Loan Note: Dislocation comes round again; HNWs poised to grab bigger slice of alternatives

Following the dislocation of peak pandemic, here comes the economic dislocation era. Plus: high-net-worth individuals are piling into alternatives and CVC launches its latest CLO. Here's today's brief for our valued subscribers only.

They said it

“Liquid market returns are volatile, and capturing returns above the long-run average requires investors to time their entry into and out of the market precisely”

Taken from Arcmont Asset Management’s Direct Lending vs The Liquid Market whitepaper, which compares the return characteristics of the European direct lending market against the liquid leveraged loan and high-yield markets.

First look

Back to the future: managers are once again planning for dislocation (Source: Getty)

Dislocation is back, with different priorities
Just two years after the peak of the covid-19 pandemic, when the market saw a wave of dislocation funds raised to take advantage of pricing volatility on the public and private markets, the trend is once again back in fashion.

“We have shifted gears to more of a dislocation investing mindset,” said David Allen, managing partner and chief investment officer of London-based fund manager AlbaCore Capital Group, in his latest outlook on the credit market.

While dislocation is the common thread, Allen noted that investing today requires a focus on different priorities from two years ago. In 2020, he said analysts were conducting modelling based around zero revenues, liquidity shocks, sponsor support and temporary interventionist government policies. Today, he said, the focus is on stress testing for economic recession, severe margin compression and a significant increase in financing costs.

Allen said, in this environment, AlbaCore’s focus on larger businesses provides comfort given their ability to pass through costs, retain favourable supplier terms and raise capital “to blunt the downside risks posed by present inflationary pressures”.

Allen added that the firm has shifted in favour of the secondary markets and especially to “senior secured bonds, generally with near term maturities, trading in the 80s”. He said these are almost entirely issuers in which the firm has invested over the past two years.

HNWs target alternatives as inflation hedge
Appetite for alternative assets is set to soar by 46 percent over the next year, according to a survey of mainly high-net-worth investors by AssetTribe, an alternative investment platform.

In research undertaken with market research firm Survation, 580 investors across the UK and Europe were asked for their thoughts on investing in alternative assets. While 53 percent said their appetite for alternatives would increase over the next 12 months, just less than 7 percent said it would decrease – giving a net figure of 46 percent.

The two biggest factors cited by investors were the inflation rate and the need to diversify existing portfolios (both 62 percent), with higher potential returns the driving force for 53 percent.

Asked what they were most likely to invest in, real estate was the most popular choice, with 75 percent of investors interested. Infrastructure and long-term asset funds came second with 62 percent.

Perhaps surprisingly, the survey found that only 35 percent of UK investors canvassed were currently participating in alternatives, compared with a figure of 79 percent for the rest of Europe.


CVC Credit prices $500m CLO fund
CVC Credit has priced Apidos XL, a collateralised loan obligation fund totalling $500 million that was arranged by Goldman Sachs.

Apidos XL represents the third new issue CLO that has been priced this year by CVC Credit’s transatlantic performing credit business. The latest CLO will increase CVC Credit’s global assets under management to more than $34 billion. The transaction was structured with a five-year reinvestment period and received support from both existing and new investors. Like its predecessors, Apidos XL comprises mostly broadly syndicated first-lien senior secured loans and was about 90 percent purchased at pricing.

Gretchen Bergstresser, partner and global head of performing credit at CVC, said the firm was “thrilled” with the continued support it received, and that despite “tough market conditions”, CVC expects to continue to launch new issuances across its transatlantic CLO business through the rest of the year. She said the next one would be in Europe, expected sometime this month.

Loss-making corporates could rise sharply, says S&P
The proportion of loss-making corporates could double to 17 percent by 2023 if inflation, interest rates and spreads spike, according to a report from S&P Global Ratings (login required). This compares with 7 percent of companies making losses in 2021, and 10 percent in S&P’s base-case estimates for 2022.

“If inflation spikes or persists beyond expectations, investors will seek higher interest spreads,” said S&P Global Ratings senior research fellow Terry Chan. “Should we tip into stagflation, profit losses will intensify and default rates could potentially rise.”

To assess how global corporates are faring, S&P conducted a stress test on 20,000 corporates (93 percent unrated) with debt totalling $37 trillion, representing 41 percent of total global corporate debt.

“China’s corporate losses intensified the most in a stagflation scenario. Given the country’s corporates account for a third of global corporate debt, this poses a contagion risk to the world,” said Chan.

BBI backs Tosca’s UK small business fund
British Business Investments, the investment arm of British Business Bank, has announced a cornerstone commitment of £20 million ($24 million; €24 million) to Tosca Debt Capital‘s Impact Fund, which supports smaller businesses looking to grow and create employment following the adverse pressures of the pandemic. TDC posted a first close of the fund on £40 million and is targeting a hard-cap of £50 million.

Predominantly supporting Northern UK businesses, the fund lends between £1 million and £5 million to smaller businesses that will create jobs as a result of investment. The sector-agnostic fund, led by Vicki Daly and Gary Davison, aims to use the experience, networks and skill-base of TDC to support the development of smaller businesses that would otherwise be unable to access capital to grow.

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.