Traditionally, private debt funds market products under closed-ended structures, but a growing number are now looking to open-ended vehicles to overcome the issue of the illiquid nature of the asset class.
The latest open-ended structure to launch is from Bayshore Capital Advisors, a Florida-headquartered firm, which plans to market its Global Alternative Income Fund (GAIF) next month to European investors as the demand for yield stretches to illiquid asset classes.
The strategy of GAIF is to invest in a range of specialist credit strategies, which specifically provide short-term loans with maturities ranging between 12 and 24 months and are able to deliver its unlevered target annual return of between 9 and 11 percent. It will target investments across the world with the breakdown expected to be 60 percent in the US and 40 percent outside.
Patrick Stutz, chief investment officer at Bayshore, said the firm had considered managing a closed-ended structure, but given the short-term nature of the underlying investment, an open-ended vehicle is more suitable if structured correctly. “There is no secondary market in private debt and liquidity has to matched properly.”
Part of the attraction of the open-ended structure is that investors do not have to stay committed to a fund for a lengthy period of time. There is a two-year lock up on Bayshore's fund, a significantly shorter time compared with the typical seven-year commitments to a closed-ended structure. The fund has a total capacity limit of $250 million and will initially underwrite ticket sizes between $5 million and $15 million, but seek larger tickets between $30 million and $40 million to invest in existing debt funds, limiting the portfolio to six or seven managers.
The pivot towards Europe is part of Stutz’s confidence that the asset class is now a permanent part of investors’ portfolios and the continent will develop a similar awareness to private debt in the same way it has happened in the US.
“In the US, there is a lot more competition between funds and the banks, whereas in Europe there is a lot more collaboration. When we started talking to investors in 2013 there was little institutional awareness about the asset class, but that is now changing and you cannot be a serious credit investor without looking at private debt,” he said.