Loan Note: Debt secondaries shoot up; junior capital in favour

Secondaries activity across alternatives as a whole is subdued, but a strong performance from debt is bucking the trend. Plus: fundraising data supports anecdotal evidence of a resurgence for junior capital; and the latest key hires. Here’s today’s brief for our valued subscribers only.

They said it

“Recent news flow reinforces our view that we are likely in the early stages of the US CRE office distress cycle”

Taken from BlackRock’s latest Global Credit Weekly.

First look

Taking off: debt secondaries bucking the overall trend (Source: Getty)

Debt secondaries going strong
The debt secondaries market saw a big increase in deal volume in the first half of this year, even as the alternatives secondaries market as a whole continued to decline, according to the latest report from Canadian private equity advisory firm Setter Capital.

Albeit from a relatively low base, debt secondaries shot up 94.5 percent to $2.04 billion compared with the first half of last year. Increases were also seen in infrastructure secondaries (up 43.1 percent to $2.76 billion) and leveraged buyout secondaries (up 5.8 percent to $20.57 billion).

However, the market overall shrank in size to $45.1 billion from $57.8 billion in the first half of last year. And last year was itself a year of decline, down more than 29 percent on the total recorded in 2021. H1 2023 saw falls in private equity (down 23.3 percent to $41.23 billion), real estate (down 48.4 percent to $960 million) and hedge funds (down 54 percent to $100 million).

One of the more remarkable changes in the secondary market has been the amount of debt used by buyers, with 51.4 percent saying debt had decreased in the first half of this year and 47.2 percent saying it had stayed the same. In 2022, only 12.5 percent said the level of debt used had fallen.

Investors flock to the middle
In a recent version of the Case for Junior Capital, Churchill Asset Management’s Lead Left drew attention to some of the positive characteristics of this type of investment in today’s environment including healthy cash/equity percentages, pricing “at or better than” pre-rate hike levels, improved call protection and increased flexibility around PIK toggles.

This may help to explain why, in Private Debt Investor’s fundraising figures for the first half of this year, subordinated debt was very much to the fore. The story of recent years has been the dominance of strategies targeting senior debt – peaking at 48 percent of all fundraising in 2021. The first half of this year told a very different story as senior debt slipped to 34 percent of the total, surpassed by the 39 percent accounted for by subordinated and mezzanine debt. This was the highest percentage recorded by the strategy in any year reaching back to 2018.

The figures showed no significant change in investor appetite for distressed fundraising. At 19 percent of the total in the first six months, this was exactly the same proportion that distress has accounted for as an average over the past six years. If there is a wave of distressed opportunity coming, there’s no sign as yet that investors are setting aside significant amounts of capital for it.

Of the strategies that account for smaller capital allocations, it’s notable that funds of funds saw a significant increase in capital raised in the first half of this year, while the challenges facing CLOs saw that market account for just 1 percent of the total – compared with a peak of 9 percent back in 2018.

As noted in this column last week, investor sentiment towards private debt appears to remain very strong despite the subdued H1 numbers. With some of the practical issues facing investors – most notably the denominator effect – appearing to dissipate, a stronger second half of the year can be reasonably anticipated.


Insurers focus of Golding hire
Golding Capital Partners, the Munich-based funds of funds manager, has appointed Tim Ickenroth as director of institutional clients. With many years of advising institutional investors, he will focus on supporting and servicing insurance companies in Germany.

A statement announcing the appointment said Ickenroth’s expertise in regulatory and accounting-related matters would assist Golding’s servicing of the insurance sector.

Ickenroth was previously at UniCredit Group and BNP Paribas, where he was responsible for advising German and Austrian insurance companies as well as company and sector-based pension funds.

“Our aim is to get ever closer to our German investors and to keep refining our deep understanding of their requirements,” said Hubertus Theile-Ochel, managing partner at Golding.

Golding has more than 200 professionals in offices around the world and focuses on infrastructure, private debt, private equity, secondaries and impact investing. It has more than 230 investors.

DACH director
Federated Hermes has tapped Capza’s former head of investor relations to bolster its fundraising efforts in Germany and Austria. Stefan Arneth joins as private markets sales director in Munich, per a statement.

Arneth spent three years at Capza, and prior to that oversaw the institutional clients division at Munich Ergo Asset Management.

The private markets division of Federated Hermes has €19 billion of assets under management across PE, private debt, real estate, infrastructure and natural capital investment products.

LP watch

Institution: New Hampshire Retirement System
Headquarters: Concord, US
AUM: $10.65 billion

New Hampshire Retirement System has made a $50 million commitment to Ares Pathfinder Fund II, a contact at the pension has confirmed.

This is a new manager for NHRS and enables the pension to diversify its private credit allocation, which is now approximately two-thirds senior direct lending.

The asset-backed Pathfinder Fund II has a target of $5 billion and is expected to have a final close in the first quarter of 2024.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

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