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Five minutes with Nick Cavalla

An increasing number of LPs are boosting allocations to debt. Nick Cavalla, chief investment officer for The University of Cambridge Endowment Fund, explains why his fund is one of them.

 What has your allocation to debt instruments been in recent years?

In the last two years, we have developed higher allocations to private debt. Currently, our allocations stand at approximately 9 percent. In the wake of Lehman we had literally zero allocation to credit. But as the picture changed, we quickly began developing our allocations through credit instruments, initially focusing on liquid credit, then moving into illiquid credit when the market began to pick up. We might see allocations going up this year, to between 12 and 13 percent at most depending on how the market plays out.

Within the overall private debt allocation, what areas are of particular interest?

We like real estate debt. Our investments here are mostly in mezzanine loans, backed by high quality UK and German real estate, 55-75 percent loan-to-value. Effectively, the deleveraging of banks has opened up the market, and institutional investors are becoming cross-over lenders. Generally, we build our portfolios around a series of debt funds, and ensure that we have a well-diversified portfolio that invests across a wide range of debt instruments.

How have your existing debt investments performed?

Secondary positions in the junior debt and equity tranches of CLOs have been our strongest performing positions (returns in excess of 35 percent last year). However, we find our allocations drawn to senior loans purely because we favour safe assets to risky ones. An area we also have investments in is distressed debt hedge funds. Our overall performance from these funds has been robust.

What do you look for when selecting GPs to back?

Our three most important points when looking for a manager to invest with are: people, process and performance. Generally, we prefer credible big firms to smaller ones.

How do you see the debt market evolving?

Debt is not a strategy for all seasons. It is very dependent on the market – if the market is favourable, it works, if not, it doesn’t. So the biggest challenge has less to do with regulation or competition, but more to do with whether market conditions will make the story compelling.