Loan Note: Dechert takes the market’s temperature; non-banks poised for fund finance land grab

Why Dechert thinks a down market is a 'time of opportunity'. Plus: non-bank lenders prepare to grab market share in fund finance and we publish our Women in Private Funds report. Here's today's brief for our valued subscribers only.

They said it

“Hedge funds are taking their chips off the table, [they] are leading big liquidation flows”

Dave Whitcomb, head of research at Peak Trading Research, quoted in the Financial Times in this article (paywall).

First look

Hot topic: the rise of the megatranche is keeping the market active (Source: Getty)

Taking the temperature of the market
With all the noise surrounding the public markets, the question of its impact on private credit looms large.

A recent discussion Private Debt Investor had with two Dechert partners following the law firm’s eighth Annual Permanent & Private Capital Summit in New York was somewhat reassuring.

Although there has been some slowing in raising private capital, and some changes at the margins regarding deal terms and pricing, “my sense is that there’s a significant amount of newly raised capital among sponsors who are anxious to put it to work”, said Tom Friedmann, one of the partners.

“For the large, shrewd investors, a down market is a time of opportunity,” said Jay Alicandri, the other Dechert partner. “As banks continue to retrench, it gives larger players more opportunities to make these loans to some of the larger cap deals,” he added.

Indeed, it appears that the era of the “megatranche” loan is upon us. For evidence, look no further than the recent nearly $5 billion loan – said to be the largest-ever direct loan in a take-private transaction – that software company Zendesk secured to finance its leveraged buyout with a group led by Hellman & Friedman and Permira.

“We will see more of the megatranche activity, and more opportunities for those large players, if banks retrench in that space,” Alicandri said.

If there’s a recession, the pair expect default rates to rise, but it’s unlikely they’ll be anywhere near double digits. “Private credit has already shown it has a track record of performing in these types of scenarios,” Alicandri said. “There’s no question it will continue to perform.”

Banking on change
One unexpected consequence of private equity’s frenzied fundraising could be a power shift within the fund finance market. Non-bank lenders are getting ready for a major uptick in their market share on the back of a confluence of events benefiting them and their investors, our colleagues at Private Funds CFO reported (registration required) this week from the Fund Finance Association’s European Symposium in London.

The rapid pace of PE fundraising has caused many banks to hit their lending concentration limits. “It’s not uncommon to see these mega-funds that are raising in excess of $10 billion, and there is the accelerating pace of the fundraising cycle as well,” said one non-bank lender on a panel. “And those trends together are absolutely outstripping the ability of bank balance sheets to keep pace with that growth.”

At the same time, non-bank lenders are reaping the benefits of higher interest rates. Most fund finance facilities are floating rate, as non-bank lenders don’t have to borrow on the interbank lending market – instead tapping their balance sheets – they don’t face increased borrowing costs.

Long dominated by subscription credit lines, which help GPs smooth out their capital calls, the fund finance industry has turned increasingly towards NAV-backed lending in recent years. Repaid by fund cashflows, rather than undrawn LP commitments, the market for NAV loans could grow sevenfold to $700 billion by the end of this decade, according to predictions from 17Capital.


Check out our Women in Private Funds report
Gender diversity has risen up the agenda for alternative asset managers and their investors, as well as their portfolio companies and the communities they serve. However, there is still much work to be done. In our Women in Private Funds 2022 report you can find insights on how private markets firms are working to close gender gaps, and read more about the women making their mark in the industry.

Generali appoints head of private debt
Milan-based asset manager Generali Investments Partners has hired Sandrine Richard as head of private debt, a newly created role within the Generali real assets and private markets hub, which is led by Aldo Mazzocco.

With over 25 years’ experience in asset management investment and business development, Richard will oversee “ambitious development plans” for Generali’s direct lending business and the further growth of its indirect lending business. She will report to Roberto Marsella, head of private assets.

Richard joins from fund manager Muzinich & Co, where she steered the European and French senior secured and private debt strategy in senior leadership roles, contributing to launching and managing private debt funds “with robust ESG processes”. Prior to that, she had senior roles at AXA Investment Managers, including leading the private debt investment team, and at French investment firm Exane.

Europa quartet switch to Schroders
Schroders Capital‘s real estate debt team has transferred four debt specialists from real estate investment manager Europa Capital. Mike Birch has joined as lead investment manager, Robert Game as portfolio manager, Louise Standring-Smith as investment manager and Sunny Vaghela as analyst.

The team, which has a target of raising £1 billion ($1.2 billion; €1.18 billion) in 2022, was established last year following the appointment of Natalie Howard as head of real estate debt.

LP watch

Institution: Iowa Public Employees’ Retirement SystemHeadquarters: Des Moines, USAUM: $40.83 billionAllocation to alternatives: 31.71%

IPERS has announced a $150 million commitment to Kayne Anderson Real Estate Debt IV, according to materials from its June investment committee meeting.

IPERS made the commitment in Q2 before the final close in May of the fourth iteration of Kayne Anderson’s flagship debt fund. The vehicle raised nearly $1.9 billion in capital commitments, marking the largest debt fundraise so far for the firm.

Founded in 1984, Kayne Anderson Capital Advisors is an independent alternative investment management firm focused on niche investing in upstream oil and gas companies, energy infrastructure, specialised real estate, mid-market credit and growth private equity.

IPERS has a 4 percent allocation to private debt, comprising $1.65 billion in capital.

IPERS’ recent private debt commitments are focused on North American real estate debt vehicles.

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