Loan Note: Fundraising fightback in H1, Woe looms for UK SMEs, NAV facilities go remote

The key points from six months of private debt fundraising. Plus, the UK's impending default wave and the NAV fund finance boom.

They said it

“Even as we expect the economic recovery to begin in the second half of this year, we anticipate that corporate credit measures will take longer to recover, and all sectors currently show a negative bias that is above their long-term average”

Nick Kraemer, head of S&P Global Ratings Performance Analytics, gives his assessment of US corporate downgrades, which reached 414 in the second quarter as the country’s recession deepened

First Look

Five fundraising takeaways from H1

Light at the end of the tunnel: Fundraising saw a pick-up in Q2

With just over $63 billion having been raised by private debt funds globally in H1, the record-breaking year of 2017 (in which $256 billion was raised) looks a long way off. Mind you, there is some light at the end of the covid-19 tunnel. Here are five highlights from our interactive H1 fundraising presentation, which can be downloaded in full here.

1. The second quarter was stronger than expected after a lacklustre Q1. Nevertheless, the first half of 2020 recorded the lowest H1 fundraising total since 2015.

2. Funds are taking longer to raise due to covid-19 restrictions, which have limited the ability of fund managers and investors to meet.

3. Senior debt continues to be the most popular strategy, making up 40 percent of capital raised and 30 percent of funds closed in H1.

4. Multi-regional funds are the most popular by geography. Unusually, Europe raised more capital in the first half of this year than North America – though this would appear to be a short-term rather than a long-term trend.

5. The largest funds dominate the market. Total fundraising across the 10 largest vehicles was almost as much as all the other fund closes combined.

Here comes the wave… of UK SME defaults
Three million jobs in the UK could be at risk as a result of unsustainable levels of debt among SMEs, according to a report by lobby group TheCityUK.

The report projects there could be as much as £35 billion of unsustainable debt as a result of covid-19 loans, which it is feared have been extended with minimal due diligence. A significant wave of defaults is expected as government support schemes are withdrawn.

Simon Bonney, a UK-based SME insolvency expert at business advisory practice Quantuma, told PDI: “Lots of money has been loaned via CBILS and BBLS under huge government pressure, but Bounce Back Loans in particular have seen minimal due diligence.”

TheCityUK advised policymakers to create a UK recovery corporation to help oversee and manage those firms that have accumulated unsustainable levels of debt during the covid-19 crisis. It also called on the government to support funding on more manageable terms in order to encourage private sector investment over the long term.

Remote prospects for NAV facilities
In our Friday Letter, we considered the increasing use of – and the challenges arising from – net asset value-based fund finance facilities. We were subsequently contacted by Dominik Meyer, managing partner at Zug, Switzerland-based AXON Partners, who referred us to an NAV facility his firm put together during the “darkest hours” of the covid-19 lockdown.

Remarkably, the complex facility – which involved more than 50 parties and took from April until 10 days ago to complete – was undertaken without a single physical meeting. This remote working phenomenon really is catching on.

Data snapshot

Rating woes for CLOs. The CLO market has seen ratings downgrades steadily accumulating amid the fallout from the pandemic (see table below). A podcast from law firm Dechert and investment bank Berkshire Global Advisors addresses the possibility of industry consolidation and the practical challenges involved – have a listen here.

Essentials

Star billing for Yang
Former Star Mountain Capital senior advisor Anne Yang has decided to roll up her sleeves and pitch in by becoming a partner and strategic portfolio manager at the New York-based fund manager serving the US lower mid-market (see here). The former M&A big hitter previously had senior roles at Goldman Sachs, Bank of America and Citigroup.

Meysson switches from Alcentra to H.I.G.
H.I.G. Capital, the Miami-based private equity firm, has appointed Pascal Meysson as the new head of direct lending in Europe for its European affiliate, H.I.G. Whitehorse (see here). Meysson was previously a managing director at Alcentra, where he was a founding member of the firm’s European direct lending platform.

LP Watch

Institution: San Francisco Employees’ Retirement System
Headquarters: San Francisco, US
AUM: $25.9bn
Allocation to alternatives: 26.4%

San Francisco Employees Retirement System announced commitments of $50 million to Blackstone Real Estate Debt Strategies IV and $75 million to SSG Secured Lending Opportunities III.

The $25.9 billion US public pension has a 10 percent target allocation to private debt that currently stands at 4.9 percent.

SFERS tends to favour commitments to North America vehicles and the corporate sector.

Institution: Cathay Life Insurance
Headquarters: Taipei, Taiwan
AUM: NT6.21trn
Allocation to alternatives: n/a

Cathay Life Insurance has confirmed a $50 million commitment to Oaktree Opportunities Fund XI. The fund is managed by Oaktree Capital Management and has a target size of $15 billion.

Cathay Life’s recent private debt commitments have been made to funds that focus on distressed debt and senior debt strategies across several regions.


Today’s letter was prepared by Andy Thomson with John Bakie, Robin Blumenthal and Adalla Kim