the U.S. and Canada. Monroe’s middle market lending platform provides debt financing to businesses, special situation borrowers, and private equity sponsors. Investment types include cash flow, enterprise value and asset- based loans; unitranche financings; and equity co-investments. Monroe is committed to being a value-added and user-friendly partner to business owners, senior management, and private equity and independent sponsors.

Creditﬂux Manager Awards 2018

Lower Mid-Market Lender of the Year, Americas 2018 BEST U.S. DIRECT LENDING 2018 SMALL MIDDLE MARKETS 2018 LOWER MID-MARKET 2016 LENDER FIRM 2015 SMALL BUSINESS INVESTMENT FUND of the YEAR LENDER of the YEAR, AMERICAS LENDER of the YEAR, AMERICAS of the YEAR COMPANY of the YEAR

Chicago • Atlanta • Boston • Los Angeles • New York • San Francisco To learn more about Monroe Capital, visit monroecap.com

of cash. And, once again, they’re a credible We are always thinking about a “down” force in the M&A market. “IN THE US, WE HAVE AN credit cycle. In a competitive landscape, like This marks a shift. Financial sponsors, UNPREDICTABLE AND we’re facing today, it can be even more dif- for the past few years, have been paying ERRATIC FOREIGN POLICY ficult. The influx of money in the asset class significantly more than strategic buyers. AND IT’S BEEN SOME TIME has attracted newcomers who haven’t expe- But we’ve seen a number of transactions SINCE THE GOVERNMENT rienced a downturn before. They’re being recently that demonstrate a willingness HAS BEEN THIS DIVIDED” particularly ravenous in competing for new among corporate acquirers to pay well sponsor-backed financings, for instance. It Ted Koenig above the market rate for assets with a just makes it that much more important distinct strategic value. It’s the old “buy for lenders to sharpen their pencils around versus build” question. The IBM/Red Hat underwriting and due diligence. deal provides a great example of that. So has been this divided. There is also ongo- At Monroe, we’re maintaining our lend- the return of the corporate buyer to the ing uncertainty regarding trade, tariffs, for- ing standards and increasing our selectivity M&A process only adds another catalyst to eign sales, and imports. When you throw in of our borrowers in cyclical industries. We an already dynamic environment. questions about the direction of interest are also providing more scrutiny to any rates and currency volatility, it can become EBITDA adjustments that may seem overly If institutional capital continues to flow incredibly difficult for companies to map aggressive and are very cautious around Qunabated into private debt and the M&A out long- or medium-term strategic plans, valuations today. We also believe that the market is showing no signs of let up, is there not to mention deal with the potential for market is more aggressive on covenants, anything that could surprise the debt market unexpected surprises in the near term. loan documentation and EBITDA adjust- in 2019? ments, so you have to be more attentive Company performance is always the most Have these concerns had any impact to the risks and consider all the different important factor that impacts our portfolio. Qon the types of deals that are getting scenarios that could affect a credit. This is something we monitor closely. It has financed today? The difference between the longer-ten- now been a year since the tax legislation was Not in the US middle market, where it ured players and the newcomers, though, implemented in the US. That means most seems like all deals are getting financed. is that those of us who have gone through companies will be comparing 2019 oper- Healthier deals – involving good compa- cycles in the past recognise and appreciate ating results and earnings with those from nies that generate consistent cashflow – that each of these items will factor into 2018, which benefitted from the earnings will always generate interest. In particular, the recovery rates of defaulted credits. It acceleration attributable to the first year we’re seeing a lot of activity in business happened in 2008 and 2009 and it will of the more favourable tax regime. I would services, enterprise software, healthcare, happen again. expect to see either decelerating or declin- consumer staples and food, as well as new All that being said, we’re still quite bull- ing earnings growth in 2019. That being digital-media businesses. Even out-of- ish. M&A activity is strong and the econ- said, cashflows remain quite strong and we favour sectors, like traditional brick-and- omy continues to provide optimism. We’ve remain optimistic around the trajectory of mortar retail, are showing no shortage of used this opportunity to expand the depth performance. lender interest, although this area tends of our product offering and add industry Finally, we’re also cognisant that other to attract asset-based lenders and inven- expertise across each of our verticals. In factors could come into play. I’d argue that tory liquidation firms. Still, the competi- a crowded market, this allows us to dif- this is one of the toughest periods over the tion to participate in the recent Sears DIP ferentiate ourselves as a true value-added past 20 years to find clarity around what financing and exit package demonstrates partner. We want to be the first and last these “other factors” will be and how they the liquidity available in this sector. call a borrower makes, and it’s the strength will impact corporate growth. For instance, of our relationships that excites me most the geopolitical risk, while tougher to quan- So it sounds like you remain optimis- about our business today. n tify, has escalated. In the US, we have an Qtic, albeit with an eye on potential risks. unpredictable and erratic foreign policy and How are you guarding against a potential Sponsored by MONROE CAPITAL it’s been some time since the government downturn?

18 Private Debt Investor | April 2019 ANALYSISRANKING RISING STARS Welcome to the future Everyone knows the Bennett Goodmans and David Golubs of private debt, but who is leading the next generation? For the first time, we identify the asset class’s emerging leaders from the ranks of the young and already successful. The list was compiled and summarised by Andy Thomson, Andrew Hedlund and Rebecca Szkutak

aving published our first- to be under 40 years of age on 1 April 2019, experience of their talents, we simply felt ever “Most Influential” and and we asked that each person from within they could not be overlooked. “Rainmakers” rankings last year a nominator’s own organisation should be As with our previous rankings, we found H– based on those who have transformed accompanied by a recommendation from this an extremely interesting exercise the asset class in the former case, and those someone outside that firm. and congratulate those on the pages that who have had made their mark in capital This process ensured a wide range follow. It is also worth noting that outside raising in the latter – PDI now brings you of candidates to choose from, and we this list of 30 were many other worthy our inaugural list of youthful achievers, are extremely appreciative of the strong challengers. It is surprising how many the Rising Stars 2019. response from the market. However, notable achievements have been racked up How did we draw up the list? Initially, this was only part of the process. Some by individuals who may have been exposed we sought nominations from the market, candidates were selected by the editorial to the asset class for less than a decade. The supplemented by supporting evidence in the team, despite us not having received a overall conclusion was that the future of form of key achievements. All nominees had nomination on their behalf. From our own private debt appears to be in safe hands. n

April 2019 | Private Debt Investor 19 RANKING RISING STARS

PDI’S 30 RISING STARS SIKANDER AHMED, EXECUTIVE DIRECTOR, NBK CAPITAL PARTNERS Name Firm Ahmed joined Middle East and North Africa fund manager Sikander Ahmed NBK Capital Partners NBK in 2009, the year the firm launched its private debt Roy Awad Permira Debt Managers business. Since then, he has been at the forefront of that Stephanie Berdik Kirkland & Ellis business’s development, leading complex deals across Taylor Boswell Carlyle Group multiple geographies and tailoring bespoke financing structures. According to peers, these include: the use of Jared Brimberry Alaska Permanent Fund Corporation convertible preferred shares for a UAE-based wastewater Grant Chien InfraRed NF Investment Advisers treatment company; a Sharia-compliant debt instrument for Scott Colton Paul Hastings an education business in Saudi Arabia; and an equity-sharing Alex Cota Stroock & Stroock & Lavan subordinated loan for a courier services firm in Turkey. James Del Gaudio Pennsylvania School Employees’ Ahmed has also helped to conceptualise and lead Islamic Retirement System private debt initiatives, structuring Sharia-compliant deals Elizabeth DiCioccio Mercury Capital Advisors across the Gulf Arab states and serving on the boards of numerous portfolio companies. A peer who worked with Nicole Drapkin Owl Rock Capital Partners Ahmed in prior investment banking roles said he had been Kirsten Glaser CR Capital Advisory “instrumental in creating awareness in the Middle East, North Dev Gopalan Angel Island Capital Africa and Turkey of the private debt asset class”. Bobby Hagedorn Missouri Department of Transportation and Highway Patrol Employees’ Retirement System William Hayles Credit Suisse Private Funds Group ROY AWAD, INVESTMENT DIRECTOR, Tor Holberg Herno BlackRock PERMIRA DEBT MANAGERS Guillaume de Jongh Capzanine Awad spent five years in the leveraged Marcin Leja CVI finance teams at Natixis and BNP and three Rony Ma KKR years as an investment manager at private equity firm Argos Soditic Private Equity Nicolas Nedelec Idinvest Partners before arriving at PDM in October 2015 and Adrien Paturaud Goodwin Procter assuming responsibility for origination of Ruth Pearson LendInvest new investments, credit analysis and monitoring of existing Timothé Rauly AXA Investment Managers – Real Assets investments. He has led a number of direct lending deals, Rodolfo Sánchez-Colberg Parliament Capital Management helping to boost PDM’s share of the French market. Among these deals was one for Private Sports Shop, which has grown Brett Shapiro Varagon Capital Partners rapidly to become one of the largest online sports platforms in Hernan Sorate Lazard Europe – a deal in which Awad worked closely with sponsor Sloan Sutta Crayhill Capital Bridgepoint, owner of PEI Media. James Wallington CVC Credit Partners Awad is described by PDM’s head of private credit, David Hirschmann, as a “high spirited, very energetic and talented Molly Whitehouse Mariner Investment Group individual”. His areas of specialism include business services, Felix Zhang Ares Management technology and software.

