A necessary wall

French asset management group Tikehau this week announced it had bought a 35 percent stake in Duke Street Capital. The move raised eyebrows at first at Private Debt Investor HQ, as Tikehau has a well-established private debt arm. Did this mean Duke Street, which switched to a deal-by-deal funding model last year, would solve its debt funding riddle? One concern with a deal-by-deal model is that wedded to the time it takes to put together a debt financing package, you also have to pull together an equity syndicate too. Would Tikehau Investment Management (the French group's debt segment) get first refusal on a string of Duke Street buyouts?

Fortunately (bear with us), the deal was more straightforward. Tikehau will seed a new Duke Street fund, and will own a stake in the buyout firm's management vehicle. Duke Street partner Buchan Scott explained there were no plans for Tikehau to underwrite Duke Street deals.

This is sensible, because it avoids a potentially grievous conflict of interest, one that is studiously avoided by another manager, IFM, who Private Debt Investor spoke with this week. IFM has both infrastructure equity and debt teams, but the two never invest in the same deal – the only time they'd have exposure to the same project is if the debt team bought into a deal at a discount in the secondary market.

As IFM's global head of debt investments Robin Miller pointed out, debt and equity teams have competing interests: the equity team wants to get its hands on the cheapest debt possible, whilst the debt team will be looking for the best returns possible. Consequently, if the two were to pitch into the same project, someone will walk away with a bad deal.

There are relatively few managers who could potentially face this sort of scenario (if they chose to). GSO Capital Partners, for example, could theoretically access The Blackstone Group's huge pipeline of deals, but it has such sizeable Chinese walls in place there's never any danger of a conflict.

The sort of strategic partnership that Duke Street and Tikehau have agreed is however something we might well expect to see more of. As more firms adjust their models to take into account the difficulties associated with post-crisis fundraising, having the support of a firm of Tikehau’s pedigree will certainly come in handy.

Hopefully those walls stay up.