Loan Note: ESG tops investor concerns; Carlyle credit sees strong year

ESG has risen rapidly to become one of the top concerns of investors. Plus, Carlyle's third quarter results hail the contribution of its credit funds and NXT grapples with a succession plan. Here's today's brief for our valued subscribers only.

He said it

“Credit markets are reflecting the risks that exist but they are also reflecting the positives.”

Ashish Shah, co-head of fixed income at Goldman Sachs, comments in the Financial Times (paywall) on volatility in credit markets ahead of the US election.

First look

ESG becomes hot topic in leveraged finance
One thing is clear from a new report from the European Leveraged Finance Association: environmental, social and governance issues are an increasingly important factor in determining whether or not investors will support a particular borrower.

However, driven by an appetite for information about ESG that is often not sated, investors are sending borrowers a barrage of questionnaires – many of them overlapping, but which borrowers are compelled to respond to one by one.

To try and resolve this unsatisfactory situation, ELFA is working with the Principles for Responsible Investment “to create tools to support engagement between sub-investment grade corporate borrowers and investors on ESG matters”.

The discussions, and the lead taken by ELFA, are yet another sign of the growing importance of ESG to investors in leveraged finance and private debt.

Credit makes big impact at Carlyle
Carlyle’s credit unit was hailed as having made a major contribution to its third-quarter earnings, doubling its fee-related earnings to $22 million.

Debt strategies also contributed $2.4 billion of the firm’s $5.5 billion total capital raised so far in the year, not bad for a year in which the covid-19 pandemic has caused serious economic turmoil.

However, Carlyle CEO Kewsong Lee said it was direct lending that is currently leading the way in credit opportunities, with the distressed market having few actionable opportunities due to the presence of Federal Reserve liquidity programmes, though distressed is likely to become more attractive next year.

Data snapshot

Covid collapse. Mid-market private debt transactions nosedived in Europe during the second quarter as most countries saw extensive restrictions to control the spread of covid-19. Deloitte’s Alternative Lender Deal Tracker shows just 48 deals completed in Q2 2020, the lowest quarterly figure in years and way off the 157 seen in Q3 2019.

Essentials

NXT plans for Radway retirement
ORIX Corporation USA has announced that Robert Radway, chairman and chief executive officer of ORIX USA’s subsidiary, mid-market debt fund manager NXT Capital, will retire toward the end of 2021, following more than 11 years at NXT Capital and over 30 years in the industry.

John Finnerty, head of the corporate finance group for NXT Capital, has been named president of the firm effective 1 January 2021, at which time Radway will no longer serve as chief executive officer, but will continue as chairman and member of the NXT Capital investment committees until his retirement.

As part of the transition, NXT Capital’s real estate lending and investing activities, led by Real Estate Group co-heads Craig Andreen and Kevin Rostowsky, will merge with ORIX USA’s broader real estate lending and investing platform.

New roles for Peck and Marchand at SVP
Strategic Value Partners, a Greenwich, Connecticut-based distressed debt and private equity fund manager, has expanded its portfolio operations team with the addition of David Peck and Paul Marchand as managing directors. Both will serve as members of SVPGlobal’s 16-person management council.

Peck, who has been named head of the North American portfolio operations team, joins SVPGlobal from private equity firm KPS Capital Partners, where he was managing director of portfolio operations and a senior member of the 16-person operations group.

In Europe, Marchand, a new senior operating partner, joined SVPGlobal earlier this year from Bain Capital Private Equity, where he was a senior professional in that firm’s portfolio and operations group over the past 11 years.

LP watch

Institution: State of Wisconsin Investment Board
Headquarters: Madison, US
AUM: $126.35 billion
Allocation to alternatives: 17%

State of Wisconsin Investment Board recommended an increase for its target allocation for private debt in 2021, according to board materials from its October 2020 meeting.

The $126 billion pension’s target allocation for the asset class will increase from 9 percent to 11 percent. It expects to hit its target by the end of next year, depending on market performance, the document shows. SWIB’s long-term invested return for private equity/debt sits at 10.2 percent, with its 10-year expected return at 9.9 percent.

Private equity/debt currently makes up 9 percent of SWIB’s total portfolio. SWIB focuses on debt, growth equity and buyout investments.

Institution: Baltimore City Fire and Police Employees’ Retirement System
Headquarters: Baltimore, US
AUM: $2.86 billion
Allocation to alternatives: 25.7%

Baltimore City Fire and Police Employees’ Retirement System is backing private debt funds from Nexus Capital Management and Torchlight Investors, according to September 2020 board meeting documents.

The system committed $15 million to Nexus Special Situations III, which focuses on the corporate sector. It is targeting $1 billion.

The institution also invested up to $15 million in Torchlight Debt Opportunity Fund VII, which is targeting $1.5 billion.

BCFPERS’ allocation to private debt currently stands at 1.8 percent. It has typically committed between $10 million to $20 million to private debt funds.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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