5 takeaways for LPs from AIMA’s 2018 private credit study

The Alternative Investment Management Association has released its annual survey in a partnership with Dechert – a 51-page document with enough charts and statistics to keep all the asset class’s data wonks busy for the next few days. Below are several key takeaways.

Pension funds and insurance companies make up over half of private debt’s investor base

Globally, the survey showed a bias toward pension funds and insurance companies for private credit managers. Respondents’ investor bases consisted of 35 percent pension funds and 31 percent insurance companies.

When broken down by geography, the opposite is true for European managers: 35 percent of their investor base is insurers, whereas 33 percent consists of pension funds. For North American credit shops, 38 percent of their LPs are pension funds, while that number stands at 26 percent for insurance companies.

The third largest constituency fell within the “other” category, while family offices and high-net-worth individuals consisted of 5 percent and 3 percent, respectively.

Managers with <$1bn AUM have more first-time investors

Smaller private debt managers have more LPs making their initial commitments to the asset class than larger managers. Those firms with less than $1 billion in assets under management have 33 percent of their investor makeup as first-time illiquid credit investors, while that number is 18 percent for managers with more than $1 billion in AUM.

This is not completely unexpected, the report notes, pointing to the fact that smaller managers will have smaller funds, resulting in a lower minimum commitment; first-time investors are likely unwilling to carve out a good chunk of their portfolio to try something untested for them.

GPs use discounts to encourage LPs to write bigger cheques

Responding to a question about fee discounts, a plurality of credit managers will give breaks only to investors that make allocations over a certain size. Often those are in management fees, with firms like Crescent Capital Group, Monroe Capital and Alcentra offering such breaks on some vintages of their flagship funds, according to investor presentations.

The latter two also offer additional discounts. Monroe Private Credit Fund III also charges a higher carried-interest rate – 20 percent rather than 17.5 percent – for commitments under $5 million, while Alcentra’s vehicle also offered a 25 basis point discount for investors participating in a first close.

In the survey, some 18 percent said they offer no discounts, while 18 percent said they offer early-bird discounts and another 18 percent said they give other discounts.

Private credit management and performance fees lower than private equity’s

Many private equity firms run the 2-and-20 fee model: a 2 percent management fee on committed capital and a 20 percent carried interest. The private credit fee structure is more investor friendly – for both the headline management and performance fee numbers.

For alternative lenders, the average management fee stood at 1.29 percent – with 80 percent of respondents charging on invested capital – while the average performance fee was 15 percent. Only 15 percent of managers charged 20 percent or more, with almost three-quarters of respondents charging between 10 and 20 percent.

Not even half of credit managers use subscription line finance facilities

In recent months, the use of subscription line financing has garnered widespread discussion and media coverage – garnering particularly unflattering headlines like The Wall Street Journal’s “Private equity’s trick to make returns look bigger” and The Financial Times’ “Private equity’s dirty finance secret”.

But only 43 percent of private credit managers utilise subscription line financing, billed by its proponents as a way to make the funding of investments more efficient than executing a capital call every time an investment needs to be funded.

For those that use subscription financing, duration of the facility was about evenly divided between four timeframes: 26 percent of respondents said their subscription financing facilities were three months or less or six months to one year, while 24 percent said those lines were three to six months or 12 months or more.