Loan Note: Direct lending can emerge intact in a new era, Carlyle’s positive view of Asia

Cliffwater chief explains how direct lending can weather the storms. Plus: why Carlyle has a positive take on debt in Asia; and the latest key industry hires. Here's today's brief for our valued subscribers only.

They said it

“Tools or warning mechanisms… that highlight weakness in the borrower’s credit profile early on will play a key role in risk management”

Taken from a report by S&P Global company CRISIL, which highlights the risks in private credit portfolios and methods that can be used to guard against potential defaults

First look

Floating not sinking: Cliffwater’s Nesbitt believes direct lenders will prevail (Source: Getty)

Nesbitt: Direct lending can survive Volcker playbook
Stephen Nesbitt, chief investment officer and chief executive officer of Cliffwater, has published an analysis of the monetary regime into which the US Federal Reserve is leading the country, and of its consequences for direct lenders. His analysis begins with an analogy between this moment and 1980-82, the years after President Jimmy Carter installed Paul Volcker at the Fed. The Fed, Nesbitt says, is reopening the Volcker playbook.

Volcker’s medicine did cure the inflationary disease at which it was aimed. But it had severe costs. Over the 1982-85 period in particular, the non-investment grade bond market saw a 20 percent cumulative default rate (12 percent in cumulative losses) and corporate earnings fell 18 percent, Nesbitt reminds us.

Nesbitt, though, is an optimist on prospects for the direct lending market. He expects that the relatively short maturities, absence of interest rate risk, credit seniority and covenant protections together should help this asset class through the Volcker-like weather, both absolutely and relative to other asset classes. Cliffwater’s annualised five-year forecast for direct lending (levered 1:1) under a Volcker-like regime is 9.23 percent. This contrasts markedly with the same figure for US stocks over the same period on the same presumption: 1.30 percent. Investment-grade bonds, Cliffwater expected, will do much better than stocks (annualised to 4.10 percent) but, again, the comparison favours direct lending.

Carlyle won’t fret about debt in Asia
Rising interest rates weren’t exactly the talk of the town at IPEM 2022 in Cannes last week, giving rise to affiliate title Private Equity International‘s take that the industry both feels it is well positioned to weather the challenges ahead and that it may be in a very different mindset this time next year.Interest rates also cropped up in an interview with Carlyle Group’s Asia chairman, Xiang-Dong Yang, at SuperReturn in Singapore last week. The bottom line: the impact of the cost of borrowing going up isn’t as pronounced in Asia-Pacific private equity.

“First of all, deals in Asia haven’t been that big compared to the US and Europe,” Yang said. “For the bigger buyouts in the billion-plus range, there may be some impact in terms of availability of debt, but overall, private equity in Asia has not all been driven by leverage. A lot of our deals don’t have leverage. In some of the minority deals, for example, clearly the operating companies don’t take on high leverage.”

Yang expects rising rates and credit volatility to impact the US and Europe more than Asia, noting that borrowing, which is more expensive, hasn’t been the main driver of returns. “Historically, we have predominantly relied on bank financing for our deals, even for buyouts,” he said. “And it’s really driven by the attractive bank loans we get in each locale, whether it’s Korea or Taiwan. We have also borrowed from Chinese banks. We are doing more control deals and we are getting generally attractive financing packages from the local banks.”

Yang also said Carlyle is leaning into Chinese private equity over the next six to nine months, contrary to some of its global peers and US LPs.

We have a favour to ask…
Once again, a team from PEI Media is heading out on a (hopefully) balmy October morning for this year’s Royal Parks Half Marathon to raise money for Shelter, the UK homelessness charity. Any support will be very gratefully received – if you would like to donate, you can find our fundraising page here.


Dear LP: What’s on your mind?
Private Debt Investor‘s research colleagues want to hear from all investors globally – on an anonymous basis – about their investment plans for our LP Perspectives Survey 2023. Now in its 11th year, the survey results will be published in a special report in December. Click here to take part. The deadline for submissions is 7 October.

