Loan Note: ADM Capital on the Asia-Pacific fundraising scene; the challenges facing Europe RE debt

ADM Capital shares insights into Asia-Pacific fundraising. Plus: Mubadala's timely investment in Starz; and the debt service challenge for European real estate debt. Here’s today’s brief for our valued subscribers only.

They said it

“Based on our expectation of a soft landing, the eurozone economy could bottom out in the first quarter of 2024”

Sylvain Broyer, EMEA chief economist at S&P Global Ratings, quoted in an assessment from S&P of prospects for the European economy.

First look

Asia-Pacific: fundraising down but new sources of capital emerging (Source: Getty)

ADM: New money filling gap in Asia-Pacific

Loan Note had the pleasure of attending a media roundtable hosted by APAC-focused direct lender ADM Capital in Hong Kong last week. Over a lunch of dumplings and egg tarts, we had the opportunity to quiz ADM’s founding partner, Christopher Botsford, about the outlook for private markets fundraising in the region at a time when many international LPs are rethinking their exposure.

“The market has shifted considerably and that’s partly due to geopolitical concerns, but also rising rates,” Botsford said. “And so particularly US money is tending to stay at home. But on the other hand, there’s plenty of new money coming in from, for example, the Middle East, that is filling the gap. ADM Capital is well balanced in Asia, but for private markets in general, and particularly for funds investing mainly in China, the geopolitical situation has had a big impact.”

Botsford’s colleague, managing director Sabita Prakash, added that regional LPs were also developing an intra-Asia appetite. “We are seeing investors in alternatives and private credit in particular coming in from Asia, Australia and the region, where before there was a propensity to invest outside in the west,” she noted.

In all, 32 funds collected a combined $15.7 billion for APAC private credit in 2022, up 34 percent from the record-breaking previous year, according to Private Debt Investor data. But that figure has fallen dramatically, with just $1.8 billion raised in the first three quarters of 2023. As PDI noted in its APAC Special Report earlier this month, private credit had been gathering pace until global macroeconomic movements shifted the appeal for investors from outside the region.

Aiming for the Starz 

This year has proved tricky for managers with credit strategies to plug the refinancing gap, report our colleagues on PERE. But one opinion gaining traction as the year rounds out is that banks, in light of more clarity on interest rates, are starting to apply pressure on borrowers to find new lenders or sell assets.

With this in mind, news that Abu Dhabi’s sovereign wealth fund Mubadala Investment Company has contributed an undisclosed amount of anchor capital to mid-market lender Starz Real Estate’s latest debt fund looks nicely timed.

The Starz Orion Capital fund will be used to target senior, mezzanine, bridge and non-performing loan opportunities. Loans of between €30 million and €60 million in size are expected to be issued from the vehicle. The London-headquartered manager will top up Mubadala’s commitment, giving it total funds of €300 million to deploy.

Depicting the opportunity ahead, Starz’s director Alexandre Bretz told affiliate title Real Estate Capital Europe in October: “Valuers are lowering values by 10 percent but on certain assets that should be between 25-30 percent, and that is not just down to interest rate rises but because of dramatic changes in the way real estate is used.”

Europe RE debt sees coverage ratios plummet  

The shift from quantitative easing to quantitative tightening has delivered a shock to the European real estate debt market, according to the latest research from the European Association for Investors in Non-Listed Real Estate Vehicles (INREV).

The INREV Asset Level Index finds that debt service coverage ratios – the ability of borrowers to pay debt obligations from current cashflows – have tumbled as the “higher for longer” interest rate environment kicks in. In 2021, the average DSCR was 9.67. This fell to 5.11 in 2022 and was 3.17 at the beginning of this year.

However, on leverage levels there is good news. The average level of gearing of core and value-add real estate funds has dropped to historic lows – 22.2 percent and 38.5 percent respectively in the first half of 2023. The post-Global Financial Crisis peaks were 39.7 percent and 57.1 percent respectively.

The current funding gap in the market is estimated to be around €94 billion with European debt funds expected to meet a significant portion of this at the expense of traditional lenders, whose lending capacity is hampered by stricter regulation.

