Loan Note: Fundraising expected to improve in 2024; private debt secondaries holding value well

Fundraising headwinds continue to blow but the outlook appears to be brightening. Plus: private debt secondaries are showing only modest discounts; and France's Tikehau Capital expands into Abu Dhabi. Here's today's brief for our valued subscribers only. 

They said it

“As credit fundamentals unveil signs of weakening, interest coverage ratios are expected to erode in the quarters ahead with the lagged impact of higher rates”

Taken from fund manager Monroe Capital’s Monthly Capital Markets Update.

First look

Improving outlook: managers raising funds have reasons for optimism (Source: Getty)

Fundraising tipped to get back on track
Limited partners are preparing to pile back into private debt in 2024, according to conversations Private Debt Investor has had with market sources.

This year started on a quiet note, with only $42 billion raised globally for private debt in the first quarter, according to PDI data – compared with more than $62 billion in the first three months of 2022.

This subdued environment still prevails, sources say, with investors having limited capital to commit thanks to reduced distributions from across their private markets portfolios. Investors are also concerned about a lack of dealflow in the sponsor-led market, not wanting to commit big tickets to managers currently struggling to deploy.

However, LPs are noting portfolio company resilience through economic challenges. This is helped by many GPs having focused their efforts only on selected sectors in which businesses have justified the use of high levels of leverage with strong performance. This is encouraging greater confidence. There is also a practical reason why fundraising should pick up soon – the huge levels of dry powder residing in the coffers of private equity and private debt firms alike.

This leads sources in the market to predict a strong fundraising pickup towards the end of this year and into next year, with many institutions still looking to allocate to the asset class for the first time. While moving allocations from fixed income to private debt has been a trend for some time now, it is believed to still have a long way to play out. Reports suggest many first-time LPs in private debt are looking at allocations of 2-3 percent, or even as much as 5 percent.

In terms of where investors are looking to allocate, asset-based lending is drawing particular attention – including in the distressed arena, where collateral acts as a hedge against the additional risk. A further observation made is that strategic preferences may vary depending on LPs’ views about economic prospects, with those predicting a slow-growth environment often continuing to favour direct lending and those expecting a recessionary environment more likely to favour distress and special situations.

Secondaries not going cheap
Private debt secondaries are commanding only small discounts according to research from Jasmin Capital, the Paris-based private markets advisory firm.

The firm says strong buyer appetite for private debt during the economic downturn means that both large generalist buyers and specialised private debt players are pricing the asset class at low double-digit discounts.

The survey found that 53 percent of private debt secondary buyers had an expectation of a 10-20 percent discount, while 32 percent expected zero to 10 percent, and 15 percent expected between 20-30 percent.

This was a similar outcome to infrastructure, where 56 percent are expecting discounts of 10-20 percent only, due to the asset class’s predictability of cashflows over the long term.

By contrast, 75 percent of investors in venture capital and growth would expect a discount of between 50-70 percent “on the back of high uncertainties about asset valuation”.


Fund Leaders survey: we’d love to hear from you!
This year’s Fund Leaders survey is up and running and we want to hear from you! Submit your form to us by 17 July and you will get a complimentary copy of the results when they are published at the end of July, as well as entry into a prize draw to win a $250 Yeti Cooler.

Topics covered in this year’s survey are as follows:

  • Fundraising (market sentiment, factors impacting performance, performance predictions).
  • Sources of capital (private wealth capital, digital fundraising platforms, geographic distribution of investors, continuation funds).
  • Headcount and AI (changes in headcount, priority areas for increasing headcount, AI implementation across firms).
  • ESG and DE&I (factors driving ESG adoption, link between ESG and performance/value creation, DE&I in portfolio companies).
  • GP stakes (GP stakes interest, objectives and considerations in selecting buyers).

New Abu Dhabi office for Tikehau
Tikehau Capital, the Paris-based manager, has opened an office in Abu Dhabi – its 15th office globally and a first step in establishing the firm’s presence in the GCC region.

Tikehau says it has established client relationships across the UAE over the past few years. With its new permanent presence in Abu Dhabi, the firm says it will serve UAE’s “vibrant ecosystem of leading financial institutions, sovereign wealth funds, corporates and entrepreneurs” with its experience in private debt, real assets, private equity and capital markets strategies.

With a local team on the ground, the office will aim to strengthen existing relationships with local players and follows the group’s announcement in February 2021 of Hassan Karimi’s appointment as a senior adviser in the region.

Gustave Laurent, who was part of Tikehau Capital’s M&A strategy department based in Paris, has relocated to Abu Dhabi to help co-ordinate business development and office operations. He will work alongside the firm’s senior management team and local senior partners to help develop long-term relationships.

Three go into Four
Capital Four, the Copenhagen-based manager, has hired three additional team members in New York. They bring the US team to a total of 13 professionals led by Jim Wiant, chief executive officer, partner and portfolio manager of Capital Four US.

Jordan Goldstein joins from Black Diamond Capital Management, where he focused on performing, stressed and distressed loans. He previously held similar roles at Riverbirch Capital and Arrowgrass Capital Partners as an analyst focused on high-yield bonds and leveraged loans. He joins the firm’s coverage of business services, telecoms and healthcare.

Robert Horn joins from Farmstead Capital Management, where he focused on distressed and special situations opportunities across the capital structure. Previously, he spent five years in the CMBS business at Wells Fargo. At Capital Four, Horn joins the consumer and retail sector coverage.

Deborah Freire moves from Octagon Credit Investors where she was a research analyst covering building products, real estate services, telecommunications and cable, and hardware. Before Octagon, she was an associate analyst at Moody’s Investors Services on the high-yield research team analysing issuers across sectors. She will cover the software and technology sectors.

Capital Four US manages $3 billion across credit strategies including CLOs, traditional mandates and opportunistic mandates for institutional investors.

LP watch

Institution: Government Employees Pension Service
Headquarters: Jeju-do, South Korea
AUM: Won 6.28 trillion
Allocation to alternatives: 34.91%

Government Employees Pension Service (GEPS) has issued a request for proposal from global real estate debt fund managers.

The firm aims to commit $35 million to two managers. Its funds should allocate at least 80 percent to North America and/or Europe, while funds that allocate to a single sector, as well as distressed funds and funds with 50 percent or more allocated to mortgage-backed securities, will be excluded.

The funds will have a target size of at least $500 million at final close, and the firms should have run their business for least five full years. The fund manager should have at least $10 billion in private debt AUM, in which $5 billion is into a real estate debt strategy.

The 6.28 trillion won ($4.69 billion, €4.25 billion) South Korean government employees pension has a 34.91 percent allocation to alternative investments.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

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