STEPHANIE BERDIK, PARTNER, KIRKLAND & ELLIS Berdik joined Kirkland & Ellis in 2017 as a partner in the investment funds group. She was the lead partner on Ares Capital Europe Fund IV, which closed in July 2018 on more than €6.5 billion, making it the largest European direct lending fund raised to date. Since 2017, Berdik has been the lead partner on 20 different funds managed by Ares Management. Berdik focuses on helping clients with the establishment of private investment funds, portfolio investment activities, capital raising, fund regulatory and compliance matters, and firm ownership and operational issues. She is also one of the four founding members of Women in Private Debt, an organisation that aims to connect and support women in the private credit asset class.

20 Private Debt Investor | April 2019 ANALYSISRANKING

TAYLOR BOSWELL, MANAGING DIRECTOR, CARLYLE GROUP Boswell joined Carlyle from Apollo Global Management in April 2018. He was the first senior-level hire made by Alexandar Popov, managing director and head of credit opportunities, to build Carlyle’s new opportunistic credit strategy. Since his hiring, Boswell has helped the fund complete five transactions worth more than $800 million in total. He is also a key member of the hiring and fundraising teams. Popov says: “Taylor is an exceptional investor and strong team leader. It is rare to find professionals in our industry who have not only helped launch new initiatives, but also successfully invested and exited investments across various credit cycles, sectors and capital structures. Taylor not only demonstrates a remarkable technical expertise but, more importantly, a keen sense of investment judgment and the ability to see value and opportunity where others do not.”

JARED BRIMBERRY, SENIOR PORTFOLIO GRANT CHIEN, HEAD OF SPECIAL MANAGER, ALASKA PERMANENT FUND SITUATIONS FINANCING, INFRARED NF CORPORATION INVESTMENT ADVISERS Brimberry has helped Alaska Permanent Fund “On multiple occasions I have … seen him Corporation come into its own as a direct work at 4am,” says Lawrence Chiang Kok credit investor in the signature way the Sung, chief executive of Metro Holdings, sovereign wealth fund has become recognised the Singapore-based corporate, of Chien. for in both private equity and real estate. Chien makes mezzanine investments as He has taken the lead in building the well as conducting fundraising and investor $1 billion Alaska Direct Alternative Credit programme, an relations for InfraRed NF, the Chinese real estate fund manager. amalgamation of internally managed non-investment grade bonds While the quote above speaks to a strong work ethic, more and ETFs as well as co-investments with its private credit managers. important is the fact that the time has been spent wisely. Brimberry joined APFC in 2016 and helped produce a Chiang Kok Sung cites an IRR of 18 percent or higher on return of 8.79 percent for the 12 months ending 30 June 2018, mezzanine deals Chien has led. Perhaps this is part of the according to an announcement last autumn. The three- and explanation for Metro having committed more than $400 five-year returns for the same date were 6.47 percent and 7.2 million to InfraRed NF funds to date. Having led $200 percent respectively. million-worth of deals since January 2018 across Hong Kong Firms with which APFC has invested include Atalaya Capital and the provinces of Jiangsu and Sichuan, Chien is seen as a Management, Audax Group, Intermediate Capital Group and pioneer of the nascent Chinese private real estate debt market. Permira Debt Managers.

SCOTT COLTON, ALEX COTA, PARTNER, PAUL HASTINGS PARTNER, STROOCK & STROOCK & LAVAN Colton joined Paul Hastings in 2016 to help build out the firm’s alternative lender and Cota runs the debt finance practice at private credit practice and was promoted to Stroock & Stroock & Lavan and also works partner in 2019. In 2017, he represented a with the law firm’s restructuring group, of second-lien loan agent and lenders for a which he is a “critical part”, according to his $415 million second-lien term facility in nominator. connection with the sponsor-backed acquisition of Nord He has worked on Sears Canada’s $375 Anglia, a multibillion-dollar, multinational education company. million first-in, last-out credit facility and on Cenveo’s $100 Last year, Colton represented the agent and lenders for the million debtor-in-possession financing in its bankruptcy case. creation of a $54 million senior credit facility in conjunction He also represented a private credit firm in an oil refinery’s with the sponsor-backed acquisition of SRS Acquiom, a merger Chapter 11 proceeding in which the lender provided a “first- and acquisition advisory business. A colleague described him of-its-kind” working capital facility as the bankruptcy financing, as “one of the nation’s most experienced attorneys with respect his nominators said. to negotiating agreements among lenders”. In addition to his work with private debt funds, Cota He has extensive experience working with mezzanine funds, works with business development companies, banks and hedge funds, business development companies, speciality hedge funds. His nominators said his “acumen, performance finance companies, SBIC funds and private equity funds. and stellar reputation among his clients and peers” made him stand out.

April 2019 | Private Debt Investor 21 RANKING RISING STARS

JAMES DEL GAUDIO, PORTFOLIO ELIZABETH DICIOCCIO, PARTNER AND MANAGER, PENNSYLVANIA SCHOOL CO-HEAD OF GLOBAL DISTRIBUTION, EMPLOYEES’ RETIREMENT SYSTEM MERCURY CAPITAL ADVISORS A colleague of Del Gaudio describes him as “one of the “She’s just as comfortable presenting to a most understated investors in this space. He deserves this CIO of one of the largest SWFs in the world type of recognition”. as she is sitting down with the working level Del Gaudio worked as a senior investment officer at the team and getting into the nitty gritty of a New York City Comptroller’s office for more than eight due diligence questionnaire.” So says a years before joining PSERS in 2015. He oversees more than colleague of the Dubai-based DiCioccio, a $6 billion across the private credit and special situation senior executive at global capital raising and advisory firm sleeves of PSERS’ portfolio, and works closely with managers Mercury Capital Advisors. A fundraiser who has built wide- on co-investment strategies for the pension fund. Another ranging relationships with investors as far afield as the Middle of his colleagues said he is always willing to look into niche East, Scandinavia, Australia and Azerbaijan, DiCioccio covers a strategies and expansion opportunities. Since joining PSERS, range of strategies including venture, buyout, growth, real Del Gaudio has recommended and closed more than estate and infrastructure, as well as private debt. $4.2 billion in deals.

NICOLE DRAPKIN, MANAGING DIRECTOR, KIRSTEN GLASER, FOUNDER AND OWL ROCK CAPITAL PARTNERS DIRECTOR, CR CAPITAL ADVISORY A former investment banker at Bank of America Merrill Lynch, Owl Rock Capital Partners may have only been around for three Glaser switched to real estate advisory at Q10 Capital, where she years, but the firm has already made its mark in private credit. originated more than $1 billion of debt and equity transactions. Much of this can be attributed to Drapkin, who was one of the She then transferred her US capital markets mindset to Europe, company’s first five employees – taking a chance on a firm that, crossing the Atlantic to join JLL’s debt advisory team in London while launched by industry heavyweights, was still spreading before moving to CR Investment Management two years ago its wings. Drapkin played an important role in creating the and launching CR Capital Advisory in October 2017. firm’s investment framework. According to her nominator, this Peers describe Glaser as being “at the forefront of change”. framework allowed the firm to “experience significant growth Now in London, Glaser works closely with investors in European in a short period of time”. She oversees Owl Rock’s relationship commercial real estate and recently advised Hines on its with more than 30 private equity sponsors, including Platinum acquisition of Fresh Park Venlo – the largest-ever single asset Equity and TPG. “Nicole is incredibly diligent, very sharp, logistics deal in the Netherlands. She is also a strong promoter always asks great questions, and acts like a true partner,” says of women in real estate, helping to bring North American Platinum Equity’s head of capital markets, Kevin Smith. organisation Commercial Real Estate for Women to the UK.

