Friday letter: Insider insight

PDI is asking investors some key questions, mainly for the benefit of debt managers. But managers should also be doing more to explain themselves to investors.

Who is investing in private debt and why? Even more fundamental to private debt managers – will they continue to do so?

We're looking for the answers to these questions at the moment. PDI Research & Analytics has reached out to almost 4,000 investors with a survey that covers the whole gamut of questions managers have for investors. The results will be published in a special report in tandem with the December issue of the magazine.

That report will include a mine of information on investor's intentions regarding private debt allocations, as well as the regions and credit subsets they are most interested in. It also covers their views on managerial issues ranging from fees to reporting. Any investors reading this who haven't already been hit up with an email or phone call from our research team can follow this link to complete the survey – we'll make a charitable donation in return. 

While managers are keen to get this information from investors, the reverse is also true. Many investors still have questions about private debt and with base-level knowledge of credit still fairly low, debt managers need to cut through the impression that credit is an insiders' game.

Investor education is a recurring theme, with many in the industry acknowledging that “a better job could be done”. But it's generally couched in phrases that absolve the individual of responsibility.

One of the biggest barriers to education is the fact private debt truly is an insiders' game. Not much information is officially shared and what does get out comes via leaks for the benefit of other experts. The private equity origins of many private credit funds compound this as the habits of a notoriously opaque market infuse the credit side too. By contrast, most banks are public and have always had to air their laundry, clean or otherwise.

But investors want answers to some basic questions. Are the differences between terms like senior, stretched senior and unitranche substantial or just semantics? What role will the banks play in a post-Basel III world? How reliable is the information that credit decisions are made on?

This last question is particularly valid. 

When Budapest Airport was seeking a refinancing deal in 2014, your correspondent came across the information memorandum that accompanied its leveraged buyout seven years earlier. The revenue projections and accompanying falls in leverage that the original financing was premised on looked like the work of a fantasist. 

Hindsight is a wonderful thing and few could have foreseen the collapse of Malév, the Hungarian national airline, in 2012 on top of the fallout from the financial crisis which destroyed the earlier projections. But it is still reasonable to question the original, aggressively-structured loan. Following the kind of problems that could have been factored in the airport was around 12x levered ahead of its refinancing, rather than under 3x as the forecasts had anticipated. 

Things got better for Hungary's main airport and it executed a strong refinancing deal that proved popular with lenders, though it wasn't without cost. It replaced cheap pre-crisis term debt with a senior deal supplemented by an expensive PIK note. The deal is currently performing well and some debt funds have picked it up in the secondary market, PDI understands.

Some will argue that investors find out everything they need to know during exhaustive due diligence. But that process doesn't address the knowledge deficit that prevents new investors from taking the plunge. And few would argue that credit investment is for hobbyists.

There's a reason why credit is an insiders' game.