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Member FINRA/SIPC | Authorised and regulated by the Financial Conduct Authority | Licensed and regulated by the Securities and Futures Commission | Licensed by the Monetary Authority of Singapore The Global Guide Understanding to Private Debt Private Debt in Europe
A guide to the evolution of the market and investing in the The practitioner’s handbook to asset class navigating the asset class Edited and sponsored by EPIC Private Equity and Edited by EPIC Private Equity, this comprehensive European Capital, this book explores the private debt and detailed guide on the private debt market brings market in Europe, with expert contributions from a together the views and opinions of 19 of the number of market participants. world’s leading practitioners. It will help fund managers: It will help fund managers:
• Understand how LPs are constructing private debt • Understand how LPs are navigating this new asset allocations within their portfolios class and constructing an allocation within their • Determine how best to structure the legal, portfolios taxation and financial terms of a private debt fund • Determine how best to structure the key financial • Anticipate which strategies are likely to attract the terms of a private debt fund in Europe most interest from LPs ...plus much more • Learn more about the benefits of different private debt strategies such as unitranche and senior direct lending ...plus much more
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Senior Editor Andy Thomson [email protected], +44 20 7566 5435 Senior Special Projects Editor Graeme Kerr [email protected], Global Investor 30 +44 20 3862 7491 Americas Editor Andrew Hedlund ISSN 2051–8439 • NOVEMBER 2019 [email protected], +1 212 633 2906 News Editor John Bakie [email protected], +44 20 7566 5442 Reporter Beyond sponsored lending White Oak Adalla Kim Insight Global Advisors CEO and co-founder [email protected], +852 2153 3874 Andre Hakkak suggests investors take Contributors a wider perspective 18 Victoria Robson, Stephen Schultz, Chin Yuen, 2 Tom Zimmermann Investor stories From San Francisco Managing Editor, Production: Mike Simlett The new frontier Angel Island to Seoul, the last 12 months have seen Head of Production: Greg Russell Capital CEO Dev Gopalan and chief growing interest in private debt from Production Editors: Daniel Blackburn, strategy officer Lynette Vanderwarker global institutions Adam Koppeser explain the appeal of an asset-based Copy Editor: Eric Fish strategy 20 Head of Design: Miriam Vysna The Campbell Lutyens view Senior Senior Designer: Lee Southey secured private direct lending offers Staying in your lien Benefit Street Designers: Denise Berjak, Glen Reynolds compelling solutions to investors looking Partners’ senior portfolio manager Blair Head of Marketing Solutions: to protect returns 4 Beth Piercy Faulstich describes how the firm is [email protected], +44 20 7566 5464 EDITOR’S LETTER More than just an readying its private debt portfolio for a Subscriptions and reprints market downturn 22 [email protected] alternative 7 Customer Service [email protected] Editorial Director: Philip Borel Director, Digital Product Development: Analysis Amanda Janis Director of Research and Analytics: Dan Gunner Head of Investor Research: Nicole Douglas 8 Managing Director, Americas: Colm Gilmore Welcome to the PDI Global Investor 30 Managing Director, Asia: Chris Petersen The 30 largest institutional private debt Group Managing Director, Brands and Markets: Paul McLean investors Chief Executive: Tim McLoughlin The Global Investor 30 in numbers A data snapshot 10
What makes a top 30 investor The methodology behind the The 10 most active investors ranking 12 The top 10 in terms of number of reported commitments provides a very different set ‘Private debt is being used as a fixed of names 24 income replacement’ All the signs point to growth in both fundraising and The Koreans are coming Korean deployment, say Campbell Lutyens head investors are yet to make the GI30 but it could only be a matter of time For subscription information visit of private debt advisory group Richard privatedebtinvestor.com von Gusovius and private debt specialist judging by the growing appetite for Jeffrey Griffiths 13 private debt 28
Investor profiles Where are the Points of view What investors are top 30 investing? 16 saying 32
November 2019 • Global Investor 30 1 Investor stories From San Francisco to Seoul, the last 12 months have seen growing interest in private debt from global institutions
DEC 2018 JAN 2019 FEB MAR APR
South Korean LPs Need for stable Korea Post seeks global shifting focus to returns driving CIC’s distressed debt fund European private private investments managers credit China Investment Korea Post is seeking two A state-backed Corporation, the global distressed debt fund pension fund world’s second- managers, according to a in South Korea, largest sovereign request for proposals. The the Government wealth fund, is prospective commitment Employees Pension boosting its alternative size is up to $100 million Service, made investments and direct apiece. The capital comes an €80 million investments, according from Korea Post’s savings commitment across to vice-chairman San Francisco pension fund plans fund and insurance fund. two commingled and president Tu $800m for private credit The investor is seeking private debt funds Guangshao, speaking managers with proven managed by at the Asian Financial The San Francisco Employees’ Retirement investment performance Alcentra and BlueBay Forum 2019 in Hong System is planning to deploy $800 in distressed commingled Asset Management. Kong. “If we increase million towards private debt in 2019, with funds, including both pre- According to PDI our exposure to subsequent increases in coming years as and post-GFC. Korea Post data, Alcentra direct investment and the pension fund looks to hit its 10 percent will exclude hedge funds European Direct alternatives, we will portfolio allocation target for the asset class. and special situation- Lending Fund III is create stable returns,” The northern California-based retirement focused funds, although targeting €2 billion. he said, adding that plan anticipates committing dramatically distressed debt funds The BlueBay Direct this is one of the main more to the asset class than in 2018, when it with a partial allocation to Lending Fund III has focuses of CIC in allocated $225 million, according to pension special situations will be a €2.5 billion target. 2019. fund documents. considered.
2 Private Debt Investor • November 2019 Two in three family offices looking to grow private debt allocation
Almost two-thirds of family offices and wealth managers are expected to increase their exposure to private debt, according to research. A survey by aviation finance specialist Shearwater Aero Capital found 63 percent of family office and wealth manager institutions intend to invest more in private debt between now and 2021, while 13 percent expect to invest less in the asset class.
ACERA creates a dedicated private credit bucket European and Asian investors face costly hidden fees The Alameda County Employees’ Retirement for US debt funds Association, a California-based public pension fund, voted to implement a 4 percent allocation to private Invisible costs for international investors investing in US private debt could credit. The strategy expects an average annual return be eroding returns by as much as 5 percent, according to a report by of 6.7 percent. The plan outlines that ACERA will investment consultancy bfinance. Historically, high taxes have put off many invest $490 million in the strategy by the end of 2022 Asian and European institutions from investing in US debt. However, recent to reach the target allocation of 4 percent by 2023. developments in fund structures have attempted to make US funds more The fund plans to achieve this goal by investing in no appealing internationally. Nevertheless, bfinance has warned that a number less than three core investment managers. of visible and hidden costs cause leakage on returns.
MAY JUN JUL AUG SEP
PensionDanmark merges POBA seeks five alternatives and private debt teams direct lending fund managers PensionDanmark merged its private debt and alternatives departments to give it The Public Officials greater investment flexibility. The move Benefit Association, a sees its current head of private debt, Kim Seoul-based institutional Nielsen, take over as head of alternatives investor, is looking for following the departure of Claus four private debt fund Lyngdal, who has left to become head of managers that invest in alternatives at Danske Bank after almost mid-market corporates 11 years at the pension fund. in North America and one manager that Dai-ichi Life to launch in-house structured lends to corporates in finance team Asia-Pacific, a source familiar with the matter Japan-based Dai-ichi Life Insurance Company told told PDI. It is understood PDI that its new department, launched on 1 April, is that the Korean investor designed to develop the company’s in-house capability plans to commit $50 for corporate and structured financing. The firm million to each of the announced on 22 February that the team would be fund managers. The led by Tetsuya Kikuta. He will oversee the investment $250 million in planned planning department, the corporate and structured commitments will be finance department, and the real estate department. invested in mid-market Kikuta has been managing executive officer and chief senior secured corporate general manager of investment since last year. lending strategies.
