Loan Note: Deep dive into the documents; how the mid-market is faring

In the latest issue, we take a deep dive into why deal documentation is so different in Asia-Pacific than North America and Europe. Plus, how the mid-market is responding to the covid challenge and why the focus is on sophisticated solutions to manager due diligence. Here's today's brief for our valued subscribers only.

They said it

“While we are unable to give an accurate number on the market scale, mid-market lending has no doubt become increasingly active in China in recent years.”

Simon Leung, a partner in Baker McKenzie’s banking and finance practice in Hong Kong, quoted in our article on the private debt opportunity in China (see here)

Just happened

A world divided by documents 
“It’s quite amazing, how different the documentation in Asia is compared to what you see in Europe and North America,” says Nitish Agarwal, chief investment officer at Orion Capital Asia, a mid-market direct lender, in Singapore. “We still get away with very tight covenants. We still have very strong cashflow ring fencing in our structures.”

You may have thought, particularly if you operate in the leveraged loan and high-yield bond markets, that covenants were some quaint reminder of a world consigned to the history books. In fact, in Asia Pacific – as this month’s cover story discovers – they are alive and kicking.

Our coverage takes a look under the bonnet of how deals are being structured in North America and Europe, as well as Asia-Pacific, and examines the similarities and differences. For investors, there appears to be a stark choice between the borrower-friendly more proven markets of the West or the lender-friendly but more nascent markets of the East.

The latest issue also includes vital insights into the senior debt market, ESG, trends in recruitment and much else besides. Read all about it here.

How the mid-market has risen to the covid challenge
“Private credit has benefitted from stable, patient capital structures and strong governance and support from private equity sponsors,” says David Ross, head of private credit at Northleaf. “This led to lower-than-projected default rates and ample liquidity through the covid-induced economic shutdown.”

Having enjoyed tailwinds since the global financial crisis, covid-19 has been widely described as the first big test for private debt. In our Mid-Market Lending report, we find that the mid-market heartlands of the asset class have by and large responded very well to that challenge.

For one thing, as suggested by Ross, good portfolio management has so far fended off too many problems – though no one should assume all the challenges are now in the rear-view mirror. Secondly, the banks – as they did in the GFC – have retreated from certain lending activities, making private debt’s role in the economy all the more vital.

The report tackles wide-ranging themes including the lower mid-market, the opportunity in China, the refinancing wave and key themes in the US and European mid-markets.

EMA’s due diligence deep dive
Private Debt Investor last week caught up with Kamal Suppal, chief investment auditor at Boston-based investment advisory firm Emerging Markets Alternatives to hear about an interesting new product designed as a response to the challenges of virtual due diligence.

The firm’s “Virtual Intelligence” offering is a package of video recordings including conversations with managers to draw out the personality of team members and their value proposition; a deep dive into the investment thesis; a ‘virtual onsite’, where investors can see managers going about their day-to-day business; a full report of EMA’s findings about the manager; and ‘town halls’ where managers respond to investor questions.

The product is designed as a more comprehensive – and arguably more interesting – alternative to multiple Zoom calls. Not being able to meet managers in person has led many LPs to focus on brand-name GPs only and Suppal thinks this means they could be missing out on smaller firms able to nimbly exploit niche opportunities. “Virtual Intelligence” is designed to give them more comfort in backing these ‘below the radar’ operators.

Essentials

Hayfin busy on the deals front
London-based manager Hayfin Capital Management says it achieved record deployment through its direct lending strategy in 2020, investing €3.7 billion. Hayfin also reached a final close on its commingled Hayfin Direct Lending Fund III and related separately managed accounts last year, raising in excess of €5 billion to deploy into performing loans to European mid-market companies.

KKR hires for speciality and asset-based finance
US-based manager KKR has appointed two managing directors in its global private credit team to focus on sourcing investment opportunities in the speciality lending and private asset-based finance markets. Jim Lees and Vaibhav Piplapure will be based in New York and London, respectively.

Lees joins from Wells Fargo Securities where he was managing director in the ABF business, while Piplapure most recently served as co-head of speciality finance at M&G Investments where he helped establish a business line focused on originating, structuring and investing in consumer and mortgage credit portfolio opportunities in Europe.

Connection investors back SCIO 
UK-based Connection Capital, which channels private professional investment into alternative assets, says it has raised £3 million ($4 million; €3.5million) of private capital for SCIO Capital, a specialist European secured private credit fund manager focused on sub-€25 million loans.

The SCIO European Secured Credit Fund III specialises in providing credit to businesses where the type, size or circumstances of loan requirements would not typically be considered suitable for the public markets and which are increasingly ignored by banks, but where it is claimed there is high return potential and limited downside risk.

LP Watch

Institution: State Universities Retirement System of Illinois
Headquarters: Champaign, US
AUM: $21.91bn
Allocation to alternatives: 14.3%

State Universities Retirement System of Illinois confirmed the introduction of a standalone private credit asset class to its portfolio offering at its March 2021 board meeting, according to meeting minutes.

Highlights from the meeting include:

Creation of private credit as its own asset class with a long-term target allocation of 5 percent. Introduction of this asset class comes at the expense of the pension reducing its target exposure to public credit.

$450 million-$550 million to be committed to the asset class annually, with individual commitments ranging from $50 million-$150 million.

Private credit commitments to diversify across strategy, collateral, vintage year, geography and manager.

A target of 20 percent of all new commitments will focus on emerging and MWDBE (minority, women and disadvantaged business enterprise) managers.

Institution: Chicago Teachers’ Pension Fund
Headquarters: Chicago, US
AUM: $12.2bn
Allocation to alternatives: 14.3%

Chicago Teachers’ Pension Fund agreed to commit $40 million to BIG Real Estate Fund II at its March 2021 Board of Trustees meeting, a contact at the pension informed Private Debt Investor.

The US pension fund had previously committed $30 million to Fund I of the manager’s real estate debt series, which held a final close in May 2019 at $410 million.

CTPF’s recent private debt commitments have predominantly targeted North American corporate and real estate debt funds focusing on subordinated lending.


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

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