Loan Note: Discover the identity of our Rising Stars; KKR reaches out to new investors

A reminder to peruse some of our latest content, including Rising Stars and our Global Investor 50. Plus: KKR seeks to connect with new investors; and McKinsey finds evidence that fund managers will be rewarded for diversity. Here's today's brief for our valued subscribers only.

They said it

“A fresh bout of volatility has reared up on indices after the chair of the Federal Reserve told investors to hold their horses when it comes to expectations about lower rate rises”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, in a press release from the firm

First look

Rising Stars: Set to lead the industry to new heights (Source: Getty)

Introducing private debt’s young talent“Forty individuals under the age of 40 with the potential to shape the future of the asset class.” That’s quite some description to live up to, but we received nominations in the hundreds for our latest class of Rising Stars – and we’ll readily admit the standard was very high indeed. You can see who made it – and why – here.We have plenty of bumper content to bring you this week. In case you haven’t had the chance to take a look yet, you’ll find our 10 defining deals of private debt here; our latest ranking of the 50 most prolific allocators to the asset class here; and an interview with ICG’s co-heads of direct lending here.

Making new friends
KKR is connecting with a new set of investors as traditional capital sources pull back from private equity fundraising due to overallocation. That was one takeaway from its third-quarter earnings call, which our colleagues at Buyouts listened to. “There’s no doubt some US pension plans are getting their bearings right now and are trying to figure out where the market is going to go,” co-chief executive Scott Nuttall told analysts. The firm is nonetheless having “very productive conversations” with these LPs, typically about non-PE strategies, such as “anything that has got an inflation-protection element or yield”, he said. “Think credit, infrastructure, real estate.”

In addition, KKR is cultivating an altogether new group of institutional partners, Nuttall said. “We’re spending a lot of time with institutions we’ve never spent time with before.” They include insurance companies, which “are trying to figure out how to navigate the rate environment”, he said. They also include sovereign wealth funds, which, along with family offices and high-net-worth investors, “have a different dynamic entirely”.

KKR remains optimistic in spite of macro uncertainty. The firm has had a “bit of luck” in its fundraising processes, with $65 billion gathered across strategies from January to September, said CFO Rob Lewin. This is the firm’s second-best fundraising year to date and puts the alts giant in a position to deploy a significant amount of dry powder at a time when asset prices are dislocated. KKR continues “to have a really active calendar and remain constructive about the outlook for scaling our strategies that are coming to market”, Lewin added.

Diversity premium
Institutional investors tend to allocate more capital to diverse GPs. That’s according to McKinsey’s The state of diversity in global private markets: 2022, which found that, when deciding between two firms with identical historic performance, investors would allocate on average twice as much capital to the deal team with more gender diversity and 2.6 times as much to the team with more ethnic and racial diversity.

The report asked 10 CIOs or their equivalent at organisations managing between $20 billion and $460 billion to commit $100 million between two hypothetical PE funds. In this scenario, less diverse firms were ‘penalised’. The data also showed that investors have the same mindset when building new relationships – they would allocate an average of 1.3 times as much capital to new funds with more gender diversity than to funds they previously backed and which had less diversity on deal teams.

Essentials

Zombies on the riseData from consultancy Kearney shows that a rapidly increasing number of businesses have become ‘zombie companies’, or firms unable to cover interest costs on their borrowing for the past three years, based on current operating profit. These so-called ‘zombie companies’ are at imminent risk of insolvency as interest rates rise around the world, and now account for 4.7 percent of all listed companies globally.The Kearney study drew on approximately 4.5 million data records from circa 70,000 listed companies from 154 industries and 152 countries. It found that the number of zombie businesses has risen by 10 percent since 2021, to almost 2,000, and could increase further as interest rates continue to rise.

Across the globe, the share of zombie companies averages between 4 percent and 6 percent, but with significant differences in growth rates. While North America saw the share of zombie firms rise from 3.5 percent to 5.7 percent between 2010 and 2021, Europe saw a much larger increase from 1.2 percent to 5.5 percent.

Stress tests undertaken as part of Kearney’s study show that the proportion of ‘zombie companies’ is set to rise. Barring any changes to the economic environment, the number of zombies would rise by 17 percent if 2021 average net-interest rates (currently 1.5 percent) rose by 1.5x in 2022, or would increase by 38 percent, if these interest rates doubled.

Join us in Seoul and Tokyo
With the headwinds facing Western economies, Asia-Pacific is once again under scrutiny for investors considering whether to reallocate resources to a part of the world where demand for new sources of finance is increasing.

This makes our latest Private Debt Investor events extremely timely, as we visit Seoul on 8 November and Tokyo on 10 November for our Japan Korea Week 2022. The event features our usual mix of keynote interviews, panels and presentations with industry leaders based in and outside the region. Make sure to book your place as soon as you can.

LP watch

Institution: Teachers’ Retirement System of the State of IllinoisHeadquarters: Springfield, USAUM: $63.27 billionAllocation to alternatives: 6.7%

Teachers’ Retirement System of the State of Illinois confirmed a commitment of $125 million to Brookfield Infrastructure Debt III, a source at the pension fund told Private Debt Investor.

Founded in 1899, Brookfield Asset Management is an asset manager focused on investing in high-quality assets across real estate, infrastructure, renewable power and private equity. The fund’s predecessor had a final close on $2.7 billion in December 2020.

TRSIL’s recent fund commitments have predominantly focused on the corporate sector in North America.


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