Loan Note: Be optimistic but not too optimistic, says Carlyle; banking mini-crisis a ‘one off’

Carlyle highlights opportunity for private debt but also concerns. Plus: banking turmoil seen as a one-off; and BlackRock finds positive sentiment prevails among investors. Here's today's brief for our valued subscribers only. 

They said it

“Powell signalled that the Fed’s hiking action is done for now. However, he also emphasised that its view is that inflation will be readjusting slowly”

Kambiz Kazemi, chief investment officer at Validus Risk Management, commenting on the US Federal Reserve’s latest quarter-point interest rate hike.

First look

Carlyle’s credit outlook: Optimism without triumphalism
Mega-asset manager Carlyle Group maintains that although now is “hardly the time for triumphalism” in the private credit world, the position of the asset class has “improved meaningfully” over the past year.

Private credit’s status has improved in part because the easy-money days of the pandemic are over and returns on speculative-grade loan packages have gone from just over 6 percent in January 2022 to 10-11 percent today. Also, private lenders have taken market share from broadly syndicated loans and high-yield bonds.

Carlyle’s new report on the credit outlook for 2023 is the work of Jason Thomas, head of global research and investment strategy, and Mark Jenkins, head of global credit. They ask, somewhat rhetorically, “what’s not to like about higher returns and increased market share?”

But they suggest putting a hold on any parade. That higher market share does not bring with it greater deal volumes, with the merger/acquisition deal arithmetic of 2023 troubling. In January 2022, a company with a 60/40 capital structure (60 percent debt financed, 40 percent equity) would pay 6.1 percent on its senior loans and expect to generate the cash needed to pay its creditors in just half a year of its operations. “Financial sponsors could realistically underwrite 20 percent equity returns,” say Thomas and Jenkins, “with a plausible strategy to grow company earnings by 9 percent per year.”

Now, however, with the same capital structure, debt service can consume more than 10 months of the year. The acquirer must plan on getting company earnings to 16 percent per year to generate 20 percent returns.

There has been a drop-off in dealflow because fewer companies have met the higher bar.

Opportunistic strategies, where lenders are willing to sacrifice upfront interest payments for upside participation, might fill some of the gap in deal volume. But even if one is very optimistic about opportunism there is another impediment to triumphalism, Carlyle says.

This is that the ebb tide of banks and broadly syndicated loans is not entirely a good thing for private credit which “cannot fill the entire M&A finance void”, the report reminds us. It particularly cannot do so for deals in excess of $10 billion and within the more cyclically sensitive businesses that direct lenders regularly avoid.

Even the mid-market that direct private lenders prefer needs the data generated by investment and underwriting decisions. CLOs in particular generate data streams across ratings tranches that are of use to many market participants.

“Broadly syndicated lending is more complementary to private credit than commonly supposed,” the two authors conclude. “One hopes its prolonged absence is not how market participants learn this lesson.”

Banking turmoil ‘a single disruptive episode’
A survey conducted by law firm Morrison & Foerster indicates that businesses and their employees view the recent collapse of certain prominent banking institutions not as a severe, long-term crisis but as a single disruptive episode. Indeed, more than one third of respondents did not acknowledge that it had any impact on their company at all.

The survey drew respondents from several business sectors, including finance, fintech, technology and life sciences. Based on the responses, the law firm said that those appear to be the sectors feeling the greatest impact from banking disruption. Less severely hit is consumer products.

The statement from Morrison & Foerster announcing the survey results quoted Jennifer Marines, co-chair of the firm’s business restructuring and insolvency group, who said: “Companies should always be prepared for a crisis, particularly as it relates to maintaining sufficient liquidity. The banking crisis happened swiftly and without meaningful notice. Many companies were unprepared to quickly address challenges related to employees, vendors, lenders and investors.”

Of those respondents who acknowledge that the banking collapses have affected their company, 27 percent said the impact would last between a year and two years. Another 16 percent said six months to a year. This left a substantial majority, 57 percent, reporting that it would be in the rear-view mirror by the time six months had passed.

Yet the disruption may well have served as a wake-up call. Forty-eight percent of respondents were “moderately concerned” about their access to capital. Another 16 percent were “very concerned”.

In response to an open-ended question, at least one respondent seemed rather boastful about preparedness. “We implemented safeguards over 23 years ago. We’ve been marginalised for our risk management by clients and colleagues alike, though now our work becomes an enduring strategic advantage.”

Morrison & Foerster conducted the survey between 17 March (one week after the seizure of Silicon Valley Bank) and 24 March. The law firm’s report on the subject includes feedback from 70 respondents.