DEV GOPALAN, CHIEF EXECUTIVE, BOBBY HAGEDORN, MANAGER OF ANGEL ISLAND CAPITAL REAL ASSETS AND CREDIT, MISSOURI Gopalan became the first chief executive of Golden Gate DEPARTMENT OF TRANSPORTATION Capital-backed AIC in January 2018. He has since fleshed out the firm’s top ranks, hiring chief strategy officer Lynette AND HIGHWAY PATROL EMPLOYEES’ Vanderwarker, general counsel and chief operating officer RETIREMENT SYSTEM Nicole Macarchuk and chief financial officer Robert Ryan. Hagedorn oversees the real assets and credit Gopalan has also expanded AIC’s business development and sleeves, leading the sourcing of new client relations teams. According to documents filed with the US relationships and opportunities. In 2017, the Securities Exchange and Commission, it is currently in the midst pension fund cut its hedge fund allocation of raising AIC Credit Opportunities Partners Fund II. from 15 percent to 10 percent and boosted Gopalan previously worked at KKR, where he was the head both the real assets and opportunistic of US private credit. He helped the firm expand its private credit credit buckets from 5 percent to 7.5 percent. Hagedorn’s business significantly from $1 billion to $10 billion of assets nominator say he was “integral to the top percentile returns the under management and grow from a staff of three to 22 in New team has generated” and applies his equity analyst experience York and 10 people in London. He also oversaw the enactment in a “very intelligent way to the credit space”. of risk ratings for the firm’s private credit positions.

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WILLIAM HAYLES, TOR HOLBERG HERNO, DIRECTOR, CREDIT SUISSE VICE-PRESIDENT, BLACKROCK PRIVATE FUNDS GROUP Having joined BlackRock as recently as 2017, following spells in Hayles is cited as a key member of the Credit Deutsche Bank’s structured finance department and at Credit Suisse PFG team, which had a prolific year of Suisse (where he covered less-liquid credit solutions in the raising capital for debt strategies in 2017 and Nordics), Herno has quickly made a splash in the private credit unit. picked up PDI’s annual award in the Handed responsibility for alternative credit fundraising in the European placement agent category. Nordic region, Copenhagen-based Herno has lured substantial But while debt is in Hayles’ sweet-spot, capital for first-time funds from Scandinavian pension funds peers say he also brings useful perspectives from buyout and – for example, around 30 percent of the €1.8 billion in capital real estate strategies, which he has also advised on. In all, he that was raised for BlackRock’s inaugural European Middle has led execution on eight European private debt fund closings Market Private Debt fund. In addition to fundraising, Herno worth over €12 billion in commitments since 2008. originates deals for the BlackRock private credit platform from Described by colleagues as a leading project manager in the private equity sponsors, advisors, family offices and banks with firm’s London office, Hayles has been involved in some of the a presence in the Nordic mid-market. landmark private debt fundraisings of recent years.

GUILLAUME DE JONGH, MARCIN LEJA, MANAGING DIRECTOR, CVI PARTNER, CAPZANINE When he joined six years ago, Leja was only the fourth employee at the Warsaw-based Having closed his first private debt deal in manager. Since then, he has been 2008, de Jongh has since worked on a instrumental in helping to grow the firm, further 29 deals, worth €1.2 billion in total. which is focused on Central and Eastern Among these transactions have been the Europe, to a 27-strong platform while likes of asset management software provider building out its strategies from plain vanilla senior financing into Neoxam, data centre maintenance service more complex areas such as mezzanine and structured equity. business Evernex and subsea services firm Acteon. A peer says Leja has met hundreds of companies and financial Having developed strong specialisations in technology advisors, promoting private debt as a viable source of finance in and healthcare, de Jongh’s progress was recognised when a region where its use is still nascent. This has helped CVI build a he was made a partner of the Paris-based fund manager four dominant position in the market, with over 500 deals completed years ago. He has also been handed responsibilities ranging to date. Leja is also a regular on the conference circuit, where he across origination, analysis, execution and the monitoring of acts as an evangelist for CEE private debt, making sure it is on investments. the radar of the international investment community.

RONY MA, DIRECTOR AND US CO-HEAD NICOLAS NEDELEC, MANAGING OF CREDIT RESEARCH, KKR DIRECTOR, IDINVEST PARTNERS Ma joined KKR Credit in 2011 and was At just 33, Nedelec has already racked up promoted to director in 2018 at only 30 years many years of private debt experience, old. He has since become an integral part of formerly in the structured finance team at the credit team and manages 17 people. Natixis and now as a managing director at He currently assists the investment Paris-based fund manager Idinvest Partners. committee with new investments and He has played a vital role in the holds board roles across multiple existing investments. He development of the firm’s private debt business, joining when has played an integral role in the transition period following it was launched in 2007. From an initial €150 million dedicated the close of the merger of FSIC and CCT, an affiliate of KKR, to French small-cap mezzanine, the firm now has a €3.5 billion in incorporating approximately 170 new loans into the KKR platform covering the European mid-cap space through portfolio. Ma also serves on the junior committee for Answer the unitranche, mezzanine and leveraged loan offerings. Despite Call, an organisation providing financial assistance to families of still being youthful himself, he is now a mentor supporting New York City police officers, firefighters and other emergency younger employees as they move into more senior roles. service personnel who have died in the line of duty.

April 2019 | Private Debt Investor 23 RANKING RISING STARS

ADRIEN PATURAUD, COUNSEL, GOODWIN PROCTER Having initially had spells at law firms Shearman & Sterling and Linklaters, Paturaud joined Goodwin Procter in 2016. What has caught the eye of the market is his innovation, particularly leading the charge in the development of the unitranche bond market in France since 2011. That was the year when he advised on a seminal unitranche for Flexitallic Group, the sealing products manufacturer. Since then, he has worked on many of the country’s leading unitranche bonds. These have included the €140 million facility supporting the acquisition of Acteon from PEI Media owner Bridgepoint by Dentressangle, the French family office; and the €85 million unitranche supporting the purchase of LPG by Carlyle Group in 2018. Also last year, he was credited with pioneering the “first-loss/second-loss” structure in France for Eurazeo’s purchase of a stake in motorcycle brand Shark.

RUTH PEARSON, GENERAL COUNSEL, TIMOTHÉ RAULY, HEAD OF FUNDS LENDINVEST GROUP, AXA INVESTMENT MANAGERS Pearson joined the real estate finance – REAL ASSETS platform in 2016. She previously spent nine Rauly joined AXA IM – Real Assets in 2006, years at Simmons & Simmons, including initially with a brief of investing in CRE secondments at Skandinaviska Enskilda mortgage loans. He rose to become head of Banken and RBS. As LendInvest’s first legal CRE finance where he oversaw investment hire, she joined with the ambitious target of of more than €10 billion into private and building the legal function from the ground up. She now public commercial real estate debt. manages a team of four and oversees the compliance function. In this role, Rauly spearheaded the launch of the Commercial A peer says she has overseen “every key milestone” for Real Estate Senior 9 and 10 funds, the largest in the firm’s the business since she joined. These include two major flagship CRE debt fund series, representing combined capital financing rounds, LendInvest’s transition from an unregulated of €4.3 billion. In 2014, he led the firm’s first transatlantic debt peer platform to an online alternative investment fund, and investment and then oversaw last year’s acquisition of the transaction management for nearly £760 million ($1 billion; $9.4 billion Quadrant Real Estate Advisors platform. By that €891 million) of funding from major financial institutions. time, Rauly had risen to the role of head of funds group and The first woman appointed to the company’s executive became a member of the AXA IM – Real Assets board. During his committee, Pearson leads its first corporate social responsibility tenure, AXA IM – Real Assets’ CRE debt platform has picked up scheme, providing support in the workplace, marketplace, numerous awards from PDI and sister title, Real Estate Capital. community and environment.