November 2019 • Global Investor 30 3 Insight
he emergence of private The Campbell Lutyens view Senior debt as an investable asset class in the past 10 secured private direct lending offers years has had invaluable benefits for capital compelling solutions to investors markets. What was once Tthe exclusive domain of banks has now looking to protect returns been opened to a deeper and broader network of institutional investors, namely pension funds, insurance companies, endowments, foundations, sovereign wealth funds and wealth management firms. The systemic shift of private, corporate credit risk from banks, backed Expert analysis by Jeffrey Griffiths, principal largely by short-term liabilities, to private funds, backed by investors with long- term liabilities, strengthens and stabilises Prior to the opening of private debt needing to match short-term liabilities the savings and investment nexus at the markets, institutional investors other with short-term assets. It makes a lot heart of developed economies. than banks were forced to rely primarily of economic and financial sense for The exciting growth of this market on liquid credit instruments to gain these long-term asset holders to be presents both risks and opportunities exposure to corporate risk. Although the principal capital providers for for investors. They should tread carefully sizeable and deep, both the investment longer duration credit, such as bullet given expectations of future economic grade and high-yield credit markets maturity term loans for buyouts or turbulence after a long period of limited investors to financing large-cap capital expenditure programmes. It sustained growth. Senior secured, private businesses at tighter spreads than what does not make sense, from a macro direct lending provides a compelling the private markets can offer. prudential perspective, for deposit- solution for investors seeking to protect Also, institutional investors, such as taking institutions, such as banks, with their total returns versus both traditional pension funds, insurance companies, very short-term liabilities, to provide fixed income and alternatives, while and endowments, have the advantage these loans. The structural and regulatory sustaining a key financial role in the of long-term liabilities and the ability framework, therefore, for banks to exit economy for capital provision to mid- to invest for the long term, rather than the corporate, leveraged credit markets, market enterprises underserved by and for institutional investors to enter it, is banks. sound and desirable.
Origins and growth of the market Companies need private In many ways, corporate, private debt is capital, especially in the one of the oldest and largest financial lower mid-market assets in the world. Lending directly As the banks retreat from longer term, to companies privately, without a leveraged credit exposure, companies public listing or syndicated instrument, that require leveraged finance and are has always been one of the main not large enough to issue a broadly components of commercial banking There is a syndicated loan or high yield bond, activity, alongside lending to consumers, “ have by necessity gravitated to the real assets and governments. This growing recognition private debt fund market for capital. market has never really been open to Banks remain the main contributors to non-bank investors other than through that lending to corporate credit in short-dated, asset- the purchase of bank securities. The backed and working-capital facilities tightening of bank regulatory capital non-sponsored because these instruments work better ratios via implementation of the Basel from a regulatory capital perspective. accords has curtailed banks’ commercial businesses should However, mid-market businesses that lending activities in longer-dated loans to are looking to complete a leveraged highly leveraged corporate enterprises. form a core part buyout, add-on acquisition, major capital This particularly applies to the of a private debt expenditure programme, shareholder financing of leveraged buyouts, bolt-on recapitalisation or dividend re-cap need acquisitions, dividend recapitalisations manager’s portfolio to approach the private debt fund world and major capital expenditure for their capital needs. programmes. construction ” As institutional investors continue to
4 Private Debt Investor • November 2019 Insight
allocate increasing amounts of capital LSTA leveraged loan index of just above to private markets versus public ones, “ It is important that 5 percent for a similar time period the available capital for investment in (suggesting a 3 percent premium). private equity and debt has increased senior lending is Institutional investors with a long-term substantially over the last 10 years. backed by real assets investment horizon, who do not require Although initially growing out of a subset a large amount of liquidity in their fixed of private equity dealflow, growth in as much as possible. income allocations, have been shifting private debt is starting to outpace that portions of their liquid leveraged credit of private equity. This is because most Otherwise, the value exposures out of public markets and into private, mid-market and lower mid- the private debt markets. This is primarily market businesses are not owned by of a ‘senior’ facility the result of being able to earn a better private equity funds. Businesses owned return for comparable levels of risk – with by families, entrepreneurs or employees, could be rendered the only cost being the assumption of or even publicly-listed ones, also have a additional illiquidity. need to finance growth with private debt worthless ” capital. Often these businesses are unable Market risks or reluctant to issue new equity to finance But it is important to recognise the this growth, and therefore private debt risks in this market for investors. A lot of presents itself as a cost-effective solution. fund capital has been formed around addressing the financing of businesses The relevance of the illiquidity in the upper mid-market, or deal sizes in premium syndicated leveraged loan market in the excess of $200 million. Although there In exchange for taking on illiquidity, United States. The comparable return in are fewer lenders who can commit to private markets should offer investors senior secured, private direct lending is larger deals, the competition to complete a return premium over their public between 8 and 10 percent, on a gross, these transactions is often higher versus equivalents. In the case of private debt, unlevered basis. what occurs at the lower end of the various market estimates of this premium The Cliffwater direct lending index market. This is especially the case for are between 2 and 4 percent per annum. has shown that senior private loans in private equity sponsored deals, where For example, an investor can expect to the US have returned about 8 percent the debt arrangement processes are earn an approximately 6 percent return since 2010. This compares with an highly efficient and intermediated. by investing in the current broadly average yield to maturity on the S&P/ As a result, pricing is lowest and credit
The relevance of private debt to the vast mid and lower mid-market universe
Number of companies* EBITDA* Debt financing options Low leverage Syndicate lev. High yield Private bank loans loans bonds debt
Large ✔ ✔ ✔ ✖ 500- caps $/€100m+ 1,000
5,000- Mid-market 10,000 $/€50m-100m ✔ ✔ ✔ −
25,000- Lower mid-market $/€5m-50m 50,000 ✔ ✖ ✖ ✔
100,000- $/€0-5m ✔ ✖ ✖ 300,000 SMEs −
Source: Campbell Lutyens *Estimates for either the US or European economies
November 2019 • Global Investor 30 5 Insight
Fund managers who choose the Growth opportunities right credits, minimise default rates and maximise recoveries will likely The current market for private debt expansion is not only limited outperform those who may build the to traditional, private equity-backed deals. highest-yielding portfolio but sacrifice on diversity, creditor protections and There is a growing recognition that lending to non-sponsored businesses should quality of asset protection. A manager’s form a core part of a private debt manager’s portfolio construction. This leads to philosophy of investment in the current greater diversity in deal selection, and often superior pricing power and robust market, and their rigour in implementing creditor documentation in non-sponsored businesses. Also, most businesses in it, is arguably a better predictor of future the lower mid-market are not owned by private equity sponsors, but that does performance in an environment where not make them unattractive debtors to providers of private debt capital. The credit losses have been very minimal. challenge is opening the non-sponsored market up to capital formation – and Finally, it is important that senior encouraging signs of this growth has filtered through the markets recently. lending is backed by real assets as Another growth area is providing not just term loans to companies, but much as possible. Otherwise, the value also competing with banks on asset-based facilities, such as working capital of a “senior” facility could be rendered loans and equipment leases. Banks often have rigid requirements for these worthless. Managers in leveraged loans, and private debt funds are increasingly seeing an opportunity to credit must lend to businesses that provide customised solutions to businesses that have non-standard financing have estimable and reliable recovery requirements in this area. values in the case of insolvency or Finally, private debt does not only need to be the realm of high leveraged distress. Certain services businesses, corporate balance sheets. There is a growing market for investment grade-type such as in the technology sector, are risk financed privately. This would provide investors with an illiquidity premium currently commanding high levels of over investment-grade bonds, rather than leveraged loans or high yield leverage, some with relatively light asset bonds. The opportunity to provide leverage to most family-owned, mid-market protection. Senior lending strategies businesses is naturally capped by their often more prudent desire to restrict depend on a robust recovery value in leverage to a reasonably low level for financial stability. order to protect in a downside scenario However, these financings are often not possible due to bank restrictions. and avoid capital losses, which can very There is a very promising market in the making for providing low-levered loans to adversely impact the net performance businesses for mid-single-digit returns in return for a lower risk exposure, rather of a fund and wipe out interest income than only focusing on higher risk, higher return sub-investment grade credits. earned in the rest of the portfolio if not properly diversified.
