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Loan Note: Boom time over as deal activity falls; KKR identifies favoured investment themes

Deals have slowed from last year's boom but the market remains reasonably active, PineBridge finds. Plus: liquid credit at the forefront as KKR identifies favoured strategies against a changing macro backdrop and PE returns close to record levels. Here's today's brief for our valued subscribers only.

They said it

“Investors are turning tentatively optimistic, following months of market turmoil. But they should be wary – volatility is far from over”

Emma Wall, head of investment analysis and research at Hargreaves Lansdown after the private investment platform’s investor confidence index found sentiment improving across all regions apart from global emerging markets. Investors were most bullish about Asia-Pacific.

First look

Deals slowing but market ‘still open’
Private debt deal activity has slowed from the record peak seen last year but is still “quietly humming along” according to PineBridge Investments‘ Private Credit Snapshot.

According to PineBridge, total sponsored mid-market volume in the direct lending market in the first quarter of 2022 was $30.3 billion from 301 transactions, compared with $72 billion from 627 deals in the fourth quarter of 2021. Last year as a whole saw deal activity soar to a record $196 billion, attributed mainly to pent-up demand following the covid-related slowdown in 2020.

The volume of activity has increased slightly on a year-on-year basis as direct lenders took a larger share of mid-market volume and deal terms held up well. Direct lending appeared to be relatively well insulated from inflation, geopolitical tensions and rising interest rates compared with the equity, bank loan and high-yield markets, according to PineBridge.

PineBridge also shone a positive light on prospects for the second half of this year – while less robust than 2021, the market remains “open and positive”. The firm said: “On the demand side, middle-market companies still require capital to grow, professionalise and execute on generational wealth transfers. On the supply side, record amounts of dry powder across private equity and private debt markets alike remain a strong catalyst for dealmaking.”

KKR’s thumbs up for liquid credit
The liquid end of the credit market – including municipal bonds, mortgages and collateralised loan obligation liabilities – are favoured in an assessment of the current macroeconomic situation by KKR.

The firm’s Mid Year Global Macro Outlook also highlights the attractiveness of investments linked to pricing power and collateral-based cashflows including infrastructure and parts of real estate as well as opportunistic pools of capital “that can provide thoughtful solutions to good companies with levered capital structures”.

KKR says it expects oil prices to remain “higher for longer” and for inflation to shift from goods to services, with food and energy inflation also expected to remain at elevated levels. The firm believes that corporate margin degradation has not been priced in, with S&P 500 earnings per share tipped to contract 5 percent next year versus “a consensus expectation of nine percent growth”.

Essentials

PE returns near record levels
Coller Capital’s latest Global Private Equity Barometer has found 42 percent of limited partners are reporting net annual returns of more than 16 percent across the lifetime of their private equity portfolios. The proportion reporting this level of return has only been higher once (in 2007) since the Barometer was launched in 2004.

Over 70 percent of LPs said their private equity assets have outperformed their public equity portfolios since the global financial crisis, while most said they would hit their target private equity returns if each of their funds achieved only the median performance for its fund type and vintage year.

Bruen joins Schroders in credit solutions
Mark Bruen has joined Schroders Capital as head of private credit solutions in the firm’s private asset solutions team. He will be responsible for income-oriented solutions as part of the London-based role and will report to David Seex, the head of private asset solutions.

Bruen was previously at Federated Hermes where he was head of fixed income solutions, responsible for solutions spanning public, private and sustainable fixed income as well as the firm’s multi-asset credit offering. He also had prior spells at BlackRock and Accenture.

Malezieux steps up at Bayside
HIG Bayside Capital has promoted Mathilde Malezieux to managing director in its London office. Malezieux has over 16 years’ investment banking and distressed investment experience having previously worked at Nomura, where she focused on European senior and mezzanine deals.

“Since joining the firm, Mathilde has helped to grow the firm’s distressed debt portfolio in Europe, successfully completing a number of investments at all levels of the capital structure in a broad range of industries,” said executive managing director John Bolduc.

Bayside Capital has eight offices in the US and Europe and is the mid-market special situations affiliate of HIG Capital.

LP watch

Institution: District of Columbia Retirement Board
Headquarters: Washington, DC, US
AUM: $11.01 billion
Allocation to alternatives: 15.1%

District of Columbia Retirement Board has confirmed a $100 million commitment to Fortress Lending Fund III according to minutes from the pension’s May 2022 board meeting.

This is a first-time commitment between DCRB and Fortress Investment Group.

DCRB currently allocates 0.4 percent to private debt, while its target stands at 3 percent. Its previous fund commitments range between $25 million and $100 million, predominately focused in Western Europe.


Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.