RODOLFO SÁNCHEZ-COLBERG, BRETT SHAPIRO, PARTNER AND HEAD PRINCIPAL, PARLIAMENT CAPITAL OF CORPORATE STRATEGY, VARAGON MANAGEMENT CAPITAL PARTNERS Shapiro was barely 30 when he Sánchez-Colberg founded Parliament Capital Management, a co-founded Varagon Capital Partners credit manager based in San Juan, Puerto Rico. with its chief executive, Walter Owens. The firm’s first institutional fund, the Parliament High Yield In the five years since Varagon’s Fund, focuses on credit investment opportunities in Puerto Rico launch, Shapiro has played an important and the continental US. The vehicle invests in both senior and role in creating other partnerships junior debt. The firm has invested approximately $160 million that have helped the firm make $9 billion in loan since its inception. commitments to mid-market companies. This included Sánchez-Colberg’s nominator referred to him as an negotiating and structuring the Senior Direct Lending “innovator in the Puerto Rico industry for this type of strategy”. Programme with Ares Capital Corporation, which provides The firm is preparing to launch a second fund that will continue senior and unitranche loans. the same strategy as the first. Shapiro has also helped expand the firm from just him Before founding Parliament Capital, Sánchez-Colberg and Owens to more than 65 employees. He previously was chief executive of another San Juan-based company: worked at Oak Hill Capital Partners and UBS, where he Operating Partners Company, a servicer of non-performing worked on the American Express acquisition of GE’s financial assets, such as consumer loans, leases and residential corporate payments business. and commercial mortgages.

24 Private Debt Investor | April 2019 ANALYSISRANKING

HERNAN SORATE, SLOAN SUTTA, MANAGING DIRECTOR, VICE-PRESIDENT, LAZARD CRAYHILL CAPITAL Currently a vice-president in Lazard’s private capital A colleague says of Sutta: “His specialised advisory business, Sorate first built his reputation in skillset and tenure in this dedicated field of Citi’s international fund distribution team, where he private credit, in addition to his experience at advised across the private debt spectrum in areas top-notch firms focused on niche and such as direct lending, infrastructure debt and trade asset-based private credit, make him a rising finance. Antoine Josserand, partner and head of star in private debt.” business development at Pemberton, was Sorate’s Sutta has worked in the asset lending space throughout his line manager and says he saw at “first hand his career. He started as a credit analyst in Credit Suisse’s asset positive impact on the team”. finance capital markets group, before moving to Garrison While at Citi, Sorate advised on Pemberton’s Investment Group where he focused on speciality finance, real €1.2 billion European Mid-Market Debt Fund I and estate and structured credit investment opportunities. After Tikehau Capital’s €2.1 billion Direct Lending Fund Garrison, Sutta became a managing director in Och-Ziff’s US IV. He was part of the team that picked up PDI’s private structured and illiquid credit team. European and US placement awards in 2016. Now at Crayhill Capital, Sutta works on sourcing, origination Since moving to Lazard, Sorate has focused on and underwriting complex solutions within asset-based lending. coverage of investors in countries, including France, He has acquired and realised more than $2 billion in distressed Spain, Italy and Israel as part of the European team. real estate debt, commercial and industrial, and equipment loans since the financial crisis of 2008.

JAMES WALLINGTON, MOLLY WHITEHOUSE, DIRECTOR, DIRECTOR, CVC CREDIT PARTNERS MARINER INVESTMENT GROUP Among the numerous nominations for CVC’s Wallington is Whitehouse, who joined Mariner a vote of confidence from a source at a reinsurer, who says Investment Group in 2012, focuses on Wallington helped to oversee and structure the company’s origination, structuring, and management first private debt investment: “He helped us to gain of the due diligence process for confidence in the private debt asset class.” investments. Since 2013, she and her team The former Babson Capital employee was also cited for have completed approximately $15 billion having raised the profile of CVC’s credit business in the UK of notional risk transfers. and continental Europe through an extensive network of Most recently, she helped originate and structure the contacts; as a facilitator of meetings with key team members Room2Run transaction with the African Development Bank. and a provider of vital information; as a tough terms and According to Whitehouse’s colleagues, the transaction – the fee negotiator; and as a highly adept communicator and first-ever synthetic securitisation between a multilateral provider of useful market insights. development bank and private sector investors – is regarded One source at an advisory firm applauds Wallington’s as one of the most prominent impact investments ever hosting of a roundtable for family offices, which “struck just completed. the right tone – not too salesy”. Whitehouse is frequently sought out to speak on panels and Another lauds him as “friendly, approachable and willing conferences about esoteric asset classes, impact and green to have an honest conversation about difficult issues”. securitisation.

FELIX ZHANG, MANAGING DIRECTOR, ARES MANAGEMENT Zhang has helped drive the growth of the alternative credit platform at Ares Management. The business line is the result of a rebranding and includes the firm’s asset-backed and structured credit strategies. The Harvard graduate joined the firm four years ago and has originated, structured and closed over $1 billion in asset-backed investments with various speciality finance companies. His nominator says he played a “key role” in the expansion of the alternative credit group, which has been an area of focus for the firm of late. “We believe our alternative credit strategy has an addressable market of over $3 trillion in assets across the globe,” chief executive Michael Arougeti said on the firm’s fourth-quarter earnings call. “As discussed over the past year, we’ve added and we’ll continue to add significant talent to our team and have enhanced our capabilities across a wide range of assets.”

April 2019 | Private Debt Investor 25 REGULATION EUROPE How the EU should seek to level the rules With Brexit and European elections due to be over in the coming months, legislators will be looking again at Brussels’ regulatory agenda, and private credit managers are urging them to break down barriers. By John Bakie

t has been almost three years since private debt industry are closely aligned in information on loans with the fund’s inves- the pan-European financial regulator, their thoughts on the future regulation of tors, while its insolvency and credit protec- Ithe European Securities and Markets non-bank lending and the major challenges tion regime can create excessive risks for Authority, penned its opinion on how to facing the industry today. The ACC has out- funds in the event of default or bankruptcy regulate fund loan origination (or private lined what it believes are the most pressing of a borrower. debt) but little has changed. issues that must be resolved in order to ease While slow movement on regulation can cross-border activity in Europe and create GERMANY: UNCERTAINTY have its upsides, as it allows the industry to a more harmonised regime. These are the AROUND NEW REGIME continue to develop unimpeded by poten- country-by-country issues identified: Compared with France, the tially stifling new rules, there is a place for German market is more open, allowing AIFs sensible regulation and this is particularly the FRANCE: DEFYING based in other jurisdictions to make loans. case in a large and developed (but inconsist- FREE MOVEMENT This follows some relatively recent changes ent) market for financial services like the Private credit’s biggest obsta- to the German Investment Code and there European Union. cle to doing business in France is that loans remains some uncertainty over how the new In April 2016, ESMA outlined plans to must be originated from a French-domiciled regime will affect loan funds in practice. examine differences in regulatory regimes alternative investment fund. This means any Germany places other burdens on loan pertaining to how investment funds origi- pan-European lender that wants to originate funds, requiring them to establish detailed nate loans in the hope it could create a more loans in the country would need to establish procedures for loan origination, processing, consistent environment that would increase a fund purely for that jurisdiction, adding a workout and restructuring. Other aspects cross-border activity by private debt vehicles. significant cost and administrative burden of the rules are often not suitable for pri- ESMA said: “[We are] of the view that a that is simply not economical for many alter- vate credit managers as they mimic banking common approach at EU level would con- native lenders. models. The result is that most of the activity tribute to a level playing field for stakeholders, The ACC argues these rules are inconsist- conducted in Germany is done via special as well as reducing the potential for regula- ent with the free movement of capital within purpose vehicles owned by AIFs domiciled tory arbitrage. This could in turn facilitate the EU and with the Alternative Investment elsewhere in the EU. the take-up of loan origination by invest- Fund Managers Directive. Furthermore, it However, these SPVs are not expressly ment funds, in line with the objectives of believes the rules are bad for France’s econ- covered under a German Banking Act the Capital Markets Union.” omy: “This both undermines the commercial exemption which allows approved AIFs or The Alternative Credit Council published case for investing in France and ultimately AIFMs to make loans without additional its own thoughts on how regulators should increases the cost of finance for French busi- authorisation. While the German regulator approach the asset class at the end of Febru- nesses seeking finance.” BaFin has taken a view that SPVs are merely ary this year and recommended harmonisa- France has a number of other problem- an extension of an AIF, the ACC believes the tion of rules across the bloc. atic rules for non-bank lenders. Banking exemption should be clarified to specifically It appears that both ESMA and the secrecy laws can make it difficult to share cover activities by SPVs.

26 Private Debt Investor | April 2019 REGULATIONANALYSIS

company. The ACC says this is too low and PLAYING IT SAFE should be brought into line with other Euro- What is the most resource intensive activity in carrying out private credit strategies? pean jurisdictions.