protections are weakest in larger cap Resilient returns deals, where the financing packages Despite the likelihood of entering more need to resemble more the terms difficult economic conditions in 2020, on offer in the publicly traded credit investors should view private debt markets. It is important that lenders at exposure – especially well-managed, the upper end of the market remain as diversified portfolios of senior secured selective as possible and turn away deals loans – as offering robust and resilient that may be stretched from a leverage returns. The high levels of current perspective and provide unattractive risk- income earned on portfolios can act return dynamics versus what is available as a strong buffer against elevated loss in the public markets. rates. The value of asset protection, Likewise, managers will deliver covenant enforceability and portfolio “alpha” in senior secured lending by loss diversification are greatest when going avoidance, and not necessarily through into an elevated credit risk environment. maximisation of gross returns. Investors Relative to other markets in both liquid should evaluate strategies based on their leveraged credit and equity alternatives, assessment of whether an appropriate private debt has proven to provide return is being extracted based on robust and resilient returns. Investors the risks assumed. It is not enough to are fortunate to have this new market benchmark funds based on their gross or as an allocation alternative to navigate net returns, especially in an environment increasingly complex markets and in which default rates have been so low in protect and preserve quality returns for the last decade. their stakeholders. ■
6 Private Debt Investor • November 2019 Insight
Editor’s letter
New York 130 West 42nd Street More than just Suite 450 New York NY 10036 T: +1 212 633 1919 an alternative London 100 Wood Street London EC2V 7AN T: +44 20 7566 5444
Hong Kong Graeme Kerr 19F On Hing Building [email protected] 1 On Hing Terrace Central Hong Kong T: +852 2153 3240
Private Debt Investor Published 10 times a year by hen will we stop foisting the alternatives label onto private debt? That struck PEI Media. To find out more about PEI Media visit thisisPEI.com me as I glanced through PDI’s first-ever global investor list and saw the breadth of the institutional investor community committing to private debt strategies. © PEI Media 2019 W Some such as the Texas County and District Retirement System have invested as much No statement in this magazine is to as 18 percent of their assets in private lending strategies. The proportions may be smaller be construed as a recommendation at other institutions, but with $230 billion in total capital commitments, private debt has to buy or sell securities. Neither this publication nor any part of it clearly become more than just an alternative for these investors. It is a core part of their may be reproduced or transmitted returns strategy. in any form or by any means, And the investor base is clearly growing. electronic or mechanical, including photocopying, recording, or I spent a decade as a financial journalist in by any information storage or Tokyo in the 1990s and came to appreciate “ Private debt has retrieval system, without the prior the unimaginably large asset pool held by permission of the publisher. clearly become Whilst every effort has been the government-backed pension schemes made to ensure its accuracy, the and the postal savings system. The story of publisher and contributors accept more than just an no responsibility for the accuracy how these notoriously cautious institutions of the content in this magazine. have gradually warmed to private markets alternative for Readers should also be aware is one of the key investment themes of that external contributors may these investors ” represent firms that may have recent years, and it was notable how the rise an interest in companies and/or of Asian investors was a core topic of our their securities mentioned in their contributions herein. recent PDI Europe Roundtable in London. Interesting to note, therefore, the appetite of Korean investors. Korean pension funds Cancellation policy You can were among the delegates at PDI’s inaugural Seoul Forum this year and, judging by their cancel your subscription at any time during the first three months enthusiastic response, it can only be a matter of time before one of these joins our ranking. of subscribing and you will Compiling these lists is a painstaking task and we are indebted to the PDI Research receive a refund of 70 percent and Analytics team for their work in pulling this ranking together. There are valuable of the total annual subscription fee. Thereafter, no refund is contributions, too, from Campbell Lutyens, our partner in this project. Campbell Lutyens’ available. Any cancellation request conviction that the private debt markets offer a compelling investment opportunity is the needs to be sent in writing to the subscriptions departments perfect retort to the gloom-laden downturn talk all too prevalent in these uncertain times. (subscriptionenquiries@peimedia. Enjoy the supplement com) in either our London or New York offices.
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November 2019 • Global Investor 30 7 Analysis
Welcome to the PDI Global Investor 30
Private Debt Investor is proud to present its first-ever ranking of the world’s largest institutional private debt investors based on the market value of private debt portfolios. Our Research and Analytics team carried out primary and secondary research on more than 100 institutions to produce this ranking. We look forward to publishing it again in 2020
8 Private Debt Investor • November 2019 Analysis
Rank Institution Headquarters Private debt Private debt allocation (%) allocation ($m)
1 Nuveen, a TIAA company New York 12.2 30,698 p. 9 table
2 Manulife Toronto 3.2 27,275 we need: 3 New York City Retirement Systems New York 9.6 19,246 2019 rank Institution name Headquarters (country) Allocation 4 Canada Pension Plan Investment Board Toronto 5.1 15,066 (%) (1 decimal point) Allocation ($m)
5 AXA Investment Managers Paris 1.4 11,738
6 European Investment Bank * Luxembourg 1.6 10,288
7 Legal and General Investment Management * London 1.6 10,181
8 MEAG Munich 3.3 9,874
9 Zurich Insurance Group * Zurich 4.7 9,200
10 Temasek Holdings Singapore 4.0 9,164 R&A Attributions 11 Public Sector Pension Investment Board (PSP Investments) Ottawa 6.3 7,870 Dan Gunner, Director of Research & analytics, dan.g@peimedia. com 12 Arizona State Retirement System Phoenix 17.5 7,053 Nicole Douglas, Head of Investor Research, nicole.d@peimedia. 13 Texas County and District Retirement System Austin 18.6 5,666 com 14 Ontario Municipal Employees Retirement System *, ** Toronto 7.8 5,561 Contributors: Stephen Schultz, Chin Yuen, Tom Zimmer-
15 Pennsylvania Public School Employees' Retirement System Harrisburg 9.1 5,077 mann
16 California Public Employees' Retirement System Sacramento 1.4 5,024
17 Maryland State Retirement and Pension System Baltimore 8.0 4,216
18 Assicurazioni Generali Trieste 0.7 4,152
19 Universities Superannuation Scheme (USS) Liverpool 4.7 4,113
20 Crédit Agricole Assurances * Paris 1.2 3,801
21 Australia Future Fund * Melbourne 3.0 3,051
22 AustralianSuper Melbourne 2.7 2,985
23 Metropolitan Life Insurance Company Whippany 0.7 2,935
24 New York State Common Retirement Fund Albany 1.3 2,733
25 Teachers' Retirement System of the State of Illinois Springfield 4.4 2,300
26 BCI (formerly British Columbia Investment Management Corporation) Victoria 1.9 2,223
27 Virginia Retirement System Richmond 2.7 2,187
28 Employees Provident Fund of Malaysia Kuala Lumpur 1.0 2,106
29 South Carolina Retirement System Columbia 6.3 2,015
30 California State Teachers' Retirement System Sacramento 0.8 1,934
* figures from date prior to 31 March 2019 ** figure includes mortgages
November 2019 • Global Investor 30 9 Analysis The Global Investor 30 in numbers
0510 15 20 25 30 35 Nuveen, a TIAA company Manulife New York City Retirement Systems Canada Pension Plan Investment Board AXA Investment Managers European Investment Bank Legal and General Investment Management MEAG Zurich Insurance Group Temasek Holdings Public Sector Pension Investment Board (PSP Investments) Arizona State Retirement System Texas County and District Retirement System Ontario Municipal Employees Retirement System Pennsylvania Public School Employees' Retirement System California Public Employees' Retirement System Maryland State Retirement and Pension System Assicurazioni Generali Universities Superannuation Scheme (USS) Crédit Agricole Assurances Australia Future Fund AustralianSuper Metropolitan Life Insurance Company New York State Common Retirement Fund Teachers' Retirement System of the State of Illinois BCI (formerly British Columbia Investment Management Corporation) Allocation to Virginia Retirement System Employees Provident Fund of Malaysia private debt South Carolina Retirement System California State Teachers' Retirement System ($bn)
Regional breakdown of appetite to private Investor appetite debt by investors globally (%) 020406080 PDI data reveal private $230bn debt investors have a clear North America Total capital commitment preference for North America of the top 30 to private debt opportunities
Europe $153bn Asia-Pacific Total capital commitment of MENA the top 10 to private debt
10 Private Debt Investor • November 2019 Analysis The Global Investor 30 in numbers
0510 15 20 25 30 35 Nuveen, a TIAA company Manulife New York City Retirement Systems Canada Pension Plan Investment Board AXA Investment Managers European Investment Bank Legal and General Investment Management Capital commitment by regional HQ of the top 30 MEAG Zurich Insurance Group Temasek Holdings Public Sector Pension Investment Board (PSP Investments) Arizona State Retirement System Texas County and District Retirement System Ontario Municipal Employees Retirement System Pennsylvania Public School Employees' Retirement System California Public Employees' Retirement System $149.1bn $63.3bn Europe Maryland State Retirement and Pension System North America Assicurazioni Generali Universities Superannuation Scheme (USS) $17.3bn Crédit Agricole Assurances Asia-Pacific Australia Future Fund AustralianSuper Metropolitan Life Insurance Company New York State Common Retirement Fund Teachers' Retirement System of the State of Illinois BCI (formerly British Columbia Investment Management Corporation) Virginia Retirement System Employees Provident Fund of Malaysia South Carolina Retirement System California State Teachers' Retirement System
Strategy preferences of private debt investors globally (%)
01020304050607080
Subordinated/Mezzanine debt (origination) Distressed debt (acquisition) Senior debt (origination) Subordinated/Mezzanine debt (acquisition) Senior debt (acquisition) Fund of private debt funds Unitranche (origination) Venture debt (origination) Royalty financing (origination) CLO
November 2019 • Global Investor 30 11 Analysis
What makes a top 30 investor?
The Global Investor 30 is based upon the market value of investors’ private debt investment portfolios. This value is measured at a single point in time for all investors to provide a like-for-like comparison. For this year’s ranking, it is 31 March 2019.
This is a ranking of investors only and not funds of funds or private debt funds.