Trio of business development hires for MonroeFund manager Monroe Capital has expanded its institutional and high-net-worth business development team with the addition of Brian Dutzar as a director in Chicago, Mark Friedrich as managing director in Los Angeles and Brian Lee as director in New York.Dutzar was previously an executive director at Perella Weinberg Partners/Agility, a firm specialising in outsourced chief investment officer services, where he led business development efforts with financial intermediaries. He has more than 20 years of experience in business development and consulting with sophisticated investment products for high-net-worth clients and financial intermediaries. Friedrich was formerly a sales executive with Western Asset Management Company, focusing on institutional relationships in the Western US region and has more than 25 years of experience in the financial industry, having also been a senior vice-president at Nuveen, responsible for new business development across their suite of products from equities to private credit.Lee was a regional director at Ashmore Group, where he was responsible for business development, within the intermediary channel, in the Eastern US region. He has more than 14 years of experience in financial services, working in asset management and wealth management.Four join SVPGlobal, three in IRFund manager SVPGlobal has made several senior appointments to its North American investor relations team, including Greg Lawton as co-head of investor relations, Seth Healy as managing director and Liz Bruce as head of communications and brand. The firm has also hired Tom Tull as a senior adviser. Lawton, Healy and Bruce will serve on the firm’s management council.Lawton, who will lead the investor relations team in the US and focus on deepening engagement with investors across North America, has over 17 years of experience working with institutional investors globally. He joins from Crescent Capital Group, where he was co-head of investor relations, leading capital development and fundraising activities, as well as managing strategic relationships with institutional investors.Healy will lead the firm’s engagement with investment consultants across North America. He has more than 20 years of experience at financial institutions including Goldman Sachs, Crescent Capital Group and Lord Abbett & Co. At Crescent, he led capital development and fundraising across investment consultants and plan sponsors.Bruce will focus on engaging SVPGlobal’s key stakeholders and developing and promoting the brand globally. She has worked with asset management firms and financial institutions, including Goldman Sachs, where she was global chief of staff for corporate communications during the global financial crisis. She was most recently a senior managing director at advisory firm Teneo.As a senior adviser, Tull will work closely with the investor relations team on increasing the firm’s connectivity and brand with US-based institutional investors and consultants. He was most recently chief investment officer at the Employees Retirement System of Texas where he managed a $36 billion public pension plan.Government unit, fund manager launch UK homes fundUK government housing agency Homes England and fund manager Newstead Capital have joined forces to launch a long-term lending fund to provide residential development finance.Homes England, alongside Greater Manchester Pension Fund, clients of listed wealth manager Mattioli Woods and other private institutional investors, have committed £80 million ($86 million; €89 million) to the initial close of the Newstead SME Real Estate Lending Fund. The intention is to grow the fund to £300 million and deliver £1 billion of funding over its lifetime.The fund aims to help deliver Homes England’s mission to accelerate change in the housing market by bringing in new sources of institutional capital and diversifying lending channels to the SME housebuilding sector. It will provide “competitive and accessible” loan finance to SME housebuilders to support an underserved part of the market that faces significant challenges with access to traditional finance.A statement said the fund will enable the construction of more than 5,000 high-quality, affordably priced and efficient new homes throughout England.

LP watch

Institution: Indiana Public Retirement System Headquarters: Indiana, USAUM: $45.28 billion Bitesize: $100 million-$200 million

Indiana Public Retirement System has committed a total of $250 million to two private debt funds, following a board meeting this month. The pension committed $150 million to Innovation Credit Growth Fund IX and $100 million to ICG/Indiana Public Retirement System – Sale and Leaseback Separate Account.

Intermediate Capital Group‘s fund will focus on acquiring “operationally or mission-critical” real estate that is core to the lessee’s business or its occupational market and leasing the asset back to the company. ICG will primarily work with European tenants in industries with favourable long-term outlooks.

SVB Capital‘s fund uses a venture debt strategy focusing on lending to mid-to-late stage growth businesses in the technology, software, healthcare and life sciences sectors. The fund provides loans on a first lien, senior basis with equity upside through warrants.

Indiana PRS and ICG have an existing investment relationship. The commitment to SVB Capital marks a new investment relationship.

The public pension currently allocates 3.9 percent to private debt, equivalent to $1.77 billion of its investment portfolio. Indiana’s recent fund commitments have predominantly been focused within North America, with varying strategies.

Today’s letter was prepared by Andy Thomson with John BakieChristopher Faille and Robin Blumenthal