Loan Note: Fractionalisation comes to Asia-Pacific; top tips from Schroders Capital

The fractionalisation of a fund in Asia that allows small investor tickets. Plus: Schroders Capital offers three tips to cope with near-term challenges; and the LMA survey that suggest restructuring is the top opportunity in 2023. Here's today's brief for our valued subscribers only.

They said it

“The technology and sophistication of broadly syndicated leveraged loans over the past three decades has developed to the point where they match high-yield bonds in issuer-friendliness”

From the latest version of The Lead Left, published by Churchill Asset Management’s Randy Schwimmer

First look

Shrinking subscription sizes to widen Asia debt funding 
ADDX, the Singapore-based private market exchange, has fractionalised a venture debt fund by InnoVen Capital. It is using blockchain and smart-contract technology to automate the processes involved in investing, with that automation allowing it to make the venture debt fund available in fractional units of scale, allowing secondary trading by investors on the ADDX exchange.

The underlying fund is the InnoVen SEA Fund I, which provides debt funding to high-growth start-ups and tech firms across Southeast Asia. It is anchored by a $50 million commitment from Seviora and UOB. Seviora is a Singapore-based asset management group and a Temasek subsidiary founded in 2020. UOB is a multinational bank also headquartered in Singapore. InnoVen is a joint venture of Seviora and UOB. The chief executive officer of ADDX, Oi-Yee Choo, said that this is a “good parentage [that] ensures good dealflow”.

Fractionalisation brings the minimum subscription size for accredited investors down from $5 million to $20,000.

Choo explained the decision to fractionalise as a way to accommodate the room for expansion of venture debt in the region. In the US, he said, “venture debt deals make up around 25 percent of venture capital funding”, but in Southeast Asia they are at less than 5 percent.

The announcement said that loan sizes can go up to 30 percent of an equity round or cash in bank. The lending will be based on a number of factors: the strength of a portfolio company’s shareholders; its competitive advantage; and the quality of its management team among them.

Schroders: Three tips for private market investors
Private asset investors “face a complex mix of challenges and risks”, an email from Nils Rode, Schroders Capital’s chief investment officer, acknowledges. As well as immediate issues such as high inflation and interest rates, elevated debt levels and the ongoing war in Ukraine/energy crisis, he also warns that social inequality and populism would remain even if these factors disappeared.

But, while insisting that investors need to assess the medium- to long-term outlook, Rode provides three tips to help investors navigate the near term:

1. Steady investment pace: Maintaining a consistent rate of deal-doing may be difficult, but those “who can make new fund investments in 2023 are well advised to do so”, since recession years “tend to be particularly attractive vintage years” with the opportunity to pick up assets at depressed values. These assets can then deliver good exits in the recovery phase.

2. Less correlated strategies: the private asset market has become “very diverse”, with specialised strategies in each asset class that “should be resilient to even a prolonged and deep recession”. Within private debt, Rode points to examples such as mid-sized real estate and infrastructure debt and opportunistic securitised products. The secondaries market is also referred to as presenting interesting opportunities.

3. Avoid major dry powder overhangs: With a negative correlation between prolific fundraising and performance, investors are advised to “avoid strategies with dry powder overhangs until they fall to more normal levels”. Rode says this can take quarters or even several years.

Where’s opportunity in 2023? Look to restructuring
Restructuring will represent the best source of opportunity in the loan market next year, according to a survey of members by the UK-based Loan Market Association, which acts as the voice of the syndicated loan market.

The proportion of members citing restructuring as the best opportunity has risen to 38.6 percent, compared with 13.6 percent when the same survey was conducted in 2021. A similar outcome (36.4 percent) was recorded in 2020 in the wake of the initial covid-19 outbreaks. Back then, the prediction was wrong but the LMA says that now “the pessimistic tone is more likely to come true” given rising rates and economies facing budgetary pressures.

Corporate M&A, meanwhile, has slumped as an expected source of opportunity, with 11.4 percent putting it in the number-one spot, compared with 27.2 percent in 2021. The leveraged market also sees a big decline, from 16.3 percent to 5.9 percent.