What the ranking includes Structures and strategies What the ranking excludes
• Private debt The definition Capital committed or invested • Expected commitments We of private debt investment, for through the following strategies is do not count pending or future the purposes of this ranking, is included: commitments and investments or capital committed to a dedicated the uncommitted portion of an programme of investing in the debt • Funds (both open-ended and institution’s target allocation. of private companies, or the non- closed-ended) bank debt financing of leveraged • Hedge funds We do not count buyouts, infrastructure projects • Separately managed accounts hedge fund strategies as these and real estate. This includes primarily target liquid securities or distressed debt, funds of private • Commitments to private debt fund trading strategies. debt funds, royalty financing, managers that happen to be public- senior debt, subordinated/ ly traded • Opportunistic investments With mezzanine debt, unitranche and these, there is no hard capital venture debt. • Capital committed to co-invest- allocation to an investment pro- ment vehicles gramme. • Investor criteria Investors with a defined allocation to private debt • Direct investments and active investors in private debt funds that may not have defined • Proprietary capital (we do not Research process allocations are both considered consider assets managed on behalf for this ranking. Where the of third parties) PDI seeks to communicate directly investments are made in what by phone and email with investors may be termed ‘grey areas’, we to find out the market value of their reserve the right to make the final private debt portfolios. In the absence judgment based on applicability of primary data, we have gathered data according to our definition. from secondary sources and sought We understand that investors’ to validate the researched figure with definitions of private debt may not the investors before publishing the entirely mirror the definition given final list. above. Hence, we have used our discretion to determine the most appropriate figure for each investor profiled.
12 Private Debt Investor • November 2019 Analysis
KEYNOTE INTERVIEW
‘Private debt is being used as a fixed income replacement’
Institutional investors are still in the discovery phase, but all the signs point to growth in both fundraising and deployment, say Campbell Lutyens head of private debt advisory group Richard von Gusovius and private debt specialist Jeffrey Griffiths
An extended period of low growth, low and private debt specialist Jeffrey Griffiths ployment. There is even a slight imbalance inflation and low interest rates has been a about where investors are eyeing opportuni- where managers’ desire to deploy capital is boon to private debt. Investors have taken ties and where they should be careful. not completely met by the provision of cap- note. According to our PDI Global Investor ital by the investor community. 30 debut ranking, the top 30 of them Given the level of fundraising combined have allocated over $200 billion Q and deployment, is the private Richard von Gusovius: We are more op- to the asset class. It is a significant chunk debt market overheated? timistic today regarding capital raising than of capital and marks its emergence from a Jeffrey Griffiths: The question is: Is private at the beginning of the year. As expectations niche alternative strategy to an increasingly debt more overheated than other pockets of of rising interest rates vanished over the mainstream part of any private investor’s the alternative market? I would argue no be- course of the first half of 2019, more inves- portfolio. cause although returns have compressed, as tors actively expressed an interest to start or With expectations of rising allocations all asset classes have, it has not been substan- increase allocations to private debt. This is to private debt over the next five years, we tial. Fundraising has been quite stable and slightly offset by some direct lending fatigue asked Campbell Lutyens’ head of private we don’t see it falling back significantly in among investors that deployed two or three debt advisory group Richard von Gusovius the future. We also see a healthy level of de- years ago that are waiting to see how their
November 2019 • Global Investor 30 13 Analysis
lic and private equity. They are weighted on When you talk to LPs, are they wary of a each end of the risk spectrum. We would argue that investing in private debt is more possible downturn? efficient and less volatile. But we understand it’s a relatively new asset class where inves- RvG: A lot of them have strong views that there will be one. Views range from tors would like to monitor performance a corporate credit-led Armageddon, which we don’t believe in, to a sideways over the longer term before they build out movement of sector-led volatility, for instance by the German automotive industry. their allocation. Investors need to make sure they are diversified over a broad set of strategies, sectors and geographies and that their underlying GPs don’t take unnecessary risks. We Is there room for growth in both often see GPs that want to participate in the larger end of the market are tempted to Q capital raising and deployment? underwrite larger loans to raise a larger fund going forward. That’s a very dangerous JG: Definitely in the senior secured direct spot. lending market that is starting to diversify into transactions with non-private equi- JG: Investors in this market tend to be risk averse. They are not necessarily looking ty owned businesses, including family and for upside but for downside protection. They worry about whether this is the right employee-owned companies. That’s a much time to invest. With downside protected senior secured lending strategies you bigger opportunity than any other in alter- shouldn’t try to time the market. It’s about adjusting the size of your allocation. If natives. we do experience a rough patch, we could see more aggressive participants perform badly and some angry investors. That will flush out the market and help investors RvG: Also, increasingly investors are looking discern between riskier and more conservative practices. to deploy outside of corporate lending into more asset-based structures, consumer lend- ing and real estate. There’s continued interest in infrastructure but also in aviation, equip- ment financing and working capital financ- ing. That’s a trend we’ve seen over the last 18 months and where there is probably not enough of an institutional grade offering yet.
During fundraising, what Q concerns do investors voice? RvG: A few years ago investors would only be worried about deployment. Those that have been in this asset class for four or five years have certainly learned a lot and now know the questions they need to ask: Is the team big enough to deploy capital well; are managers well diversified geographically and in underlying sectors; how would a manager respond when things go wrong? They look at the team and ask who is your workout ex- pert? They are more realistic than they were about the prospects and more informed. commitments perform before they take it to Would you say then that the next level. That’s natural. Q investors are under-allocated to Are they carving out more There are pockets of exuberance but if private debt? Q private debt-specific you look at the capital overhang numbers JG: Definitely. The traditional investor, a allocations? over the past five years, GPs have always pension fund or insurance company, typi- RvG: Increasingly yes, but still at a low base. been able to deploy that capital. Com- cally have long-term liabilities that require Institutions are still in the discovery phase. pared to the broader syndicated loan mar- returns of 5, 6 or 7 percent. That lends it- They are subject to stringent approval pro- ket, private debt continues to see higher self very nicely to a private debt investment cesses, so once they have gone through all equity cushions and lower leverage levels strategy. However, the average allocation to the pain of establishing the asset class, they particularly at the smaller end of the direct private debt is still in the low single digits, will run it separately rather than invest from lending market, which we find particularly 2-5 percent max. Investors will typical- their public or alternative pockets. Certainly attractive. And we see increased use of direct ly have a large allocation to low returning private debt is being used as a fixed income lending, particularly among financial spon- fixed income – government and investment replacement rather than an alternative asset sors transacting smaller deals. Previously grade bonds – and maybe some high yield class. That’s where most of the growth will they depended largely on banks. debt, and also a sizeable allocation to pub- come from.
14 Private Debt Investor • November 2019 Analysis
What types of new investors are where relatively speaking there is an under- Q eying private debt? “Private debt is being supply of capital. JG: We see more insurance companies in- vesting in the market. Asia has a large, ex- used as a fixed income Is that where you see the most panding pension market where institutions Q opportunity? have to invest outside their home markets replacement rather JG: Financing lower mid-market companies typically. This type of exposure can be at- with EBITDA of between $5 million and tractive. And we also see some family offices than an alternative $30 million, including non-sponsored trans- increasing allocations as a stable source of actions, is where we see the biggest oppor- income in their portfolios. asset class. That’s tunity and the best risk return, the strongest deal structures, reduced competition and RvG: One segment that is yet to be fully where most of the the best pricing. tapped, at least outside of the US where private investors have access to BDCs, is growth will come And where should investors private wealth. The retail market certainly Q exercise caution? would benefit from more affordable- offer from” JG: There is more risk at the larger end of ings. If someone were to create a product the market where the pricing is thinner and that independent financial advisors could the erosion of creditor protection has been a RICHARD VON GUSOVIUS put into individual pension funds that would theme that has filtered down from the lever- unleash quite a big volume of capital. aged loan market. Through another default cycle, we don’t Where do they first dip their expect to see a change in default rate behav- Q toes? iour, but loss rates might be higher because JG: New allocations generally go into lower creditor protections are weaker. And private risk, lower return, large fund strategies with equity sponsored activity may witness high- brand name managers with longer track re- er loss rates. cords. That’s why you’ve seen, particularly The interests of equity and debt holders in Europe, an explosion of fund sizes where can be very different and antagonistic. The brand name managers are able to aggregate most aggressive business owners are typical- increasingly large sums of capital. ly private equity funds that are motivated by financial gain, as opposed to a family or RvG: Private debt has reached a place employees who hold a much more con- where managers at the large end have structive, longer-term value preservation pulled away. Those teams need to deploy mindset. capital into huge transactions and are in- years ago. Sponsors at the large end can creasingly competing with the public mar- keep transactions out of the public realm RvG: At the larger end of direct lending, kets. We’ve seen unitranches of over $1 for which they pay a premium. In terms of typically sponsored lending, we have seen billion being offered and executed. That number of transactions, there’s much more cases where private equity owners were able wouldn’t have been possible three or four happening at the smaller end of the market, to use weaker creditor protection to their ad- vantage, ahead of a credit event, for example by being able to sell off profitable parts of the business, IP, etc, and extract value for them- As more LPs look to this market, do selves when traditionally the lender would have had a say over capex or disposals. you see any changes in fund structures, Sponsored lending is an important part of any given portfolio, but investors need fees or terms? to ensure there are no conflicts of interest and their GPs are underwriting compa- RvG: As investors learn the asset class, build relationships and seek to deepen nies, and not sponsors. Investors can simply them, we will see more permanent capital vehicles and the rise of large bespoke check during due diligence whether the GP mandates that absorb the sizeable allocations entering this market. Rather than LPs in question has a material concentration of recommitting every two to three years, for which they don’t have the bandwidth, in sponsors in their loan portfolio. this model investors will have core direct lending relationships with say two US and Also, at the larger end of the market, two European GPs that manage open-ended structures they can call. The GP will some very large funds are competing for a take the principle flows and reinvest the capital and give the investor the share of limited number of transactions, and as they income they need to meet their liabilities, and the investor will have the capacity to start competing with capital markets and pursue more accretive strategies around it. therefore need to lend more for less for longer, LPs should be very cautious. n
November 2019 • Global Investor 30 15 Profiles
The institution types: Global insurer European pension fund Asia-Pacific pension fund Sovereign wealth fund N American pension fund Asset manager/bank
Nuveen, a TIAA Manulife New York City company AUM: $850.4bn Retirement Systems 1AUM: $252.4bn 2 Head office: Toronto 3 AUM: $200.7bn Head office: New York Head office: New York Canadian headquartered Manulife Nuveen is the investment arm of provides more than 28 million The New York City Retirement Systems the Teachers Insurance and Annuity customers across North America, is a collection of five pension funds Association of America-College Asia and Europe with financial advice, across the City of New York covering Retirement Equities Fund and is one of the insurance and wealth management Teachers, Police, Fire and other largest investment managers in the world. solutions. As one of the most active employees. Each of the five funds has Its private debt investments focus on investors in private debt, the institution its own board of trustees to decide subordinated and mezzanine debt funds focuses on opportunities across most asset allocation and strategy. in North America and Western Europe. regions globally.