INREV’s Q3 2023 Consensus Indicator Survey found 34.6 percent of borrowers indicating a move to alternative lenders in their search for financing – up from an already increased level of 29.1 percent in Q1 2023.

Essentials

Double MD hire for ICG

Fund manager ICG has appointed Adam Gross and Anne-Marie Peterson as managing directors in its North American private debt team based in New York. The hires continue a build-out of ICG’s global credit platform, with recent additions to the private debt and liquid side of the business.

Gross had a 14-year career at Barclays, most recently as a managing director within the firm’s financial sponsor coverage team, responsible for large-cap and mid-market private equity clients. Prior to Barclays, he held a number of roles at Bear Stearns and Accenture.

Peterson joins ICG with over 20 years’ investment experience, most recently at Baird as managing director and head of debt advisory, working with sponsor-backed and corporate clients. Prior to Baird, she worked at KeyBank, as a managing director in leveraged finance focused on mid-market sponsors. She held similar roles at Credit Suisse and Lehman Brothers.

HSBC launches RCF strategy

HSBC Asset Management has launched the first vintage of its revolving credit facility strategy in partnership with HSBC banking entities.

The strategy will invest in a diversified portfolio of RCFs issued to private equity-owned businesses across Europe, originated by HSBC. It will target the senior segment of the capital structure with a focus on quality leverage credits, backed by favoured sponsors.

RCFs are floating-rate senior or super-senior facilities primarily for working capital and general corporate purposes.

The strategy will be managed by HSBC AM’s Capital Solutions team while leveraging HSBC’s origination capabilities in Europe. HSBC AM will provide an additional layer of independent strategy selection on top of HSBC’s underwriting process.

The Capital Solutions team is part of HSBC AM’s alternatives business and was set up last year to provide the firm’s institutional and wealth clients with access to HSBC’s proprietary private asset dealflow.

Two partners join L&W in London

Law firm Latham & Watkins has hired Fergus Wheeler and Paul Yin to its London office as partners in the banking practice. Wheeler and Yin, who both join from Akin, are experienced advisers to international private credit funds and direct lenders, commercial and investment banks, private equity sponsors and corporate borrowers.

Wheeler and Yin have regularly advised on acquisition financing, rescue financing, restructurings, liability management solutions and cross-border special situations lending. Their experience spans large-cap and mid-market transactions, and they both specialise in holdco financing. They also have expertise in junior capital investment, including private high-yield and preferred equity financings.

Wheeler spent nine months as a partner at Akin according to LinkedIn, having previously been a partner at White & Case for nearly five years, with prior spells at King & Spalding, Ropes & Gray and A&L Goodbody. Yin was a partner at Akin for eight months and, prior to that, a partner at White & Case for one year and two months. Yin has also worked at Skadden Arps, Ashurst and Corrs Chambers Westgarth.

LP watch

Institution: Kansas City Public School Retirement System
Headquarters: Kansas City, US
AUM: $749.6 million
Allocation to private debt: 5%

Kansas City Public School Retirement System (KCPSRS) announced updates in its maiden private credit programme in its 6 November board meeting.

The Missouri-based pension fund announced asset allocation targets for its private debt portfolio. The policy target for private credit is 5 percent, with a range of 4-10 percent.

The organisation’s investment consultant, Segal Marco Advisors, presented updates in their private credit manager search in the meeting. The IC shortlisted the following vehicles for consideration:

The fund managers were assessed against criteria such as institutional client bases, operational processes, investment team seniority, due diligence and terms and conditions.

Ultimately, Segal Marco Advisors recommended the hire of Churchill Middle Market Senior Loan Fund V. According to the consultant’s analysis, Fund V offers lower management fees and carried interest over the other candidates. Additionally, Churchill Asset Management will retroactively aggregate the assets of investors advised by Segal Marco Advisors, leading to a size discount.

Managed by Churchill Asset Management, the 2023 vintage fund has raised $729 million against a target of $3.5 million, according to PDI data. The direct lending fund has a regional focus in North America.

Kansas City Public School Retirement System will make its first private debt commitment in early 2024, as confirmed by the public pension.


Today’s letter was prepared by Andy Thomson, with Alex Lynn, John Bakie, Christopher Faille and Robin Blumenthal contributing