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Ten Views on How Covid-19 Will Change Private Debt 2020 AD 032 - PDI Debt Capital Markets.Indd 1 07/08/2020 11:24:43 Contents September 2020 • privatedebtinvestor.com EXTRA The asset class’s most popular sectors Ten views on how covid-19 will change private debt 2020_AD_032 - PDI Debt Capital Markets.indd 1 07/08/2020 11:24:43 Contents How to contact us Senior Editor Andy Thomson [email protected], +44 20 7566 5435 Senior Special Projects Editor Graeme Kerr ISSN 2051-8439 • ISSUE 76 • SEPTEMBER 2020 [email protected], +44 20 3862 7491 Americas Editor Robin Blumenthal [email protected], +1 646 970 3804 News Editor Insight John Bakie [email protected], +44 20 7566 5442 Reporter Adalla Kim 2 [email protected], +852 2153 3874 Direct lending Apollo’s new platform Contributors bets big on a return to normal Daniel Humphrey Rodriguez, Tom Zimmerman Managing Editor, Production: Mike Simlett EDITOR’S LETTER Rising to the Head of Production: Greg Russell challenge ahead 6 Production Editors: Daniel Blackburn, Adam Koppeser Survey Private credit set to be the Copy Editors: Eric Fish, Nicholas Manderson fastest-growing allocation in 2020 8 Art Director: Mike Scorer CLOs Distinguishing fact from Head of Design: Miriam Vysna Senior Designer: Lee Southey fiction 10 Why venture debt is booming Designers: Denise Berjak, Pio Blanco Venture lending offers higher returns Head of Marketing Solutions: for higher risk. Why, against such Beth Piercy Keynote interview [email protected], +44 20 7566 5464 a volatile backdrop, is fundraising Subscriptions and reprints surging ahead? 30 [email protected] Customer Service 11 Experiencing distress Transactional [email protected] Deals are down but confidence is activity has taken a major hit in the Editorial Director: Philip Borel growing The chances of a successful Director, Product: Amanda Janis US, but distressed deals will be deal at the moment may be slim, but available for those willing to wrestle Director of Research and Analytics: Dan Gunner the period ahead looks promising Managing Director, Americas: Colm Gilmore with the complexities 32 says David Brackett of Antares Capital Managing Director, Asia: Chris Petersen Chief Commercial Officer: Paul McLean Why private credit should fit the Chief Executive: Tim McLoughlin bill for ESG investors Investors are Cover story looking closely at private credit but want to see more rigorous reporting 14 and measurement of environmental, social and governance issues 34 How is covid changing private debt? As the asset class adapts to new realities, we asked 10 professionals for their thoughts on its Data transformation 36 Analysis Signs of life in the fundraising market After a highly subdued first For subscription information visit privatedebtinvestor.com quarter of the year, private debt 26 capital raising picked up a little in the How the pandemic has changed second the investment landscape We run the rule over the hot sectors Funds in market 38 September 2020 • Private Debt Investor 1 t is not as if US-based fund manager Apollo Global Direct lending Apollo’s new platform Management had not telegraphed its intention bets big on a return to normal to push further into the burgeoning market for private Senior debt, the type of loan most associated with direct lending, was the most popular strategy Icredit, writes Robin Blumenthal. in terms of funds closed during the first half of the year (%) At its investor presentation back 100 in November, John Zito, Apollo’s deputy chief investment officer of credit, predicted that as much as 10 80 Venture debt percent of the $2.5 trillion high-yield CLO loan and bond market would go Royalties 60 Fund of funds private over the following five years. Distressed debt With its $12 billion direct lending Subordinated/ partnership with Abu Dhabi’s 40 mezzanine debt sovereign wealth fund Mubadala Senior debt announced in July, the mega- 20 manager appears to be moving in earnest to capture a bigger share of that growing market. And by bulking 0 up its corporate credit team, it is $61.9bn raised 81 funds closed wagering that it can make the right Source: Private Debt Investor bets originating big billion-dollar loans and holding them until the announced, with the partnership progression, where we can pivot to syndication market rights itself. planning to hold the loans to providing the company the entire In the meantime, the platform, maturity. But that won’t preclude amount.” With the potential to make called Apollo Strategic Origination Apollo from eventually spreading loans of as much as $2 billion, Zito Partners, gets to collect hefty the risk around while it maintains a says the partnership expects to add fees for underwriting all the risk. majority share of the loans. 15 people to its 70-person corporate Assuming it does not get stuck with credit team by the middle of 2021. any loans that go sour before the Full amount Apollo’s existing direct lending coronavirus-induced disruption in “For most of my career, there have platform to mid-market companies the collateralised loan obligation been a lot of situations where we’re constitutes a fraction of the asset market abates, Apollo can win big. the largest lender,” Zito says, noting manager’s $210 billion credit “We’re going to be the only that the firm often contributes one- portfolio, and of the overall $400 lender,” Zito told Private Debt third or more to a $1 billion loan. billion direct lending market. Zito Investor when the deal was But he adds: “There’s been a natural indicates that although Apollo had 2 Private Debt Investor • September 2020 been eyeing this market before the The big numbers ➔ pandemic, the difficulties CLOs were “We have... Fundraising was substantially down in the first having in doing new financings as a seen an early half of this year compared with H1 2019, but the result of the virus increased its allure. rebound in distressed opportunity is getting larger In the past few years, there have investment activity been “more entrants with more as lockdown prominent platforms with scale to measures have start to disintermediate the broadly eased and syndicated loan market,” says Jeff business activity Topor, a director at Cliffwater who resumes” Benoît Durteste, leads the research and investment chief investment due diligence firm’s coverage of officer and chief private debt. executive of ICG, During times of dislocation and on the rapid volatility, having this kind of heft recovery from can be a “good value proposition”, coronavirus lows Stake taken by Italian asset manager Azimut Group in US credit fund manager Kennedy Lewis he says. He adds that the biggest 20% driving force for sponsors is perhaps ➔ to pay up for such loans “to get a “Now is a natural deal done fast and provide certainty”. point to focus my $63bn But Zito indicates that the Raised globally by private full-time efforts debt funds in the first half operation will be extending credit to on community of 2020 companies “as they need liquidity”, and public service not necessarily for the traditional efforts that I $105bn Raised globally by private debt funds in sponsored buyouts that constitute so believe can make the first half of 2019 much of the direct lending market: a meaningful impact” “It’s the evolution of direct lending.” George Youngkin Suhail Shaikh, head of US direct explains his lending at fund manager Alcentra, decision to step views the move as “seemingly a down as co-chief continuation” of Apollo’s current executive of Collected by French manager EMZ Partners strategy. “The size is notable,” he Carlyle Group €1bnfor its ninth hybrid debt/equity strategy says. “It will take some market share away from the banks. Direct Ups lending is definitely displacing some $950m portions of the traditional broadly- & Raised by KKR for its second real estate credit opportunities vehicle syndicated loan market.” downs But with the uncertain economic backdrop, Richard Wheelahan III, “Fast down and co-founder of Fund Finance Partners, slow up: to me an advisor to asset managers, that’s no ‘V’. I prefer to think of it Portfolio of€200m ‘CQS’ loans – salary and pension guarantee loans for speculates that the risk to Apollo’s as a checkmark” public sector employees and pensioners in Italy – acquired by strategy is in “concentrating the fund manager AnaCap Howard Marks, portfolio among a small number director and of borrowers, if the partnership co-chairman of is ultimately unable to sell down Oaktree Capital portions of the loans to other Management, on investors.” Assuming the CLO market the nature of the comes back, “this vehicle could be a recovery from the valuable source of new loan supply current crisis ➔ to various CLOs that are hungry for Current size of Europe’s distressed credit market, according to new collateral”. n €2trnZach Lewy of UK fund manager Arrow Global September 2020 • Private Debt Investor 3 Insight Trend watch German decline, ALLOCATION• W A T C H but debt funds prosper n Illinois Municipal Retirement System The US pension has approved a he pandemic significantly Anticipated level of new commitments to EM $25 million commitment to HIG private capital funds (%) affected the German Bayside Loan Opportunity Fund Decrease No change Increase Tleveraged buyout market planned VI, according to minutes from its in the second quarter. Nearly all Over the next 1-2 years July board meeting. The fund was sell-side deal processes were put 0 20 40 60 80 100 launched in March and is targeting on hold, with only 11 transactions $1.25 billion in equity. The vehicle’s completed overall, according to the manager is Bayside Capital, the latest MidCap Monitor survey from private credit arm of HIG Capital. investment bank GCA Altium. This represented a decline of Over the next 3-5 years 45 percent compared with the 0 20 40 60 80 100 n Texas County and District average second quarter from 2017 Retirement System to 2019 and a decline of more than The Austin-based organisation has 50 percent compared with the agreed to commit $100 million first quarter of this year, which was to Atalaya Asset Income Fund relatively unaffected by covid-19.
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