48.2 37 7.4 3.7 3.7 The market is also hampered by a require- 0 10 20 30 40 50 60 70 80 90 100 ment for EU AIFs seeking to originate loans % in Italy to prove they meet “equivalent” ■ Conducting credit analysis ■ Sourcing viable credit opportunities ■ Borrower negotiation ■ Legal advice on structuring product ■ Other requirements to Italy’s regime. However, Investor type breakdown as percentage of total private credit AUM the ACC said it is not always easy to verify such equivalence and ultimately leads to EU 35 31 15 3 AIFs avoiding Italy due to a need to file an 0 10 20 30 40 50 60 70 805 5 90 4 3 100 application with the Bank of Italy to have its % ■ Pension funds ■ Insurers ■ Other ■ Sovereign wealth funds home-state rules declared equivalent, which ■ Family offices ■ Private banks ■ High-net-worth individuals ■ Employees and staff can be costly in legal fees.

How much financial leverage (borrowing against portfolio assets) does your most BREAKING BARRIERS levered private credit fund employ (debt: equity)? Creating a more consistent regulatory envi-

54 7 9 11 7 9 4 ronment across Europe, which fully recog-

0 10 20 30 40 50 60 70 80 90 100 nises the EU’s commitment to enabling % cross-border capital flows and investment, ■ ■ ■ ■ ■ ■ ■ None 0 - 0.49x 0.5 - 0.99x 1 - 1.49x 1.5 - 1.99x 2 - 4.99x 5x or greater should be the main focus for European legis-

Source: Alternative Credit Council lators in the medium-term, the ACC believes. It points out that private credit managers IRELAND: FALLING BEHIND the appetite of private credit managers to already spend significant resources on under- LUXEMBOURG invest in Irish loans and the securitisation of writing and are predominantly serving insti- While Ireland has become an Irish loan portfolios,” the ACC says. “Asset tutional investors and not retail depositors, important fund domicile in recent years, the managers who purchase Irish NPLs are which makes them very different to banks Central Bank of Ireland places restrictions already subject to regulatory authorisation and would make a bank-style approach to on Qualifying Investor AIFs undertaking requirements such as the AIFMD or the regulation unsuitable for the industry. loan origination, which prevent them from ELTIF Regulation.” The ACC notes that many jurisdic- acquiring investments and instruments other The ACC warns these moves may be tions have already trended towards making than loans. This has reduced the attractive- incompatible with existing authorisation incremental improvements to their rules ness of Irish fund structures relative to under AIFMD and may also be inconsistent regarding non-bank lending and have been Luxembourg. The rules have recently been with legislation governing the free movement responding to market feedback. It adds that replaced to allow some AIFs to make invest- of capital within the EU. maintaining dialogue between industry, poli- ments in unrelated debt instruments but are cymakers and regulatory supervisors will be still restricted on equities. ITALY: HAMPERED BY essential to ensuring Europe adopts a sensi- The Central Bank’s AIF Rulebook also THE 10% LIMIT ble regulatory approach. contains provisions that make it more dif- Private credit funds remain “The focus of this dialogue should now be ficult for typical loan funds to operate, the a small part of the Italian lending market, on how to; (i) remove the barriers to finance ACC says. For example, it imposes an inability having only been allowed to carry out loan flowing from the capital markets to European to tranche and requires investors in the same origination since 2016. However, the country businesses, (ii) facilitate knowledge sharing class are treated equally and requires general is of growing interest to alternative lenders between stakeholders on non-bank lending partners to be separately regulated. due to its many high quality SMEs. in Europe; and (iii) ensure non-bank lending The Irish government is also looking at One of the main barriers for private benefits borrowers and enhances the financing proposals to extend the existing regime credit funds is an exposure limit, which of innovation throughout Europe. This will for credit servicing firms to all owners of means funds cannot lend more than 10 catalyse the growth of non-bank lending and Irish loans. “These proposals risk reducing percent of their total to a single portfolio support economic growth,” the ACC says. n

April 2019 | Private Debt Investor 27 REGIONAL REPORT AFRICA Lenders eye ‘seismic shift’ The private credit market in Africa may be relatively small but is playing an integral role in helping to fill the capital gaps left by the continent’s banks. Rebecca Szkutak reports

he lack of access to bank capital out of their equity funds to the strategy, for many businesses throughout “I SEE MORE FUNDING while some are starting to raise dedicated TAfrica is due to factors including OPPORTUNITIES NOW credit funds, and new players continue to the region’s higher-risk profile and lack THAN I DID 10 YEARS enter the market. of long-term debt products from banks, AGO, AS THE BANKING outside of South Africa. This gap creates SECTOR WOES CONTINUE BIRTH OF MEZZANINE a plethora of opportunities for the pri- IN THE REGION” Vantage Capital is one firm looking to close vate sector and is what attracts many of Zain Latif the funding gap. The South African-based the foreign credit investors operating in firm started as a private equity shop in the region. 2001 and then launched the first mezzanine “Some funds focus less on maximising fund in South Africa in 2006 after realising returns, and more on the social impact of the gap in the market, says Luc Albinski, boosting access to credit in under-served managing partner and one of the founders markets,” says Andrew Apampa, a research GROWTH SPURT of the mezzanine unit. officer for the African Private Equity and The private credit market is predicted Albinski says Vantage originally began Venture Capital Association (AVCA). to continue its upward trajectory lending mainly to businesses within South 1 AVCA recently released a report 1 Africa, but as the market became saturated, showing that the private credit market in 0.8 it began to branch out into other countries

Africa grew from less than $50 billion in 0.6 0.65 and expand the percentage of the fund

2000 to more than $650 billion currently. $ trillion 0.4 deployed abroad. Vantage currently lends to The report also predicts the market will 12 different markets all over the continent, 0.2 continue to grow and will reach more than 0.05 including Ghana, Namibia and Uganda. 0 $1 trillion in assets under management 2000 2019 2020* Vantage’s mezzanine strategy targets by 2020. Source: AVCA *forecast companies with at least $2.5 million in Enitan Obasanjo-Adeleye, head of EBITDA. The firm invests across multiple credit research at the AVCA, says the industries including healthcare, real estate organisation began to notice that many SMALL STAKE and energy. of the equity sponsors it tracks were Only approximately 8% of private funds raised London-based TLG Capital was beginning to raise funds dedicated to between 2012-17 went to credit strategies established in 2010, after its founders also

credit, which illustrated a seismic shift 20 noticed opportunities in the financing in the credit lending industry. shortage for the African mid-market.

AVCA found that only 8 percent of % 10 Founder and principal of the firm, Zain 16.2

private market funds raised in the region 0 1.4 Latif, says that TLG Capital hopes to help Capital raised between 2012 and 2017 were dedicated to ■ Private credit ■ Private equity minimise that gap. “I see more funding private credit. However, many firms lend Source: AVCA opportunities now than I did 10 years ago,

28 Private Debt Investor | April 2019 REGIONALANALYSIS REPORT

SUPPLY SHORTFALL In combination with differing currencies and legal frameworks, these factors slow down the deal process, which also slows down market and economic growth. “It is niche; there are a relatively small number of deals that meet investment criteria and for whatever reason cannot be fully serviced by the banks,” Albinski says. “We look at 100 deals to do one or two.” The other major issue mentioned by firms is that it’s difficult to secure enough commitments from LPs to grow investment in the region. This may take years to change. “There is a bit of a supply shortfall in Palmer: need to be flexible Albinski: started in South Africa and branched out the sense that there is great demand for credit among African SMEs, but what we are finding is that, for various reasons, as the banking sector woes continue in the senior debt. He adds that there is definitely institutional investors haven’t provided the region,” Latif says. a large appetite for mezzanine lending. level of funding required for credit managers TLG Capital invests across countries and “There is an increasing interest in to fully meet this demand,” Apampa says. industry sectors and has made investments mezzanine capital, a product that can Obasanjo-Adeleye says that while the in retail businesses in Rwanda; a healthcare plug the financing gap when the availability local LP base understands the risks and business in Liberia; and fintech companies of senior debt from the bank market the supply/demand for private credit such as MyBucks, which helped open the is limited, either in amount or tenor,” better than foreign LPs, the region is still first bank in a Malawian refugee camp. Palmer says. “Mezzanine can be the key dependent on getting supplementary The firm focuses on debt investments to optimising the allocation of risk to foreign LP capital. with equity kickers to get a higher return the market, enabling transactions and To lower risk, many private credit on investment, Latif says. It also requests investment to happen.” lenders in the region pair up with local quarterly distributions to keep tighter Despite many players looking to fill and foreign banks on transactions to allow control of investments in riskier markets. the gap, investing in the African market for additional protection and to help build “We look at opportunities where we will presents a much more complicated relationships on the ground in various be able to come in as a debt investor, provide strategy than other regions and the locations across the vast continent. This hard currency facilities, and structure them investing timeline is longer. also helps build managers’ track records more like flexible financing,” he says. “The structural framework of investing for lending in the region. Richard Palmer, head of corporate debt in Africa is still a problem,” Latif says. “As more fund managers are able to at CDC Group, a London-based public “Africa is a challenging place to do business. demonstrate their skill in that space, there liability company that looks to invest in Different countries require different will be more LPs wanting to support private companies that help lift people out of structures and their own legal framework.” credit in Africa,” Obasanjo-Adeleye predicts. poverty, echoes that statement. But for now, those who operate Africa “You need to be flexible [when] investing strategies think it is well worth it, and the in Africa,” Palmer says. “Africa needs market continues growing, albeit slowly. bespoke financing solutions because every “DIFFERENT COUNTRIES Palmer says that demand continues to country and every financing situation is REQUIRE DIFFERENT be large, with plentiful opportunities for different.” STRUCTURES AND lenders across the entire continent. “I Palmer adds that CDC invests across THEIR OWN LEGAL think that you do come across wonderful a variety of debt products including FRAMEWORK” opportunities even in a slow growth or no infrastructure, real estate, mezzanine and Zain Latif growth economy,” Albinski says. n