Essentials

BII and AGF team up for Africa SME guarantees
British International Investment, the UK development finance institution and impact investor, and African Guarantee Fund, a pan-African guarantee provider, have announced a $75 million re-guarantee partnership for small and medium enterprises across Africa.

Through the facility, BII and AGF will provide credit guarantees to financial institutions for up to 75 percent of the risk on SME loans, thereby increasing access to credit and reducing collateral requirements. The eight-year partnership is expected to facilitate up to $150 million in loans to 17,300 SMEs through partner financial institutions. The partnership will encourage lending to SMEs that are women-owned or led, as well as SMEs that are climate-focused.

SMEs in Africa continue to face significant challenges in accessing credit. Financial institutions are often constrained by regulatory requirements, limited appetite for a segment that is perceived to be higher risk, a lack of adequate collateral available from SMEs, knowledge gaps by lenders and skill gaps among SME borrowers.

Trade finance software developers unite
The consolidation trend among trade-finance related software suppliers continued in early December when Komgo, a Swiss software developer, bought a Canadian concern, GlobalTrade Corporation. Terms have not been disclosed.

Together, Komgo and GTC provide trade finance digitisation software to more than 120 multinational clients and their subsidiaries. The software connects the clients to financial institutions on the one hand and trade service providers on the other.

GTC, founded in 2000, hit $4.8 million in revenue in 2020 according to Latka, a database for the SaaS industry.

Komgo was founded in 2018 in Geneva. According to a statement issued upon its launch, it was created by a collection of the world’s “largest financing, trading and production institutions”, numbering ABN AMRO, BNP Paribas, ING, Koch Industries and the Mercuria Energy Group, among others. It created a blockchain-based open platform in the hope of transforming the way such operations are processed.

Jacob Katsman, chairman of GTC, said in a statement: “Solutions offered by both companies are complementary and cover the complete range of payment instruments used in international trade, starting from detection of fraudulent invoices to automation and management of letters of credit, bank guarantees, documentary collections; integrated with a trade finance marketplace.”

According to a trade publication on enterprise blockchain, the clients that GTC brings to the table include Airbus, Daimler, Ericsson, Siemens, Volvo, Vesta, IBM, Microsoft and Nokia.

The February 2023 issue of Private Debt Investor will include a feature on current themes in trade finance.

LP watch

Institution: Alaska Permanent Fund Corporation
Headquarters: Juneau, US
AUM: $76.0 billion
Allocation to alternatives: 28.9%

The Alaska Permanent Fund Corporation (APFC) has confirmed private debt commitments of up to $125 million, according to documents from its recent quarterly board meeting.

The sovereign wealth fund has put $65 million into Crestline Opportunity Fund V, with a further $60 million in NGP Royalty Partners II.

NGP Royalty Partners II is a $600 million fund that invests in the oil/gas and natural resource sectors across North America. The vehicle has received backing from two other US public pensions, according to Private Debt Investor data: $150 million from the Oregon State Treasury and a further $50 million from Sacramento County Employees’ Retirement System.

Founded in 1988, NGP is a private equity firm with approximately $20 billion of cumulative equity commitments organised to make strategic investments in the energy and natural resources sectors.

Crestline Opportunity Fund V launched in mid-2022 and had raised close to $400 million as of June 2022, according to PDI figures. The Crestline Opportunistic strategy seeks to provide capital solutions ranging from senior debt to structured equity to mid-market companies, real estate lending and speciality finance programmes across North America and Europe.

The previous fund in the series, Crestline Opportunity Fund IV, closed with commitments of $1.6 billion in March 2022, below the $1.75 billion target for the fund.

Incorporated in 1997, Crestline Investors is a Texas-headquartered asset management firm that provides financial solutions in various asset classes such as private equity, debt and real assets across North America and Western Europe.

APFC currently allocates 2.6 percent of its total investment portfolio to private credit, comprising just under $2 billion in capital. The institution has a 2.8 percent target allocation to the asset class.

APFC’s recent private debt commitments have focused on distressed and mezzanine vehicles across North America. It has committed more than $400 million to the asset class in 2022 so far.


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