Private debt allocation Private debt allocation Private debt allocation $30.7bn $27.3bn $19.2bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
12.2% 3.2% 9.6%
Canada Pension Plan AXA Investment European Investment Investment Board Managers Bank 4 AUM: $293.8bn 5 AUM: $841.6bn 6 AUM: $636.7bn Head office: Toronto Head office: Paris Head office: Luxembourg
As one of Canada’s largest pension The investment management arm of The European Investment Bank is the funds, the Canada Pension Plan French insurer AXA has a relatively lending arm of the European Union Investment Board is a major investor in small allocation to private debt given and has a strong focus on backing all alternative asset classes, including its immense size. Its private debt investments in SME and mid-cap private debt. The firm is increasingly investments focus on CLO and senior businesses, both of which fall within making direct investments in the asset debt funds across North America, the scope of traditional direct lending class, having acquired debt fund Europe and Asia-Pacific. funds. Its most recent investment was manager Antares and has set up its €80 million to venture debt vehicle the own in-house private debt team. Eiffel Essentiel Fund.
Private debt allocation Private debt allocation Private debt allocation $15.1bn $11.7bn $10.3bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
5.1% 1.4% 1.6%
16 Private Debt Investor • November 2019 Profiles
The institution types: Global insurer European pension fund Asia-Pacific pension fund Sovereign wealth fund N American pension fund Asset manager/bank/other
Legal and General MEAG Zurich Insurance Investment AUM: $303.1bn Group 7 Management 8 Head office: Munich 9 AUM: $195.0bn AUM: $628.5bn Head office: Zurich Head office: London MEAG manages the assets of Munich Re and ERGO, as well as a number of Zurich Insurance Group has committed institutional and private clients and The insurer has long been a player in a significant chunk of its $195 billion of has reach across Europe, Asia and private debt, having run its own in-house assets to alternatives and particularly North America. The firm’s private debt private debt investor which it later spun favours private debt and real estate investments tend to focus on private out as Pemberton. It continues to invest assets. Private debt accounts for debt funds in North America, in Pemberton’s funds, having backed its almost 5 percent of its total assets Asia-Pacific and Europe. most recent vehicle. under management, equivalent to nearly $10 billion.
Private debt allocation Private debt allocation Private debt allocation $10.2bn $9.9bn $9.2bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
1.6% 3.3% 4.7%
Temasek Public Sector Arizona State Holdings Pension Investment Retirement System 10 AUM: $229.1bn 11 Board 12 AUM: $40.3bn Head office: Singapore AUM: $125.9bn Head office: Phoenix Head office: Ottawa Temasek is an investment firm with Arizona’s public sector pension fund is significant investments in Asia. Its Canada’s PSP Investments is a major another prolific investor in alternatives, allocation to private debt is small player in alternative assets and with private debt commanding the but the firm is increasing its role in manages a diversified global portfolio. largest allocation from its funds. The the asset class and finalised its first Private debt is a relatively small part, but firm has 17.5 percent of its portfolio direct investment last year with a $200 the firm has made big commitments committed to the asset class and could million facility for a New York-based including €500 million for European go further with a target allocation of clothing rental firm. fund manager AlbaCore in 2016. 20 percent.
Private debt allocation Private debt allocation Private debt allocation $9.2bn $7.9bn $7.1bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
4.0% 6.3% 17.5%
November 2019 • Global Investor 30 17 Analysis Q&A
White Oak Global Advisors chief executive and co-founder Andre Hakkak suggests investors take a wider perspective and look beyond sponsored lending
Often, investors looking at the private debt top of the cycle, we’re not going to do any market assume the terrain is primarily com- more private credit”. prised of sponsored lending opportunities. Chief investment officers may say they Not so, says White Oak Global Advisors are doing less private debt while continuing chief executive and co-founder Andre Hak- to allocate a lot of money to private equity. kak. He believes that the real private debt We would say at this point, at the top of the opportunity is to be found in lending to cycle, investors should be aiming to occupy businesses seeking financing but excluded a stronger position in the capital structure from bank lending. of a business.
How does White Oak Global Are there new types of LPs QAdvisors go about investing? Q looking at private debt? We focus on non-sponsored, traditional erage. However, there are 500-600 managers In the US, the larger alternative invest- A lending to businesses that a bank may presenting sponsored lending as traditional A ment manager platforms are definitely perceive to be a little too risky to put on its lending. This means the investor base has moving downstream by launching business balance sheet. When the bank says, “no, we a skewed view of the nature and volume of development companies and integral funds can’t help you”, we are positioned to say, non-bank speciality lending. to target high-net-worth and accredited in- “maybe we can”. Unlike banks that fund vestors. On a leveraged basis, these structures loans with their liabilities, we match our What kinds of limited partners have strong purchasing power and most are loan assets with investor capital. We have Qinvest in your funds? focused on providing leverage to private eq- 25 products in three categories: equipment Our LPs are global insurance compa- uity firms. and leasing loans, asset-based loans and bank A nies, pension funds, charities and sover- term loans. A highly diversified portfolio is eign wealth funds. Where should investors and a better proposal to investors than a concen- Q managers be cautious? trated one, and our funds have thousands of What comes up in conversations It’s easy to say you’re being very cautious underlying credits diversified by sector, loan Q with investors? A and to be conservative. But, in reality, a type and geography. Number one: they have heard so much lot of the risk we underwrite is idiosyncratic. A about sponsored lending that we feel You can find wonderful investment opportu- Why don’t you look at they need to take two steps back and look at nities at the top or bottom of the cycle. If you Qsponsored deals? the whole lending landscape and get educat- only offer highly levered cashflow loans, then Our addressable market in the US en- ed. We provide them with a lot of facts and of course you are more susceptible to eco- A compasses more than 350,000 small and data. nomic cycles. If you’re lending to businesses medium-sized businesses, as well as a portion Then there’s a lot of uncertainty regard- on an asset-based basis, that’s a safer bet and of 3.3 million merchants, some of whom will ing the macro environment and geopoli- you can provide a more defensible portfolio. graduate into small businesses each year. In tics. People are taking a more cautionary Sometimes investors take a big brush and contrast, there are only 12,000-13,000 busi- approach to their portfolios. We’ve heard paint a whole sector as hazardous when there nesses owned by private equity sponsors to investors say everything from “we want to are segments within it that provide very at- which private debt managers can provide lev- have more of a liquid portfolio” to “it’s the tractive risk-adjusted returns. ■
18 Private Debt Investor • November 2019 Profiles
The institution types: Global insurer European pension fund Asia-Pacific pension fund Sovereign wealth fund N American pension fund Asset manager/bank
Texas County and Ontario Municipal Pennsylvania Public District Retirement Employees School Employees’ 13 System 14 Retirement System 15 Retirement System AUM: $30.4bn AUM: $71.1bn AUM: $55.8bn Head office: Austin Head office: Toronto Head office: Harrisburg
Texas County has a substantial The fund has a long history of The pension fund for Pennsylvania’s 18.6 percent allocation to private alternatives investment, including a near public school employees has more debt yet remains below its 25 percent 8 percent exposure to private debt. The than $5 billion invested in private debt allocation target. As a result, it has pension plan has a focus on long-term, and made several commitments in been regularly deploying capital, most sustainable returns that also focuses on 2018 and 2019. Its most recent was recently providing $250 million for ESG concerns. $200 million for Bain Capital Distressed Silver Point Specialty Credit Fund II. and Special Situations 2019.