April 2019 | Private Debt Investor 29 DATA DATA DATA ROOM PRIVATE DEBT INVESTOR | APRIL 2019

Over the following two pages you will find a list of new private debt funds in the market globally, where the capital has been raised on a geographic basis, and a selection of funds currently in the market.

NEW FUNDS IN MARKET (SINCE LAST ISSUE) FUND NAME FUND MANAGER TARGET SIZE ($MN) FUND SECTOR HPS Mezzanine Partners 2019 HPS Investment Partners 8,000.00 Corporate Kotak Special Situations Fund Kotak Investment Advisors 1000.00 Corporate Real Estate Empira Real Estate Finance Fund IV Empira 565.18 Real Estate GBC Euro Loan Origination Fund I Foxford Advisors 565.18 Corporate MEAG Infrastructure Debt Fund Sub-Fund 1 MEAG 565.18 Infrastructure SP EuroCréances 2018 Schelcher Prince Gestion 565.18 Corporate ruvercap Junior Debt Fund (Mezzanine) ruvercap investment AG 452.15 Corporate Indigo Capital II Indigo Capital SAS 395.63 Corporate

FUNDS IN MARKET (BY REGION) ➤ ➤

AMERICAS EUROPE

$106.0bn $49.4bn➤ GLOBAL ➤ $47.9bn ➤ ➤ ➤

Asia-Pacific

Middle East/ $18.3bn➤ Africa $0.9bn➤ ➤ ➤ TOTAL

$222.5bn➤

SELECTED PRIVATE DEBT FUNDS IN MARKET GLOBAL Fund Name Fund Manager Target Size ($mn) Fund Sector HPS Mezzanine Partners 2019 HPS Investment Partners 8,000.00 Corporate EIG Energy Fund XVII EIG Global Energy Partners 5,000.00 Corporate GSO Energy Select Opportunities Fund II Blackstone 5,000.00 CorporateInfrastructure Steadfast Alcentra Global Credit Fund Steadfast Companies 3,000.00 Corporate TSSP Opportunities Partners IV TPG 3,000.00 Corporate Westbourne Infrastructure Debt Opportunities Fund II Westbourne Capital 3,000.00 Infrastructure Related HPS Joint Venture II Related Companies 2,000.00 Real Estate Fortress Real Estate Opportunities Fund III Fortress Investment Group 1,500.00 Real Estate Paulson Strategic Partners Fund Paulson & Co. 2,000.00 Corporate Summit Partners Credit Fund III Summit Partners 1,500.00 Corporate Funding Circle SME Direct Lending Fund Funding Circle 1,290.61 Corporate Anchorage Illiquid Opportunities VI Anchorage Capital Group 1,250.00 Corporate York Distressed Asset Fund III York Capital Management 1,250.00 Corporate OrbiMed Royalty & Credit Opportunities III OrbiMed Advisors 1,200.00 Corporate Davidson Kempner Long-Term Distressed Opportunities Fund IV Davidson Kempner Capital Management 1,200.00 Corporate Real Estate Macquarie Global Infrastructure Debt Fund Macquarie Group 1,130.30 Infrastructure Aberdeen Standard Secured Credit Fund Aberdeen Standard Investments 1,032.49 Real Estate Infrastructure Davidson Kempner Special Opportunities Fund IV Davidson Kempner Capital Management 1,000.00 Corporate PG LIFE Partners Group 1,000.00 Corporate Stellwagen Capital Fund I Stellwagen Capital 1,000.00 Corporate NN-FMO Emerging Markets Loans Fund NN Investment Partners 500.00 Corporate Searchlight Opportunities Fund Searchlight Capital Partners 750.00 Corporate ICG Australia Senior Loan Fund Intermediate Capital Group 708.48 Corporate Cordiant VII Cordiant Capital 600.00 Corporate Infrastructure

AMERICAS Fund Name Fund Manager Target Size ($mn) Fund Sector 3G Special Situations Fund V 3G Capital 10000.00 Corporate TPG Sixth Street Adjacent Opportunities Partners TPG 5500.00 Corporate Apollo Hybrid Value Fund Apollo Global Management 3000.00 Corporate Energy Investment Opportunities Fund Goldman Sachs Asset Management 3000.00 Corporate Apollo Structured Credit Recovery Fund IV Apollo Global Management 2500.00 Corporate AG Direct Lending Fund III Twin Brook Capital Partners 2000.00 Corporate

30 Private Debt Investor | April 2019 DATA DATA

AMERICAS Fund Name Fund Manager Target Size ($mn) Fund Sector Carlyle Credit Opportunities Fund The Carlyle Group 2,000.00 Corporate Related CRE Debt Fund Related Companies 2,000.00 Real Estate York Structured Credit Opportunities Fund York Capital Management 2,000.00 Corporate Oaktree Special Situations Fund II Oaktree Capital Management 1,750.00 Corporate Churchill Middle Market Senior Loan Fund II Churchill Asset Management 1,500.00 Corporate ABRY Advanced Securities Fund IV ABRY Partners 1,500.00 Corporate BlackRock Middle Market Senior Fund BlackRock 1,500.00 Corporate Bridge Debt Strategies Fund III Bridge Investment Group 1,500.00 Real Estate Carlyle Middle Market Fund The Carlyle Group 1,500.00 Corporate CRG Partners IV CRG 1,500.00 Corporate Kayne Real Estate Debt Fund III Kayne Anderson Capital Advisors 1,500.00 Real Estate MTP Energy Opportunities Fund II Magnetar Capital 1,500.00 Corporate Torchlight Debt Opportunity Fund VI Torchlight Investors 1,500.00 Real Estate Walton Street Real Estate Debt Fund II Walton Street Capital 1,250.00 Real Estate Dune Real Estate Fund IV Dune Real Estate Partners 1,250.00 Real Estate Avenue Energy Opportunities Fund II Avenue Capital Group 1,000.00 Corporate Infrastructure Guggenheim Distressed Debt Fund Guggenheim Investments 1,000.00 Corporate Madison Realty Capital Debt Fund IV Madison Realty Capital 1,000.00 Real Estate Monroe Capital Special Situations Opportunistic Credit Fund Monroe Capital 1,000.00 Corporate Owl Rock First Lien Fund Owl Rock Capital Corporation 1,000.00 Corporate Valyrian Real Estate Partners I Valyrian Capital 1,000.00 Real Estate

EUROPE Fund Name Fund Manager Target Size ($mn) Fund Sector Apollo European Principal Finance Fund III Apollo Global Management 3500.00 Corporate Pemberton European Mid-Market Debt Fund II Pemberton Capital Advisors 2825.75 Corporate Permira Credit Solutions IV Permira Debt Managers 2825.75 Corporate AXA European Infra Senior I AXA Investment Managers - Real Assets 1695.45 Infrastructure Pemberton Strategic Credit Opportunities Fund I Pemberton Capital Advisors 1412.87 Corporate Strategic Origination and Lending Opportunities (SOLO) LCM Partners 1356.36 Corporate ICG-Longbow UK Real Estate Debt Investments V ICG-Longbow 1290.61 Real Estate Bain Capital Special Situations Europe Bain Capital 1130.30 Corporate Real Estate BNP European Real Estate Debt Fund BNP Paribas Asset Management 1130.30 Real Estate AgFe Real Estate Senior Debt Fund II AgFe 1032.49 Real Estate Hermes Direct Lending Fund Hermes Investment Management 967.96 Corporate Ruvercap Senior Debt Fund ruvercap investment AG 904.24 Corporate AnaCap Credit Opportunities IV AnaCap Financial Partners 847.72 Corporate Cairn European Commercial Mortgage Fund (open ended) Cairn Capital 836.42 Real Estate BNP Paribas Infrastructure Debt Fund BNP Paribas Asset Management 791.21 Infrastructure Capital Four Strategic Credit Capital Four 678.18 Corporate PREDIREC Immo V Acofi Loan Management Services 678.18 Real Estate Strategic Credit II Capital Four 678.18 Corporate Allianz UK Infrastructure Debt 2 Allianz Global Investors 645.31 Infrastructure Europa UK Debt Fund II Europa Capital 645.31 Real Estate GAM Real Estate Finance Fund II GAM Holdings 451.71 Corporate Global Real Estate Debt Partners - Fund II (UK) TH Real Estate 645.31 Real Estate Pemberton UK Mid-Market Direct Lending Fund Pemberton Capital Advisors 645.31 Corporate Schroder UK Infrastructure Debt fund Schroders Investment Management 645.31 Infrastructure

ASIA Fund Name Fund Manager Target Size ($mn) Fund Sector Shoreline Capital CNY Fund Shoreline Capital 1480.00 Corporate Fortress Japan Opportunity IV Fortress Investment Group 1250.00 Real Estate Edelweiss Distressed fund Edelweiss Group 1000.00 Real Estate Edelweiss Residential Credit Fund Edelweiss Group 1000.00 Real Estate Kotak Special Situations Fund Kotak Investment Advisors 1000.00 Corporate Real Estate Country Garden NPL Fund I Country Garden 883.42 Real Estate Lending Ark Asia Secured Private Debt Fund I CLSA Capital Partners 750.00 Corporate Cosmic Blue PF Trust Lily II Mizuho Global Alternative Investments 750.00 Infrastructure ShoreVest China NPL Fund ShoreVest Partners 750.00 Corporate ShoreVest Distressed Credit ShoreVest Partners 750.00 Corporate Adamas Ping An Opportunities Fund - Joint Venture Adamas Asset Management 500.00 Corporate BlackRock Asia-Pacific Private Credit Opportunities Fund I BlackRock 500.00 Corporate Real Estate Infrastructure DCP China Credit Fund II Dignari Capital Partners 500.00 Corporate Eight Capital Special Situations and Distressed Fund – II Eight Capital India Fund 500.00 Corporate InnoVen Capital - Joint Venture United Overseas Bank (UOB) 500.00 Corporate Orchard Landmark III OCP Asia 500.00 Corporate Samsung South Korean Small Business Fund Samsung Electronics 444.19 Corporate United Asia Loan Funding Pte. United Overseas Bank (UOB) 400.00 Corporate Abax Asian Structured Private Credit Fund III Abax Global Capital 400.00 Corporate

MIDDLE EAST / AFRICA Fund Name Fund Manager Target Size ($mn) Fund Sector Duet AMCON Distressed Fund Duet Private Equity 400.00 Corporate Crestmount Fund II Crestmount Capital 200.00 Real Estate Ethos Mezzanine Partners 3 Ethos 200.00 Corporate Ashburton Mezzanine Fund I Ashburton Investments 73.11 Corporate Yield Uganda Investment Fund Pearl Capital Partners 28.26 Corporate

April 2019 | Private Debt Investor 31 DATA DATA ROOM PRIVATE ASSETS, PUBLIC DEBT | FEBRUARY 2019

EMEA NORTH AMERICA

Mezzanine issuance remains at a low level, but sponsor-backed public issuance After hitting a record peak in December and then slumping in January, mezzanine continues to be buoyant, rising closer towards the record peak seen in December issuance returned to a more normal level. Sponsor-backed issuance remained of last year. healthy.

MEZZANINE DEBT ISSUANCE MEZZANINE DEBT ISSUANCE

2000 25 14,000 350 300 20 1500 3000 250 15 2500 Volume 200 Volume 1000 2000 Total ($m) Total 10 ($m) Total 150 1500 100 500 1000 5 500 50 $359 $142 $146 $227 $12 $46 $78 $35 $27 $8 $4 $4 $809 $495 $899 $651 $1813 $652 $578 $1,733 $13,520 $609 $528 0 $1 0 0 0 Mar18 Apr18 May18 Jun18 Jul18 Aug18 Sept18 Oct18 Nov18 Dec18 Jan19 Feb19 Mar18 Apr18 May18 Jun18 Jul18 Aug18 Sept18 Oct18 Nov18 Dec18 Jan19 Feb19

Source: S&P CAPITAL IQ Source: S&P CAPITAL IQ

SPONSOR-BACKED PUBLIC DEBT ISSUANCE SPONSOR-BACKED PUBLIC DEBT ISSUANCE

30000 80 22000 20 20000 70 24000 18000 60 16000 15 14000 18000 50 Volume Volume 12000 40 10 10000 Total ($m) Total 12000 ($m) Total 30 8000

20 6000 5 6000 4000 10 $1,199 2000 $1,958 $832 $5986 $4,800 $4,104 $9,341 $14,008 $11,582 $11,690 $8,136 $12,914 $19,183 $3,711 $27,791 $3,826 $10,173 $13,964 $4,237 $6,664 $5,591 $3,344 $6,105 0 0 0 $6,661 0 Mar18 Apr18 May18 Jun18 Jul18 Aug18 Sept18 Oct18 Nov18 Dec18 Jan19 Feb19 Mar18 Apr18 May18 Jun18 Jul18 Aug18 Sept18 Oct18 Nov18 Dec18 Jan19 Feb19

Source: S&P CAPITAL IQ Source: S&P CAPITAL IQ

20JANUARY 2019 PUBLIC ISSUANCE BY SECTOR JANUARY 2019 PUBLIC ISSUANCE BY SECTOR

20000 6000 $18,575

5000 15000 $4,417 4000

10000 3000 Total ($m) Total ($m) Total

2000

5000 $1,042

1000 $520 $345 $608 $300 0 0 Financials Real estate Energy Materials Financials Real Communications estate services

Source: S&P CAPITAL IQ Source: S&P CAPITAL IQ

32 Private Debt Investor | April 2019 DATA DATA ROOM The data is drawn from all W. European and N. American sub-investment THE LEVERAGED LOAN MARKETS IN FEBRUARY 2019 grade debt issuance totalling more than €150m and $150m respectively

EUROPE NORTH AMERICA Leveraged loan issuance recovered somewhat after slim pickings in January, as loan A reasonably strong recovery for leveraged loan issuance in North America after a refinancing issuance continued to lead the way. There was a clear preference for relatively quiet prior month, with issuance for acquisition and LBO activity leading 7-year tenors. the way.

LEVERAGED LOAN ISSUANCE BY DEAL TYPE LEVERAGED LOAN ISSUANCE BY DEAL TYPE

SBO $1,388m Restructuring $350m Debt Repay €145m Restructuring €46m Refinancing Bond $1,450m Dividend Recap $120m Exit Financing $1,488 Capital Expenditure $25m LBO €400m Repricing $2,762m DIP Financing $5,622m

SBO €741m RefinancingLoan Acquisition €2,477m Merger $26,913m $5,780m Acquisition €1,320m General Corporate $7,251m

Refinancing Refinancing LBO Bond $9,576m $11,821m €1,760 m

Source: Debtwire PaRR Source: Debtwire PaRR

LEVERAGED LOAN ISSUANCE BY TENOR LEVERAGED LOAN ISSUANCE BY TENOR

3200 €3,017m 25000 $22,120m

20000 2400 $17,774m $18,916m $17,961m

15000

1600 €1,510m Total value (€m) Total Total value (€m) Total 10000

$5,931m 800 5000 €425m €414m $3,343m €250m $2,216m $2,520m €50m $673m 0 0 1 3 5 6 7 8 1 2 43 5 6 87 Tenor (Years) Tenor (Years) Source: Debtwire PaRR Source: Debtwire PaRR

WEIGHTED AVERAGE LOAN PRICING COMPARISON WEIGHTED AVERAGE LOAN PRICING COMPARISON

800 900 Jan-19 Feb-19 Jan-19 Feb-19 867bps 700 800 827bps 700 600 600 500 500 400 432bps 402bps 392bps 392bps 400 407bps 300 379bps 300

Pricing (bps over benchmark) Pricing 200 (bps over benchmark) Pricing 200

100 100

0 0 Senior secured non covenant-lite Senior secured covenant-lite First lien Second lien term loan B term loan B Source: Debtwire PaRR Source: Debtwire PaRR

April 2019 | Private Debt Investor 33 DATA DATA ROOM EUROPEAN LEVERAGED LOAN COVENANTS, DEC 18 – FEB 19

INCREMENTAL FACILITIES - IS THERE A DEBT RATIO FINANCIAL COVENANT PACKAGE TYPES CAPACITY? Financial covenants force borrowers to maintain certain financial performance levels or face Incremental facilities permit a borrower to increase credit facilities on pre-negotiated terms default. The covenant package is classified according to how many covenants are included. from existing or new lenders. This provision may be based upon a fixed amount (hard cap); a ratio (ratio cap); EBITDA (grower cap) or a combination of all of the above.

100% 100% 90% 90% 80% 86% 80% 86% 70% 70% 60% 60% 50% 50% Frequency Frequency 40% 40% 30% 30% 20% 20%

10% 14% 10% 14% 8% 0% 0% Cov Lite (springing Cov Loose (lev Cov Loose (1 or 2 Traditional (3 or 4 None (HY Bond style) Yes No N/S cov only) maintenance only) maintenance covs) maintenance covs) Source: Debt Explained Source: Debt Explained

EBITDA ADD-BACKS LENGTH OF SUNSET PROVISION

If management can add synergies to the leverage test, are they capped? A sunset provision removes the MFN clause after a specified period of time.

100% 100%

80% 80% 83%

71% 60% 60%

Frequency 40% Frequency 40%

20% 20%

17% 14% 14%

0% 0% 10% Consolidated 15% Consolidated 20% Consolidated 25% Consolidated Uncapped 6 months 12 months 18 months 24 months None applies EBITDA EBITDA EBITDA EBITDA indefinitely Source: Debt Explained Source: Debt Explained

EBITDA EQUITY CURE - IS IT PERMITTED? NUMBER OF EBITDA CURES PERMITTED

A provision allowing the shareholders of a company to inject additional equity to ‘cure’a If EBITDA equity cures are permitted, it is customary to cap the overall number of times the financial breach. Rather than reducing debt, these funds may increase EBITDA thereby having cure right can be exercised a greater impact when recalculating the company’s leverage ratio. 100% 90%

No 80% 83% 14% 70% 60% 50%

Frequency 40% Yes 30% 86% 20% 17% 10% 0% None 2 3 4 5 N/A

Source: Debt Explained Source: Debt Explained

34 Private Debt Investor | April 2019 DATA

DATA ROOM Charts reflect credit agreements and amendments filed on NORTH AMERICAN LEVERAGED LOAN COVENANTS, DEC 18 – FEB 19 EDGAR by low-grade borrowers from 1 December, 2018 to 28 February, 2019

FINANCIAL COVENANT – RATIO TYPES AMENDMENTS BY TYPE

Financial covenants force borrowers to maintain certain financial performance levels or face Loans may be amended for various and multiple reasons, offering a view into current market default; below are the most popular financial covenants imposed by lenders. conditions or borrower-specific situations.

70% 60%

65% 60% 50%

50% 45% 40% 40% 42% 30% 30% Frequency 20% 20% 19%

Percentage of amendments Percentage 20% 19% 10% 10% 9% 6% 0% 6% 0% 0% 0% Leverage Coverage Minimum Maximum Other None Maturity Face Value Add / Remove Covenant Repricing Ratio Ratio Liquidity CapEx Extension Change Guarantors Change Source: Street Diligence Source: Street Diligence

FINANCIAL COVENANT – LEVERAGE RATIO STEPDOWN AMORTISATION – CUMULATIVE PREPAYMENT

Over time, lenders tighten leverage ratios on a step down basis, forcing borrowers to improve Mandatory prepayments require a borrower to make regular payments of principal prior financial performance post-issuance. to maturity. The cumulative value of such prepayments reduces risk and provides another Quarters from issuance chance for the lender to ensure continued financial performance. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0.0x 25%

(0.2x) 20%

(0.4x)

15% (0.6x)

(0.8x) 10%

(1.0x) 5%

Average ratio change from initial value change from ratio Average (1.2x) Average cumulative prepayment (% of cumulative prepayment Average principal)

(1.4x) 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Source: Street Diligence Source: Street Diligence

EXISTENCE OF EXCESS CASHFLOW SWEEP EXISTENCE OF INCREMENTAL FACILITIES

Borrowers’ use of excess cash flow (ECF) may be restricted, in part, to early repayment of Incremental facilities permit a borrower to increase credit facilities on pre-negotiated terms outstanding term loans through ECF sweep provisions required by some lenders. from existing or new lenders. This provision allows borrowers the flexibility to increase leverage post-issuance.

80% 80% 76% 70% 70%

60% 60% 65%

50% 50%

40% 40%

30% 30% 35%

20% 24% 20% Percentage with incremental facility with incremental Percentage Percentage with excess cash flow sweeps with excess Percentage 10% 10%

0% 0% Yes No Yes No

Source: Street Diligence Source: Street Diligence

April 2019 | Private Debt Investor 35 COMMENT THE LAST WORD ESO CAPITAL ‘It’s strange – business goes on as normal’

lead to a bit of a distressed market. Overall, could have a small company that is trying we don’t see a lot of growth ahead but we to go deal by deal and that can have certain COMMENT don’t see heavy storm clouds either. If you constraints. underwrite deals well, you may still have For example, we backed PlaceFirst, a Q A one or two hiccups but you should be fine. developer of built-to-rent housing in the & Risks need to be managed carefully. What north of England. They would go out and if Germany goes 1 or 2 percent negative? find capital for a deal and then the next Speculation is rife about the German businesses are managed for cash one and then the next one. And these deals ending of the cycle and what and you can get to negative equity very were tiny, around £5 million ($6 million; political developments may quickly. Are you able to hold a loan when €7 million) each. If you can provide capital be coming round the corner. there’s zero or negative growth? Do you for 10 of these deals then it becomes more Alex Schmid of ESO Capital is have the resources to see it through? of an institutional approach. We have staying focused on doing deals partnered with PlaceFirst to provide them others overlook Describe the kind of situations you with long-term capital, which enables Qare typically involved in? them to source better deal opportunities Where are we in the credit cycle, and We like deals, platforms and situations through security of funding. We also take Q how do you view market conditions? where having a narrow mindset doesn’t a stake in the operating company, which We’re in the early days of the credit cycle allow you to grasp the opportunity fully. provides important alignment of interest, coming to an end. It’s strange because There are so many cashflow-type deals delivering superior returns. business goes on as normal, but I do think done at 3-4x leverage, and you’re in a things will become trickier. What will the box if you’re that type of investor. LPs can What are your investors typically UK look like post-Brexit and what about find us a difficult business to understand Qlooking for? the US presidential election? One or two because we don’t operate within standard They want a higher return with a bit years ago, we thought there would be boxes. We think through value in all more risk but not much more. And they yield expansion in the US through higher aspects and customise a structure that are willing to take process risk rather interest rates, but that’s not happening. allows a company to take advantage of an than asset risk. We focus on protecting But there are still good opportunities opportunity. against the downside, so if a deal were out there and I think firms with niche It’s very rarely that you can come up to go sideways, we would be able to put strategies can be nimbler at finding them. with the right answer for a company our extensive workout expertise to use. We have regular discussions with straightaway; being a true partner on a It’s hard to find that kind of resource. investors and the perception of Europe deal means there is a lot of back and forth There are a number of new funds in is better than you’d think. In terms of to make sure it works for both sides. You the market that have not done workouts credit investing, it’s seen as more of an before. Some will figure it out and some open playing field than the US as there won’t. Experience through market cycles “OVERALL, WE DON’T SEE are fewer managers with niche strategies. is key. n There is not much distress, and Europe A LOT OF GROWTH AHEAD BUT WE DON’T SEE HEAVY never delivers distress in the volume WHAT DO YOU THINK? people expect. But it would be interesting STORM CLOUDS EITHER” Alex Schmid HAVE YOUR SAY if portfolios take a wobble as that could e: [email protected]

36 Private Debt Investor | April 2019

No matter where we are in the cycle, some things don’t change. Like a consistent approach to sponsored senior debt. And advantages in scale, sourcing and credit selection developed over 20+ years. It’s the kind of predictability that helps keep tomorrow’s outlook bright.

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