Loan Note: Direct lending returns robust; action needed on UK funds regime

Direct lending returns are holding up, a new report finds. Plus: the organisation pushing for a more attractive UK funds industry, and the latest from the hiring frontline. Here's today's brief for our valued subscribers only.

They said it

“Asian economies were getting out of covid when demand shocks have come back to haunt the region”

Taken from a report on Asia published by Natixis Corporate & Investment Banking

First look

Returns holding up: Direct lending index beating comparators (Source: Getty)

Direct lending continues to outperformThe Cliffwater Direct Lending Index, a measurement of the performance of the direct lending market, which is produced by US-based investment and research firm Cliffwater, showed a positive return of 1.76 percent in the first quarter of this year – beating minus 0.11 percent for the S&P LSTA Leveraged Loan Index and minus 4.83 percent for the Bloomberg High Yield Bond Index over the same period.The CDLI return is slightly below trend, with the trailing four-quarter return standing at 8.67 percent. Interest income was steady in the quarter at 1.93 percent (7.95 percent on an annual basis), while unrealised losses of 0.19 percent followed almost two years of unrealised gains. These gains had followed two quarters of unrealised losses in the first half of 2020, due to covid. The first quarter’s unrealised losses were attributed to spread widening that Cliffwater expects has continued into the second quarter.Since starting in 2004, the CDLI has averaged 10.79 percent in interest income return with a range of 8 percent to 12 percent. A decline in yield in recent years has been attributed to a significant decline in LIBOR, some yield spread compression and the growth of lower-yielding senior loans within the CDLI. Between the end of 2009 and March 2022, the percentage of senior loans in the index increased from 38 percent to 76 percent.

Calls for UK to be more attractive home for fundsA survey has made various recommendations aimed at improving the competitiveness of the UK’s asset management industry. The study, from the Independent Investment Management Initiative, acknowledges that Brexit has “thrown up a number of operational and logistical challenges for domestic asset managers marketing into the EU” but says that the UK now has greater flexibility to shape regulation and policy.Some of the key recommendations made by IIMI members include:1. Shortening the application process for start-up investment firms. HM Treasury has said current authorisation times are “perfectly satisfactory” but IIMI members disagreed, calling for the timeframe for Financial Conduct Authority authorisations to be reduced from six months just one month.2. More proactive promotion of the UK as an asset management centre. IIMI members think this is called for, especially in light of Brexit. They say that compared with equivalents in Ireland and Luxembourg, the FCA is “not as engaged in dialogue with the industry as it should be”.3. Simplifying regulations. Solvency II comes under particular scrutiny for making insurance companies allegedly hold excessive amounts of capital at a time of low interest rates, stopping them investing into illiquid assets such as infrastructure. An easing of Solvency II rules could free up an estimated £95 billion ($119.1 billion; €111.6 billion) for infrastructure and green energy projects.4. Developing a new fund regime. The IIMI calls for a “popular fund structure” in the UK that could help funds to redomicile in the country and have a “significant impact” on the fortunes of the UK economy. HMT is already prioritising a new open-end fund vehicle for investment into illiquid asset classes.


ESG hires at ICG and PantheonThe growing importance of ESG to asset managers is highlighted by two senior hires. Elsa Palanza has joined ICG as managing director and global head of sustainability and ESG, with responsibility for firm-wide ESG strategy and responsible investing.Palanza joins from Barclays, where she was global head of sustainability and ESG for four years. She had previously worked for the Clinton Global Initiative and the Bill and Melinda Gates Foundation, where she gained experience in sustainability and cross-sector partnerships.Meanwhile, Pantheon has hired Eimear Palmer as partner and global head of ESG, where she will “oversee and further develop the firm’s established ESG strategy”. Palmer is a founder of the UK network of Initiative Climat International – an investor-led platform focused on climate action among leading private market organisations – and previously held senior roles at ICG and Carlyle Group.O’Sullivan steps up in Alantra advisory businessAlantra, the global mid-market and asset management firm, has made a number of promotions in its credit portfolio advisory business.Michael O’Sullivan has been promoted from director to managing director, which will see him lead the CPA team in Ireland. He joined the firm in 2018 as a senior vice-president, having previously been part of KPMG’s global portfolio solutions group.Last year, Alantra was lead financial adviser to fund manager Pollen Street Capital on the merger of Irish non-bank lender, Capitalflow, with Bunq, the Dutch neobank.Dozen new hires for FidelityAsset manager Fidelity International has made a total of 12 new hires across its private credit team, with numerous appointments in direct lending.Fidelity’s private credit team was established early last year with the aim of launching a range of loan and private credit strategies. In November, it launched its first collateralised loan obligation, Fidelity Grand Harbour 2021. Future launches are expected to focus on European loans and CLOs, structured credit and European direct lending.The latest batch of hires includes Tim Johnston as managing director, direct lending. Johnston was previously a partner at fund manager Beechbrook Capital and has 15 years’ experience of the UK direct lending market.

LP Watch

Institution: Maine Public Employees Retirement SystemHeadquarters: Augusta, USAUM: $18.8 billionAllocation to alternatives: 39.2%

Maine Public Employees Retirement System confirmed a $125 million commitment to Comvest Credit Partners VI, a contact at the pension informed Private Debt Investor.

Comvest Partners‘ latest fund launched in March, targeting $1.7 billion. The fund will focus on corporate opportunities in North America with senior debt returns. Its predecessor, Fund V, closed on $1.3 billion in April 2021.

MainePERS has a 5.1 percent allocation to alternative credit and a 7.9 percent allocation to traditional credit.

MainePERS’ recent private debt commitments have tended to focus on North American corporate vehicles.

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