Loan Note: Family offices favouring alternatives; direct lending makes strong start to year

A BlackRock survey shows family offices favouring alternatives over public equities. Plus: Cliffwater's Direct Lending Index reports strong early-year performance; and Houlihan Lokey finds unitranche deals declining in Europe. Here's today's brief for our valued subscribers only. 

They said it

“The gains from globalisation appeared to have peaked by around the start of the new millennium, but in recent years, new forces have emerged to stall the progress of world trade, and in some cases reverse it” 

From a Schroders’ Talking Point, entitled Regime shift: Globalisation dividend coming to an end by Azad Zangana, a senior European economist and strategist

First look

On the up: family office allocations to alternatives are rising (Source: Getty)

Family office allocations to alternatives surpass equities
Family offices are allocating more to alternatives on average than they are to public equity, a survey of such investors by BlackRock has found.

The New York-based alternative investment giant’s 2022-23 survey of family offices, a survey taken every two years, found that those investors’ average allocation to alternatives was 40 percent, compared with 37 percent for public equity.

Family offices plan to increase their allocations to several private market asset classes, with infrastructure funds leading the pack at 42 percent. Private credit is second, at 28 percent; followed by private equity direct deals (23 percent); private equity funds (22 percent); and real estate (8 percent).

Some 44 percent of family offices say they will maintain their current allocation to private credit, leaving only 14 percent that plan to reduce it. In contrast, 22 percent of family offices plan to reduce their hedge fund allocation, surpassing the 21 percent that plan to increase it.

Within their private credit exposure, survey respondents are more positive about everything on the menu – primary funds, secondaries, and co-investment – than they were at the time of a 2020 survey. This reflects a greater focus on the subject post-covid. In the 2020 survey, 53 percent preferred primary funds. That figure has since leapt to 83 percent.

BlackRock’s survey ranked the asset classes by the degree to which family offices were satisfied by their performance over the last 12 to 24 months. Private equity funds were the stand-out here: 30 percent said it has exceeded their expectations, with 66 percent saying it met those expectations. That left only 4 percent saying “underperformed”.

Private credit received the “exceeded” thumbs-up from almost as many (29 percent), beating infrastructure, private equity direct deals, and hedge funds, which were at 26 percent, 25 percent and 21 percent respectively.

BlackRock found that family offices are responding to a new market environment of enhanced volatility, inflation, rising interest rates, tricky geopolitics and thickening trade barriers. Many are looking for external help in the form of partners to help them manage risks and capture opportunities.

The survey encompassed 120 single-family offices from around the world. They allocate collective assets under management of $243 billion.

Strong first quarter for direct lending 
The Cliffwater Direct Lending Index, a proxy for the performance of US mid-market corporate lending, delivered a strong total return of 2.69 percent in the first quarter of 2023. Hypothetically, if multiplied by four, this would translate to an annual return of 10.76 percent. The total return recorded by the CDLI over the last year is 7.26 percent.

The CDLI takes into account 13,000 directly originated mid-market loans totalling $276 billion at the end of March this year. Launched in 2015, the index projects back to 2004, using publicly available quarterly SEC filings from business development companies, which invest primarily in US mid-market corporate loans.

The index’s total return figures for five years, 10 years and since inception in 2004 are 8.40 percent, 8.84 percent and 9.34 percent respectively.

Interest income rose to 2.74 percent in the first quarter of this year, or 10.96 percent on an annualised basis – compared with 10.04 percent for the trailing year and 9.73 percent for the trailing five years.

European unitranches on the slide
Investment bank Houlihan Lokey’s Q1 2023 MidCapMonitor analysis of pan-European private equity-sponsored debt financing activity found pan-European unitranches decreasing during Q1, with 78 transactions compared with 95 in Q4 2022, an 18 percent decrease quarter-on-quarter, against deteriorating macroeconomic conditions and continued geopolitical uncertainty.

The UK, Germany, France, and Benelux markets continue to be active unitranche markets but all saw the number of completed deals fall in Q1 – ranging from an 11 percent decline in the UK up to 32 percent in France.