Private debt allocation Private debt allocation Private debt allocation $5.7bn $5.6bn $5.1bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
18.6% 7.8% 9.1%
California Public Maryland State Assicurazioni Employees’ Retirement and Generali 16 Retirement System 17 Pension System 18 AUM: $583.5bn AUM: $357.7bn AUM: $52.7bn Head office: Trieste Head office: Sacramento Head office: Baltimore Trieste-based insurer Assicurazioni The largest public pension fund in Maryland’s public pension fund has Generali commands significant assets the US has long been a key player more than 405,000 members and is but has a relatively small exposure to in alternative assets. Its private debt seeking consulting services to help private debt at less than 1 percent exposure is comparatively small but it invest more into private markets. It of its admittedly large portfolio. still amounts to more than $5 billion. continues to invest in debt funds and The firm’s private debt investments In 2018 it committed $250 million to in 2019 provided $150 million for CVI tend to target pan-European senior TowerBrook Structured Opportunities II. Chesapeake Credit Opportunities. debt funds.
Private debt allocation Private debt allocation Private debt allocation $5.0bn $4.2bn $4.2bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
1.4% 8.0% 0.7%
November 2019 • Global Investor 30 19 Analysis Q&A
Angel Island Capital CEO Dev Gopalan and chief strategy officer Lynette Vanderwarker explain the appeal of an asset-based strategy
Angel Island Capital, after more than a dec- ade investing as a permanent portfolio com- pany of private equity investment firm Gold- en Gate Capital, is spreading its wings. The San Francisco-based manager with approxi- mately $3.4 billion of assets under manage- ment is currently deploying capital in Credit Opportunities, its flagship investment strate- gy, and Asset Based Opportunities. We asked AIC’s chief executive Dev Gopalan and chief strategy officer Lynette Vanderwarker why the firm is targeting as- set-based lending opportunities.
Asset-based means different Q things to different people – is less correlated to corporate credit and of- many institutions’ overall allocation, the re- what’s your definition? fers downside protection for the same type of ality is that corporate credit doesn’t cut it on Dev Gopalan: Investors see “as- return profile. its own. The illiquidity premium has faded. Aset-based” as a broad category consist- Additionally, we believe this strategy will ing of everything from airplane leasing to grow as businesses grow and their capital Why did you lend to structured credit to bespoke transactions to needs expand. In our view, private sources of Q Aura? risk transfer trades. We focus on three main capital are better positioned to service such DG: We first started looking at Aura in verticals. The first is housing, which includes demand since these opportunities require A2012. We have a strong focus on being lending against things like mortgage servicing complex solutions, which many banks are a good partner to companies with good en- rights and actual single-family homes. The not willing or able to provide. vironmental, social and governance practices second is consumer, which covers lending like Aura because it’s providing loans to com- against pools of consumer loans. These two Which investors are potentially munities that don’t have access to banks due to verticals will constitute the bulk of the assets Q branching out into strategies their credit score. The company uses payment in our Asset Based Opportunities investment like asset-based lending? history, for instance, remittances, to determine strategy. Our Asset Based Opportunities Lynette Vanderwarker: Public pen- risk. The loan is backed by a pool of residuals strategy also includes investments in “risk A sions, insurance companies, endow- segregated from the company’s other assets, transfer” opportunities, such as businesses in ments, high-net-worth individuals and the which provides downside protection. There’s equipment leasing. As an example of a risk same folks that have focused on the regu- also a very tight covenant package, delinquen- transfer loan, we’ve just closed a $28.7 million lar first-lien senior secured direct lending cy triggers and a company guarantee – multi- expansion loan to consumer loans business market. These are increasingly specialist, ple ways out for us to get repaid. Aura, which is backed by a pool of residuals. established investors looking at asset-based lending to comprise a return in the low- to What does Angel Island Capital Why are investors branching out mid-teens and generate a 9-11 percent cur- Q look like five years from now? Qinto strategies like asset-based rent income. These investors typically un- LV: AIC aims to build out a multi-strat- lending? derstand that additional modest levels of A egy credit platform – focusing on not DG: Many investors exposed to corpo- leverage may be employed in making these only corporate credit but asset-based solu- A rate credit or direct lending are worried types of investments and certain deal sizes tions – that caters to the objectives of institu- that we’re 10 years into a bull market and may be relatively large. Now that private tional and high-net-worth investors seeking headed for a correction. Asset-based lending credit is a permanent asset allocation within private credit exposure. ■
20 Private Debt Investor • November 2019 Profiles
The institution types: Global insurer European pension fund Asia-Pacific pension fund Sovereign wealth fund N American pension fund Asset manager/bank
Universities Crédit Agricole Australia Future Superannuation Assurances Fund 19 Scheme (USS) 20 AUM: $326.7bn 21 AUM: $102.7bn AUM: $87.5bn Head office: Paris Head office: Melbourne Head office: Liverpool Crédit Agricole Assurances is a The Australian sovereign wealth fund The USS has a substantial 30 percent major French insurer with operations is responsible for investing on behalf of its capital allocated to alternatives, worldwide. It has a modest allocation to of several vehicles. As well as the of which private debt is the smallest private debt relative to its large portfolio main Future Fund, it also invests from component. It serves both defined and is known to have previously the Medical Research Future Fund, benefit and defined contribution invested in mezzanine funds via French Aboriginal and Torres Strait Islander pension savers and has a particularly asset manager Amundi. Land and Sea Future Fund and the strong focus on investing in the UK. DisabilityCare Australia Fund.
Private debt allocation Private debt allocation Private debt allocation $4.1bn $3.8bn $3.1bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
4.7% 1.2% 3.0%
AustralianSuper Metropolitan New York AUM: $111.8bn Life Insurance State Common 22 Head office: 23 Company 24 Retirement Fund Melbourne AUM: $431.8bn AUM: $210.2bn Head office: Whippany Head office: Albany AustralianSuper is one of the largest pension providers in Australia and claims MetLife is a US-headquartered insurer The fund claims to be the third-largest to provide services to one in 10 working that has offices in the US, Japan, Latin public pension plan in the US with Australians. Its private debt allocation America, Asia, Europe, the Middle East more than one million members. It is relatively small compared with and Africa. The firm has a 0.7 percent continues to make commitments to other alternative asset classes and has allocation to private debt and has private debt, especially distressed historically been focused on investments historically invested in mezzanine funds debt. In 2019, it provided $200 million in the Asia-Pacific region. across North America and Europe. for Clearlake Opportunities Partners II.
