Loan Note: AIMA points to big future for retail investment; family offices want more private credit

Why AIMA's Jack Inglis thinks retail investment is a "huge opportunity" for alternative assets. Plus: family offices give private debt a thumbs up; and US mid-market company performance defied the doubters in the closing months of last year. Here's today's brief for our valued subscribers only.

They said it

“As we enter 2023, we expect higher inflation and interest rates to persist in what remains a demanding market environment – conditions that offer the potential for strong vintage years

Taken from a report on 2022 from Switzerland-based private markets investor Partners Group

First look

On the up: Retail investment is the next big thing (Source: Getty)

The next wave is retail
With the end of the bull market in equities and bonds, retail investors are poised to set their sights more firmly on alternative assets in the opinion of Jack Inglis, chief executive officer of the Alternative Investment Management Association, as part of seven predictions for the alternative investment industry in 2023.

Inglis points out that while many institutional investors are already fully weighted in alternatives, private wealth assets are substantially underweight. He says this represents a “huge opportunity” for managers over the next decade as long as they adapt their distribution channels and provide innovative fund structures.

Inglis also predicts that 2023 could be a year of difficult questions from investors around ESG and what they want from alternative investment funds when it comes to the application of ESG principles and how this might affect returns. With the US setting its sights on the regulation of responsible investing, Inglis says “politicisation of ESG across the red-blue divide” could frustrate some regulatory efforts.

Private debt, the safety net
In support of Inglis’ observation (above), a study from London-based investment firm Aeon Investments found professional investors and family offices turning to illiquid assets, including private debt, as a response to volatility and rising interest rates and inflation.

The study found that 90 percent of family offices controlling nearly $100 billion in assets under management said they expected increased demand for illiquid assets over the next two years, with 12 percent expecting a dramatic increase in demand.

The main reason cited for supporting private debt was the protection it offered from macroeconomic uncertainty, especially through strategies offering a floating-rate coupon – which was seen as a natural hedge against inflation.

Private debt was also perceived to offer new investment opportunities through a growing range of assets, portfolio diversification and access to ESG benefits through certain sub-asset classes.

Nearly all those questioned said private debt offered a “high degree of safety” through attractive yields, debt covenants and credit enhancement. Moreover, 52 percent said they expected a “slight” improvement in the regulatory environment for private debt over the next two years, while 26 percent predicted a “dramatic” improvement.

Aeon quizzed investors based in the UK, US, Switzerland, Germany and the Nordic regions.

Company performance surprises on upside
US mid-market companies showed unexpectedly strong performance between October and November of last year, according to the latest Golub Capital Altman Index, published by fund manager Golub Capital and credit expert Dr Edward Altman.

The index showed the mid-market firms it tracks – which are part of Golub’s portfolio – increasing year-over-year earnings growth by 9 percent and revenue growth by 11 percent during the period. Lawrence Golub, chief executive officer of Golub Capital, described the findings as a “positive surprise”.

Altman said the findings suggested that “the odds of an economic soft landing could be higher than they looked in the third quarter. The strength in the consumer sector and the industrials sector earnings suggests supply chains are getting back to normal and pressure from higher energy costs is abating”.

He did acknowledge, however, that the impacts of rising wages in labour-intensive sectors, especially healthcare, were still being seen.

Essentials

Citco notes private debt’s growth
A drift to private credit has been noted by fund administration firm Citco Fund Services, which found private credit clients accounted for 56 percent of its $125 billion loan book at the end of the third quarter of last year. Demand for private credit has grown in tandem with a move away from broadly syndicated loans.

Citco said the embrace of private credit was due to factors including new regulations, capital requirements that have made it onerous for big banks to lend, and strong borrower demand resulting in higher interest rates and  more bespoke credit structures.

Citco said that, given the void in traditional liquidity from banks and the high-yield bond markets – coupled with continuing investor demand for yield – private credit would continue to grow as a portion of the overall book.

“We expect this trend to continue in 2023, with many managers transitioning away from the leveraged loan and public broadly syndicated debt markets into well-structured originations backed by strong underwriting and covenants,” said Elaine Furnari, head of loan services at Citco Fund Services (USA).

New credit fund for Cresset
Cresset Partners, a Chicago-based fund manager primarily associated with private equity and real estate, has launched an evergreen private credit fund targeting US mid-market borrowers with EBITDA of between $10 million and $100 million.

The firm said it will invest in “a diversified portfolio of private senior secured loans, among other private credit opportunities, with the objective of delivering consistent income and strong downside management”.

$1bn KKR aircraft deal launched
KKR has announced a $1 billion aviation finance deal, teaming up with Altavair AirFinance to acquire a portfolio of commercial aircraft from Etihad Airways, the national airline of the United Arab Emirates.

The acquisition will be made through Altitude Aircraft Leasing, the aircraft leasing investment platform established by KKR’s credit and infrastructure funds in 2018 to acquire aircraft serviced by Altavair. For more about the transaction, see here.

LP watch

Institution: Teachers’ Retirement System of Louisiana
Headquarters: Baton Rouge, US
AUM: $23.3 billion

Teachers’ Retirement System of Louisiana has committed $125 million to BC Partners’ latest distressed debt fund, a contact at the pension confirmed.

At the pension’s January board meeting, TRSL announced it will invest $125 million into BC Partners Credit Special Opportunities Fund III. The fund, which is targeting companies in Europe and North America, is seeking distressed debt returns. Its predecessor closed in December 2021 on $1.2 billion, exceeding its $750 million target.

The Baton Rouge-based pension’s recent private debt commitments have tended to focus on Europe or North America-based vehicles targeting a variety of returns.


Today’s letter was prepared by Andy Thomson with John BakieChristopher Faille and Robin Blumenthal