Loan Note: Briarcliffe positive on private debt allocations; European defaults tipped to rise

Briarcliffe predicts increased allocations off the back of private debt's 'abundant attractions'. Plus: a new infrastructure debt fund is launched by Schroders Capital; and defaults are heading up, but not to unprecedented levels. Here's today's brief for our valued subscribers only. 

They said it

“The certainty of execution provided by private credit (which, unlike the public market, is not reliant upon broader syndication of deals to a wide range of investors) is likely to support an increased pricing premium” 

Taken from the latest BlackRock Global Credit Weekly report

First look

Looking up: investor allocations to private debt heading north (Source: Getty)

Briarcliffe: Private debt allocations are poised to rise
Briarcliffe Credit Partners, in a new study called The Private Credit Compass report, begins from an estimate – taken from a Wall Street Journal story in January 2023 – that over the next decade, institutional investors will increase their average portfolio allocation to private debt to 5.9 percent from the current 3.8 percent.

Briarcliffe offered PDI an advance look at this new report on the future of private credit. It maintains that due to the sharpened interest of institutions as well as to changes in the private wealth universe, private credit assets under management could top $5 trillion globally before another decade has passed.

The report also makes the point, citing McKinsey, that private credit has abundant attractions for these investors. It offers the “tightest distribution of returns of any private asset class, by a factor of two”, the report asserts. On a risk-adjusted basis, it can also be more attractive than public equities. Over the past decade, during which the S&P 500 produced an 8 percent return, private credit has captured most (92 percent) of that with only half of its volatility.

As for institutional investors, the report makes the case that part of this exponential expansion will come from insurers. Because insurers work with strict risk-based capital requirements, fund managers that want to work with them must do the same. That entails hiring dedicated staff with technical inside knowledge of the insurance industry.

Private creditors do and will continue to woo insurance money through rated notes, collateralised fund obligations, and managed accounts.

Schroders’ Julie III raises more than €320m at first close
Schroders Capital is back in market with its third European sub-investment grade infrastructure debt fund, raising more than €320 million at first close, according to our colleagues on Infrastructure Investor.

The Junior Infrastructure Debt Europe III fund (Julie III) – which launched at the end of 2022 as an Article 8 fund under the EU’s SFDR – will target brownfield core assets in the European mid-market, the firm said in a statement, investing in water, renewable energy, electricity grids and telecoms, as well as roads and railways.

The capital raised to date came from Asian and European investors, the firm said, “with the strategy benefiting from higher yields in the current rising interest rate environment”.

As for the fund’s target, Schroders eyes commitments “similar to the previous vintage Julie II”, Jérôme Neyroud, head of infrastructure debt at Schroders Capital, told The Pipeline. That fund closed on its €1 billion hard-cap in July 2021 and is now fully deployed.

Considering the fundraising slowdown seen in Q1, keeping the target size in line with the previous fund seems wise.

European defaults likely to rise, but not soar
Europe’s corporate default rate is tipped to rise over the coming months, but not to levels that would be high compared with other challenging periods in recent history.

According to S&P Global Ratings, the European trailing 12-month speculative grade corporate default rate – which stood at 2.8 percent in March this year – is expected to reach 3.6 percent by March next year. This is the so-called “base forecast”, or most likely outcome.

This is relatively high compared with a long-term historic average around the 2 percent mark, but well below the rate of more than 6 percent that was recorded during the covid/lockdown period in 2021, and the rate of around 9 percent in 2009 following the global financial crisis.

The expected rise in defaults is attributed to rising interest rates, slowing growth and still-elevated input costs, leading to falling earnings.

However, much about the economic outlook is uncertain – reflected in best- and worst-case scenarios also calculated by S&P. In the worst case, with a prolonged slowdown in growth or recession, the rate is predicted to rise to 5.5 percent. But, in a best-case scenario of falling inflation and interest rates, the rate could actually fall from its current level to 1.75 percent.


Castlelake, Eltura buy $4bn of consumer loans
Minneapolis-based Castlelake, and its co-investor and minority partner Eltura Capital Management, have entered into a deal to buy as much as $4 billion of consumer instalment loans from a lending marketplace.

The marketplace is Upstart, a Nasdaq-listed company based in San Mateo, California, that is known both for its loan platform, where more than $32 billion in loans have been originated since 2012, and for the Upstart Macro Index, an indicator of where major economic variables are trending and what that means for creditors.

The platform uses AI-created models with the goal of offering loans from Upstart itself and from third parties to populations whose credit qualifications would otherwise be considered marginal.

Upstart is selling Castlelake and Eltura a back book of loans and a forward flow arrangement. Eltura is a private equity firm based in Hackensack, New Jersey.

In a statement, John Lundquist, Castlelake partner, speciality finance, said: “Against a backdrop of increasing economic uncertainty, Castlelake is committed to helping Upstart’s mission of unlocking mobility and opportunity for millions of US customers.”

CFE gets go-ahead for RiverRock stake
CFE Finance Group, a European credit-focused investment banking boutique, has received regulatory approval to complete the acquisition of a 60 percent stake in RiverRock European Capital Partners, an alternative investment specialist based in London, which provides capital solutions to SMEs.

First announced in October last year, CFE said the acquisition would allow it to strengthen and expand its offering in Europe and diversify its portfolio, while allowing RiverRock to continue its specialisation of providing alternative solutions to global investors and customised solutions to European SMEs.

Founded in 2001 by chief executive officer Mario Cordoni, CFE has €1.5 billion in assets under management. It is a specialist in credit strategies, mainly focused on trade finance, and has offices in London, Luxembourg, Geneva and Monaco.

Established in 2009, RiverRock has AUM of €1 billion with offices in Paris, Milan and Luxembourg, as well as London. The firm’s debt and equity investments include preferred equity, convertibles and loans with equity warrants.

LP watch

Institution: City of San Jose Police & Fire Department Retirement Plan
Headquarters: San Jose, US
AUM: $4.41bn
Allocation to private debt: 4.4%

City of San Jose Police & Fire Department Retirement Plan has outlined its private debt pacing plan for the 2023/24 fiscal year, per a recent investment committee meeting document.

The plan’s private debt portfolio, which invests through a mixed variety of strategies including subordinated/mezzanine, senior and distressed, is currently over allocation at 4.4 percent against a 4 percent target. The total private markets allocation of 20.5 percent is below the target of 25 percent.

In the recommended 2023/24 pacing plan, the annual private debt commitment amount will remain at $64 million, with a possible increase to $70 million in 2027/28.

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