Private debt allocation Private debt allocation Private debt allocation $3.0bn $2.9bn $2.7bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
2.7% 0.7% 1.3%
November 2019 • Global Investor 30 21 Analysis Q&A
Benefit Street Partners’ senior portfolio manager Blair Faulstich describes how the firm is readying its private debt portfolio for a market downturn
In the private debt space, established lender tion as downside protection across the port- Benefit Street Partners focuses on two main folio. strategies: a senior secured-only approach, Within each industry we continuously and a second strategy that allows the manag- monitor trends and will increase or decrease er to lend across the capital structure. Senior our exposure to a sector to reflect that. We portfolio manager Blair Faulstich explains are not industry generalists and leverage our why, in this current market environment, sector-focused analysts across the portfolio. the firm is sticking to the top of the capital structure. What are LPs worried Q about? There’s lots of talk of a Investors are concerned about many is- Q downturn – do you see one on Asues, but they are often asking us about the horizon? general macro economic factors, such as We expected to have seen a mac- Have concerns about the macro- trade wars, currency issues, Federal Reserve A ro-recession already. We believe one’s Q environment impacted the policy and political unrest. We say wait for a coming at some point in the next couple of sectors you lend to? market reset – there will be one. That’s the years. A variety of macro factors concern us We have always avoided highly cyclical time to rethink where to play in the capital and we are seeing warning signs of late-stage Asectors and are focused on diversifica- structure. behaviour, including rising leverage levels, tighter spreads and a significant deteriora- Given investor caution, are LPs tion of credit documents, particularly at the Q looking for new strategies? large-sponsored end of the market. That LPs concerned about competition trend is starting to work its way down into A within the private debt space are look- the middle market, where we are active. In ing to add niche strategies to core direct this type of environment, we’re dialling lending positions with a heightened focus on down our risk, playing defence and investing aviation finance, asset-backed lending and our partners’ capital at the top of the capital royalty finance. structure. We’re not chasing yield right now; we’re chasing safety and durability. It’s a cap- After a future downturn, what ital preservation strategy. “We’re not chasing Q will the private debt market look like? What type of businesses do you yield right now; It’s a crowded space and there will be Qlend to? A a shake out of private debt managers A combination of private equity-backed we’re chasing safety when the next recession hits. We believe A and non-sponsored businesses in the managers of scale with internal workout ca- North American middle market. We focus and durability. It’s a pabilities are best positioned to weather a on the core middle market with companies downturn. that generate between $25-$100 million of capital preservation Private credit is now a permanent part EBITDA. We believe this part of the market of the leverage finance market ecosystem – will outperform the lower middle market in strategy” that won’t change, but we believe there will an economic downturn. be fewer firms.■
22 Private Debt Investor • November 2019 Profiles
The institution types: Global insurer European pension fund Asia-Pacific pension fund Sovereign wealth fund N American pension fund Asset manager/bank
Teachers’ Retirement BCI Virginia Retirement System of the State AUM: $115.2bn System 25 of Illinois 26 Head office: Victoria 27 AUM: $80.4bn AUM: $52.2bn Head office: Richmond Head office: Springfield Although Canadian pension fund BCI has been a big investor in alternative The pension fund serves 705,000 assets, which makes up more than The pension fund has been actively members in defined benefit, defined one-third of its portfolio, private debt seeking out debt opportunities in recent contribution and hybrid plans. It has is still a relatively small part of this. The years. It has backed vehicles that invest particularly sought out investments fund has invested in a wide range of across the capital stack including senior in distressed debt vehicles. In 2019, it corporate lending strategies across debt, mezzanine and distressed funds. committed $150 million to KKR Real senior debt, mezzanine and distressed. In 2019, it provided $100 million for Estate Credit Opportunity Partners II. Taurus Mining Finance Fund II.
Private debt allocation Private debt allocation Private debt allocation $2.3bn $2.2bn $2.2bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
4.4% 1.9% 2.7%
Employees South Carolina California Provident Fund of Retirement System State Teachers’ 28 Malaysia 29 AUM: $32.0bn 30 Retirement System AUM: $210.6bn Head office: Columbia AUM: $227.8bn Head office: Kuala Lumpur Head office: Sacramento The South Carolina Retirement System Malaysia’s public pension plan has manages five pension funds for public CalSTRS has a significant allocation a small but significant allocation employees including police, national to alternatives, particularly real estate, to private debt and is focused on guard and judges representing more but its private debt exposure remains investing in fund of private debt funds. than 590,000 members. It continues to relatively small. It backed two debt It has a broad geographic scope and back private debt funds and in 2019 funds in 2018, including a real estate can invest globally with a preference committed $500 million to a joint debt joint venture with POBA and the for corporate debt opportunities. venture with Barings BDC. Peak Rock Capital Credit Fund II.
Private debt allocation Private debt allocation Private debt allocation $2.1bn $2.0bn $1.9bn Private debt allocation as % of AUM Private debt allocation as % of AUM Private debt allocation as % of AUM
1.0% 6.3% 0.8%
November 2019 • Global Investor 30 23 Analysis
University of 1Michigan
Size of portfolio $12.1bn
Fund commitments by vintage
12
8
4
0 2014 2019
Total commitments by regional focus
Multi-regional Western 29% Europe 15%
Asia-Pacific North America The 10 most 17% 39% Total commitments by strategy
Unitranche Royalty financing active investors 5% 7% CLO 2% Our Global Investor 30 lists the leading private debt LPs in terms of the amount of capital, but which
investors are the most active in the asset class? Distressed debt This list of the top 10 investors in terms 34% Senior debt Subordinated/ of number of reported commitments Mezzanine debt 29% provides a very different set of names 22% Source: PDI
24 Private Debt Investor • November 2019 Analysis
Figures may not add up to 100% due to rounding
Florida Retirement Texas County and Pennsylvania Public 2System Trust Fund 3District Retirement 4School Employees’ System Retirement System
Size of portfolio Size of portfolio Size of portfolio $164.4bn $30.4bn $55.8bn
Fund commitments by vintage Fund commitments by vintage Fund commitments by vintage
10 15 8 8 12 6 6 9 4 4 6 2 3 2 0 0 0 2014 2019 2014 2019 2014 2019
Total commitments by regional focus Total commitments by regional focus Total commitments by regional focus
Multi-regional Multi-regional Western Western 35% Europe Multi-regional Europe 53% 13% 46% 7%
North America Asia-Pacific North Asia- North America Pacific America 47% 3% 48% 4% 43%
Total commitments by strategy Total commitments by strategy Total commitments by strategy
Senior debt Royalty CLO Unitranche financing 3% Distressed debt Senior debt 3% 6% 3% 39% 25% Senior debt 26%
Unitranche 3% Distressed debt Subordinated/ Distressed debt Subordinated/ Subordinated/ Mezzanine debt 55% Mezzanine debt Mezzanine debt 47% 44% 10% 36%
Source: PDI Source: PDI Source: PDI
November 2019 • Global Investor 30 25 Analysis
San Francisco New York Teachers’ Retirement 5 Employees’ 6 State Common 7 System of the State Retirement System Retirement Fund of Illinois
Size of portfolio Size of portfolio Size of portfolio $24.1bn $210.2bn $52.2bn
Fund commitments by vintage Fund commitments by vintage Fund commitments by vintage
8 8 5 4 6 6 3 4 4 2 2 2 1 0 0 0 2014 2019 2014 2019 2014 2019
Total commitments by regional focus Total commitments by regional focus Total commitments by regional focus
Western Western Multi-regional Europe Multi-regional Europe Multi-regional North America 48% 4% 54% 4% 40% 56%
Asia- Middle Pacific North East/ North Asia-Pacific 19% America Africa America 4% 30% 4% 38%
Total commitments by strategy Total commitments by strategy Total commitments by strategy
Royalty Senior debt Royalty financing Distressed financing Distressed CLO debt debt 12% 4% 8% 48% 4% 24%
Subordinated/ Senior debt Distressed Subordinated/ Subordinated/ Senior debt Mezzanine debt debt Mezzanine debt Mezzanine debt 22% 26% 42% 42% 32% 36%
Source: PDI Source: PDI Source: PDI
26 Private Debt Investor • November 2019 Analysis
Figures may not add up to 100% due to rounding
European Investment Texas Municipal Teachers’ 8Fund 9Retirement System 10 Retirement System of Louisiana
Size of portfolio Size of portfolio Size of portfolio $33.3bn $30.0bn $20.9bn
Fund commitments by vintage Fund commitments by vintage Fund commitments by vintage
5 8 6
4 6 4 3 4 2 2 1 2 0 0 0 2014 2019 2014 2019 2014 2019
Total commitments by regional focus Total commitments by regional focus Total commitments by regional focus
Multi-regional Western Western 17% Europe Europe Europe 29% 4% 5%
Western North Multi-regional North Europe America America 83% 67% 73% 23%
Total commitments by strategy Total commitments by strategy Total commitments by strategy
Venture debt Venture debt CLO Senior debt Unitranche 4% 4% 4% 5% 4% Distressed debt 21%
Subordinated/ Senior debt Subordinated/ Senior debt Distressed Subordinated/ Mezzanine debt Mezzanine debt 38% debt Mezzanine debt 67% 25% 33% 73% 23%
Source: PDI Source: PDI Source: PDI
November 2019 • Global Investor 30 27 Analysis
hether it was Sep- tember’s report that the Public Of- ficials Benefit As- sociation (POBA), a Seoul-based in- Wstitutional investor, is seeking five direct managers to allocate $250 million to North American and Asian mid-market corporate lending strategies or the news that Korea Post needs two global distressed debt fund managers for prospective commitments of up to $100 million apiece, there is little doubt of the growing appetite of Korean in- vestors for private debt. That was apparent at PDI’s inaugural Seoul Forum held earlier this year. Many of the LPs at the event like the asset class because it seems tailor-made for their needs: a consistent stream of distribu- tions, unlike buyout funds, so investors can meet their obligations. Many pension funds also view private debt as a better risk-adjusted alternative to fixed income. While other LPs around the world share similar sentiments, Koreans think about the asset class differently to many European or US investors. Here are the key takeaways from the Seoul event.
It’s all about outbound Korean investors’ interest in direct lending continues to be keen, but most commit- ments are to credit funds investing in other parts of the world, as Korea is dealing with a sluggish domestic economy and low interest rates. But investing in the US is coming at a rather expensive premium and currency hedging costs are bringing Europe into fo- cus. When making US dollar-denominat- ed commitments, Korea LPs may need to The Koreans are shave 1.5 percentage points off net returns because of currency hedging arrangements, said Janghwan Lee, head of the alternative investment management team at Lotte coming Non-Life Insurance Company. Jurisdictional issues (insolvency regimes and bankruptcy laws) are at the heart of ed- ucating Korean investors when it comes to European direct lending, said Pemberton Investors from Korea are yet to make the Asset Management’s head of Asia-Pacific business development, Shintaro Mori. Global Investor 30 but it could only be a matter of time European countries have taken steps judging by the growing appetite for private debt, in recent years to bolster their restructur- ing statutes, Pemberton managing partner write Andrew Hedlund and Arshiya Khullar Symon Drake-Brockman added, to ensure businesses can seek court protection and
28 Private Debt Investor • November 2019 Analysis
raised only slightly more than $5 billion. The majority, some $14 billion, was dedi- “In the case of the cated to North America. Funds in market are seeking more than US, it is hard to meet $55 billion, targeting all geographies. How- ever, only $13.9 billion is targeting either our target returns by multiple regions or areas other than North America and Europe. There is a possibility investing in private that the capital available for real estate debt could diminish. The South Korean financial real estate debt at regulator is set to implement a new inter- national accounting standard for insurance this moment, after contracts and new capital standards, which could cause some insurers to lower their converting the returns overall real estate allocation.
into South Korean A Seoul office would help Two Korean institutional investors with real won” estate strategies told the audience at the Seoul conference for PERE that investment JANGHWAN LEE firms should set up shop in the country and Lotte Non-Life Insurance Company hire local investment professionals. “Business will not happen overnight or only after one meeting,” said Woncheol Suh, head of private markets at the Govern- ment Employees Pension Service. “[Manag- ers] will have to make more efforts to build a relationship through trust and rapport. That is why we are asking that you open a Korea office.” Lotte Non-Life Insurance’s Lee said a key consideration is whether the credit manager is willing to educate investment staff about the asset class and help them build contacts in the space. In addition, a source at an advisory firm noted that the goal of many Korean investors is to end up emerge as a going concern with a right-sized Real estate reluctance on a fund’s LP advisory committee. balance sheet. The portfolio that Lee oversees holds All of these are measures that require Germany reformed its insolvency laws to roughly $2 billion in real estate investments, extensive time and resources – particularly allow secured creditors to have a say earlier only $50 million of which is in debt. Both establishing a Seoul office. But LPs often in the case and debtors gained additional the US and Europe are tough areas to invest respond well to personal introductions or protections to help them keep their doors in at the moment. recommendations from people they know. open. In recent years, Spain added incen- “In the case of the US, it is hard to meet “We are [strongly] controlled [by the tives for lenders to offer bankruptcy loans our target returns by investing in private real government] and limited by our budget,” to help a business get to the finish line in a estate debt at this moment, after converting Suh explained. “We are [also] under [a] se- restructuring. the returns into South Korean won. And be- vere manpower shortage. We have people Senior debt-focused credit managers cause of the low interest rate environment, wearing many different hats [at work]. Have have received a warm welcome from Kore- it is hard to meet our target returns in Euro- more patience while dealing with us.” an LPs, given the inherent downside protec- pean countries also,” Lee added, explaining The Korean private credit market may tion being at the top of the capital structure the reluctance to deploy more capital in real be less mature than the US or European provides, one delegate said. estate debt strategies. equivalents, but it is a bright spot in Asia. Commitments have largely remained in Real estate debt fundraising plunged in Fund managers may spend significant sums senior and junior debt, with relatively little 2018, dropping by almost half from 2017, of money and rack up frequent flyer miles attention given to distressed debt and niche according to data from sister title PERE. into the hundreds of thousands. But the strategies. Several LPs said it may be a good The strategy seemed strong in the first half pay-offs could be plentiful as the asset class time to start looking at special situations of 2018, in which it locked down $15.7 bil- evolves within the larger Asia-Pacific re- vehicles. lion. The second half was weaker, when it gion. n
November 2019 • Global Investor 30 29 Analysis profile > Campbell Lutyens Our private debt clients
We are a leading global and independent private capital advisor, focused on fund placement and What differentiates us Thought leaders in private debt secondary advisory Fund Placement services. PRIVATE EQUITY, INFRASTRUCTURE AND PRIVATE DEBT FUNDS Unwavering focus on client delivery with a limited number of high Our team of professionals adds significant value at every Over the past 30 years, Campbell conviction mandates In-depth market Lutyens has grown to be the largest stage of the fundraising process, developing and executing independent advisory firm of its type, on well-defined capital raising strategies for our clients. analysis providing global expertise with local Specialist expertise in private debt, knowledge and relationships. RAISED FOR OVER with insightful content and advice for 200 PRIVATE EQUITY, We specialise in raising private equity, INFRASTRUCTURE AND both managers and investors Investor infrastructure and private debt funds PRIVATE DEBT FUNDS education from institutional investors globally and $230bn Focus on unlocking new and in advising on the secondary sale or growing pools of investor capital restructuring of portfolios of direct or Expert fund investments. Secondary Advisory for private debt SECONDARY PORTFOLIO SALES AND ADVISORY MANDATES commentary The firm has a team of more than 150 operating from offices in London, New We advise across a wide range of secondaries mandates, York, Hong Kong, Singapore, Chicago, including the sale or restructuring of portfolios of funds or Los Angeles and Charlotte, with global direct investments and GP-led liquidity and fund and broad-ranging expertise in the restructuring transactions. Key contacts private equity, infrastructure and private debt sectors. VALUE OF TRANSACTIONS ADVISED ON BY OUR TEAM, COMPLETING Richard von Gusovius Jeffrey Griffiths OVER 175 SUCCESSFUL Partner Principal MANDATES Tel: +44 207 432 3708 Tel: +44 207 432 3742 $90bn [email protected] [email protected] www.campbell-lutyens.com Analysis profile > Campbell Lutyens Our private debt clients
We are a leading global and independent private capital advisor, focused on fund placement and What differentiates us Thought leaders in private debt secondary advisory Fund Placement services. PRIVATE EQUITY, INFRASTRUCTURE AND PRIVATE DEBT FUNDS Unwavering focus on client delivery with a limited number of high Our team of professionals adds significant value at every Over the past 30 years, Campbell conviction mandates In-depth market Lutyens has grown to be the largest stage of the fundraising process, developing and executing independent advisory firm of its type, on well-defined capital raising strategies for our clients. analysis providing global expertise with local Specialist expertise in private debt, knowledge and relationships. RAISED FOR OVER with insightful content and advice for 200 PRIVATE EQUITY, We specialise in raising private equity, INFRASTRUCTURE AND both managers and investors Investor infrastructure and private debt funds PRIVATE DEBT FUNDS education from institutional investors globally and $230bn Focus on unlocking new and in advising on the secondary sale or growing pools of investor capital restructuring of portfolios of direct or Expert fund investments. Secondary Advisory for private debt SECONDARY PORTFOLIO SALES AND ADVISORY MANDATES commentary The firm has a team of more than 150 operating from offices in London, New We advise across a wide range of secondaries mandates, York, Hong Kong, Singapore, Chicago, including the sale or restructuring of portfolios of funds or Los Angeles and Charlotte, with global direct investments and GP-led liquidity and fund and broad-ranging expertise in the restructuring transactions. Key contacts private equity, infrastructure and private debt sectors. VALUE OF TRANSACTIONS ADVISED ON BY OUR TEAM, COMPLETING Richard von Gusovius Jeffrey Griffiths OVER 175 SUCCESSFUL Partner Principal MANDATES Tel: +44 207 432 3708 Tel: +44 207 432 3742 $90bn [email protected] [email protected] www.campbell-lutyens.com Last word
Investor points of view
“The challenge is “Alternatives are “If we increase our that we have capital still a very important exposure to direct constraints, because part of the overall investment and we are regulated by asset allocation in alternatives, we will various insurance PensionDanmark” create stable returns” regulators, and we KIM NIELSEN of PensionDanmark on TU GUANGSHAO of China Investment the decision to merge its alternative have considerations Corporation on why it is turning towards alternatives assets and private debt capabilities around our credit rating”
THOMAS SHANKLIN of Nationwide Insurance on the difficulties insurers face “The big risk for those large funds is over- “We’ve been doing a reach; if they raise lot of research work more money than they “We plan to increase over the past year can invest well, or our allocation to the trying to understand make some bad calls, distressed and special which markets are it could damage their situations category in accessible” 2019 and 2020” brand names” JOHN GRAHAM, global head of credit investments at CPPIB, on its TAEBOK KANG of Korean Teachers’ expansion plans JOHN BOHILL of StepStone Global on Credit Union on where the best the trend towards mega funds opportunities lie
32 Private Debt Investor • November 2019 The Global Guide Understanding to Private Debt Private Debt in Europe
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