Investor appetite for private markets intact
More than half of respondents to a BlackRock Alternatives survey said they would be planning to add to their private credit holdings in 2023.

The Global Private Markets Survey captured the views of capital allocators with $15 trillion under management in total and $3.2 trillion in private markets. BlackRock said this represents around a quarter of total global private market institutional investment.

“Despite broad market declines last year, recession concerns and recent market turmoil, we see that short-term uncertainty is not derailing the growth of private markets,” said Edwin Conway, global head of BlackRock Alternatives. More than 70 percent of respondents said they were planning to increase their private equity allocations in 2023.

Income generation was cited as the most important factor driving private market investment, with 82 percent saying it was a key consideration. This was followed by capital appreciation on 58 percent, ESG on 43 percent and risk diversification on 42 percent.

Interest in private credit appears to be primarily focused on infrastructure debt, real estate debt and distressed strategies. More than a third of US and Canadian investors said they expect to “substantially increase” their private credit allocations this year.

Join us in London
A quick reminder that, following the huge success of our Singapore event earlier this year, the Private Debt Investor roadshow arrives in London next week courtesy of our PDI Europe Summit – details here. The event runs from 9-11 May and includes a swathe of industry luminaries on stage and our usual range of interviews, data presentations and panels on all the key themes. We’ll see you there!

Due to the UK holiday on Monday 8 May, the next Loan Note will be published on Thursday 11 May.


Asian venture debt on the rise
Venture debt has seen striking growth in Asia-Pacific according to a new survey from Alta, the Singapore-based digital marketplace. The strategy saw $12.1 billion invested in 2021, four times the 2018 level of $3.2 billion.

The finding was part of the Private Credit Sector Report, published by Alta and fund manager Aletheia Capital. The report noted that private credit “may be on the cusp of a further boom”, with yields currently 3 to 4 percent above those of two-year US treasury funds.

In a speech at the recent PDI APAC Forum, Lim Cheng Khai, executive director in the Financial Markets Development Department in the Monetary Authority of Singapore, said the Asian private credit market has grown almost 30 times over the past two decades from $3.2 billion in 2000 to more than $90 billion in June 2022.

Kartesia adds Flexam’s real assets specialism
Pan-European fund manager Kartesia has agreed to acquire a majority stake in Flexam Asset Management, a Paris-based real assets financier. Terms of the deal were not disclosed. Closing is expected this summer, subject to regulatory approvals.

Flexam focuses on sale and leaseback and financial leases in the lower mid-market in sectors including mobility, logistics, light infrastructure and tangible/movable assets. It has what it describes as a strong emphasis on energy efficient assets.

Flexam said it would retain its existing management and investment autonomy while benefiting from Kartesia’s operating and financial resources, distribution network and scale.

Japan, insurance hires for Muzinich
Fund manager Muzinich & Co has hired Akihiro Hayashi as country head, Japan and Tokio Morita as senior adviser as the firm expands into Japan.

Hayashi joins from Barings Japan where he spent eight years as a member of institutional sales. He has more than 25 years’ industry experience with a focus on servicing, planning and business development for pension funds and financial institutions.

Morita has spent over 36 years at the Ministry of Finance and the Japanese Financial Services Agency in a variety of roles, most recently as vice-minister for international affairs, Financial Services Agency.

Separately, Muzinich has hired Chris Price to lead the firm’s insurance channel in Europe, based in London. He will work closely with Muzinich’s institutional teams across the UK and Europe as well as with Lloyd Ayer, director of insurance advisory in the US.

Prior to joining Muzinich he was an adviser to asset management, private equity and fintech firms, and before that was head of insurance solutions UK at AXA IM, where he led the UK insurance strategy as well as providing asset allocation modelling and accounting, regulation and other technical expertise.

LP watch

Institution: School Employees’ Retirement System of Ohio
Headquarters: Columbus, US
AUM: $17.3 billion
Allocation to private debt: 5.8%

School Employees’ Retirement System of Ohio (SERS) has allocated $175 million to two private debt vehicles, according to recent meeting materials.

The public pension committed $100 million to Carlyle Credit Opportunities Fund III and $75 million to HPS Specialty Loan Fund VI.

SERS’ recent private debt commitments have focused on subordinated/mezzanine debt and senior debt strategies in the North American region.

School Employees’ Retirement System of Ohio has allocated 5.8 percent of its total portfolio to private debt, amounting to $1 billion in capital.

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