Out of the 78 unitranche deals completed, the UK remained the most active market with 25 deals, followed by Germany with 15, France with 13, Benelux with 13, and Spain with eight.

Debt funds were still able to maintain their market share versus banks in Germany, with 54 percent, and in the UK with 62 percent. But in France, banks are more competitive and taking market share from debt funds, up from 52 percent in Q4 2022 to 68 percent in Q1 2023.

Debt funds continued to pursue add-on acquisitions in Q1 2023, with 39 deals closed (50 percent of the total). This was driven by sponsors looking to create additional value through buy-and-build transactions and direct lenders keen to deploy capital into performing portfolio assets.


Brightwood taps Wells Fargo’s Pratt as chief credit officer
Brightwood Capital Advisors has named Eric Pratt chief credit officer, to oversee its existing portfolio and play an important role in the firm’s analysis of new investments.

Pratt, who brings more than 20 years of experience to the New York-based mid-market credit firm, was most recently managing director, global head of corporate and investment banking credit portfolio management at Wells Fargo. There, he established a new credit portfolio function to enhance loan portfolio management and risk control capabilities. Pratt has also held senior leadership roles at Mizuho, Deutsche Bank, JPMorgan Chase and Procter & Gamble.

Sengal Selassie, Brightwood’s chief executive officer and managing partner, said that as the firm continues to scale and grow its portfolio, Pratt’s “depth of knowledge and expertise across portfolio and risk management will help ensure” its safety and security in a rapidly rising interest rate environment. Pratt also will be “instrumental” to Brightwood’s go-forward strategy, Selassie said.

Pratt said Brightwood “has a longstanding track record of supporting growth-oriented businesses across the middle market”. Brightwood said it deployed $2 billion of capital to 35 new borrowers in fiscal year 2022, with the firm’s assets under management growing to more than $5 billion.

Marathon names Cong as a partner
Marathon Asset Management has named Ed Cong, who has been with the firm for 17 years, as its newest partner. Cong will continue to serve as senior portfolio manager for the firm’s structured credit and asset-based lending business, and as a member of Marathon’s executive and investment committees.

“Colleagues and clients alike have long admired Ed for his exceptional investing acumen and leadership qualities and this promotion is a well-deserved recognition of his capabilities and dedication to our firm and investors,” said Bruce Richards, co-founder and chief executive.

Louis Hanover, Marathon’s co-founder and chief investment officer, said of Cong that his “investment expertise, integrity and teamwork have been incredibly beneficial to the firm and its growth over his many years at Marathon”.

New York-based Marathon is a global investment adviser with more than $20 billion of capital under management.

White Oak UK sees rise in VAT lending
White Oak UK, a UK non-bank lender, says it has seen a strong uptick in its VAT lending offering since the start of the year as business confidence increases. White Oak UK is an affiliate of White Oak Global Advisors.

So far this year, the firm has reported an 83 percent year-on-year increase in VAT lending – amounting to a 139 percent rise in VAT lending overall since the start of 2021. White Oak UK believes the increase shows the UK’s small business economy is well on the way to post-pandemic recovery despite strong economic headwinds with rising costs and interest rates.

Firms across professional services, support services and manufacturing industries recorded the highest average VAT bill of all sectors, following a rally in business activity. With increased revenue leading to higher VAT bills, spreading the cost of the payments allows small businesses to manage their cashflows more effectively.

The average size of VAT funding packages averaged £53,000 (€62,000; $66,000) in the first quarter of the year – a 20 percent increase on the figure for 2020.

LP watch

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, US
AUM: $46.1 billion
Allocation to private debt: 3.4%

The Connecticut Retirement Plans and Trust Funds has approved a new commitment of up to $150 million to Hg Titan 2, according to recent board documents.

Connecticut has previously committed to other Hg vehicles including its previous offering, Hg Titan, which raised $1.2 billion. Both Hg Titan and Hg Titan 2 target senior corporate debt in North America and Europe.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing