Loan Note: High potential returns in Asia-Pacific; US default outlook improves

A survey into Asia-Pacific lending suggests the possibility of strong returns. Plus, the default outlook gets better in the US and another product targets sophisticated remote pitches to LPs. Here's today's brief for our valued subscribers only.

They said it

“Our conviction at Tikehau Capital has always been that the asset management sector should facilitate the directing of French savings to the financing of companies and the real economy.”

Antoine Flamarion, co-founder of Paris-based Tikehau Capital, on the firm’s tie-up with insurer MACSF Group to launch an evergreen, liquid private debt solution for individual investors. See more here.

First look

The pros – and some cons – of Asia-Pacific
Fancy doubling your private debt returns? Best head to Asia-Pacific. A new report from Hong Kong-based fund manager Zerobridge Partners says investors can expect an unlevered gross internal rate of return of 15 percent or more from mid-market lending in the region compared with between 7-10 percent in the US and Europe.

The report points to tighter documentation, better covenants and lower financial leverage levels in Asia-Pacific deals, resulting in higher quality transactions with more downside protection. “In the US and Europe,” it says, “returns and loan quality are being pushed down by a surplus of capital chasing fewer deals, and covenants in both markets are getting even more ‘lite’.” It adds that default rates in Asia-Pacific are in line with Europe and lower than in the US.

So what’s the catch? The report acknowledges that Asia-Pacific is “diverse and fragmented” with high barriers to entry, including language, culture, regulation, tax and longer origination and execution periods. Some markets are less lender-friendly than others and incorrectly structured deals can pose a risk to the overall portfolio. In other words, you need to work for your money.

Leveraged loan default picture brightens
Things are looking up. S&P Global Ratings has revised its estimate for the December 2021 S&P/LSTA Leveraged Loan Index issuer default rate (paywall protected) to 2.75 percent from 3.5 percent because of a more positive view of the US economy this year.

“The improved outlook comes as the pace of covid-19 vaccinations in the US has picked up and signs point to a faster and sustained reopening of the economy,” said Nick Kraemer, head of S&P Global Ratings Performance Analytics. “We expect fiscal stimulus passed since December 2020 to provide a tailwind for demand in the second quarter that continues into the second half of the year.”

Beyond the Zoom call – part II
In a previous edition of Loan Note, we reported on a new product from Boston-based investment auditor Emerging Markets Alternatives that aimed to offer more sophisticated pitches from fund managers to investors in the new world of remote due diligence.

Only fair to point out we have been informed of another product moving into the space. New York-based Incos.Media’s “Virtual Pitchbook” is “designed to help asset managers with the convenience of efficiently creating and delivering remotely produced fully digitalized due diligence videos and investor updates”.

More such offerings may follow as firms look for ways of grabbing LP attention that go beyond the now-standard but arguably fairly uniform video calls.

Data snapshot

A minor setback. While all financial markets were affected by the coronavirus pandemic, figures from Deloitte reveal private debt was relatively robust in the face of an unprecedented period of business disruption. After years of steady growth, European mid-market private debt deals fell from 512 in 2019 to 385 in 2020. However, this remains well above the 291 seen in 2016 and only slightly lower than 2017, which saw 394 deals completed.

Essentials

Hong Kong developer launches real estate debt fund
Hong Kong-based developer Sun Hung Kai & Co has announced the launch of a real estate debt fund managed by its in-house real estate investment group, Multiple Capital Investment Partners. It is aiming to raise between $200 million and $300 million for the fund, which will invest in first and second mortgages for commercial and residential real estate in Asia-Pacific over its five-year life. SHK & Co has committed $100 million of capital.

The team is co-led by partners and portfolio managers Rai Katimansah and Simon Tozer, based in Singapore and Melbourne respectively. Katimansah has more than two decades of real estate investment experience with various real estate funds and Standard Chartered Bank. Tozer has held several senior roles across 20 years, including with Nomura Securities and ABN AMRO Bank.

Retailers at less risk in US than UK 
A new report from Credit Benchmark shows US retail default risk remaining stable and only marginally higher than overall US corporate default risk. UK
retail risk has also come down over the last month but, by contrast with the US, is much higher than the overall corporate default risk in the country.

Private debt hire for Africa’s Altica
Africa-focused credit fund manager Altica Partners has appointed Andrew Afori as a partner and member of the investment committee. He will lead private credit investments and expand the firm’s strategies targeting fast-growing African businesses. Afori was previously MEA head of structured credit and head of private side structuring at Standard Chartered.

LP Watch

Institution: Oklahoma Police Pension and Retirement System
Headquarters: Oklahoma City, US
AUM: $3.03bn
Allocation to alternatives: 21.8%

Oklahoma Police Pension and Retirement System agreed to retain Asset Consulting Group to provide investment consulting services at its March 2021 retirement board meeting, a contact at the pension told Private Debt Investor.

Asset Consulting Group provides a range of services including investment performance reporting and monitoring, portfolio rebalancing, and asset allocation.

OPPRS currently allocates approximately 1.5 percent of its investment portfolio to private debt. The pension’s executive director is Ginger Sigler.

Institution: South Carolina Retirement System
Headquarters: Columbia, US
AUM: $35.61bn
Allocation to alternatives: 16.1%

South Carolina Retirement System has made $115 million in commitments across two private debt funds, according to minutes from the pension’s recent committee meeting. SCRS committed $40 million to ASI Hark Capital III and $75 million to Ares Pathfinder Fund.

ASI Hark Capital III, which is managed by Aberdeen Standard Investments, will invest into North American companies. Ares Pathfinder Fund, which closed in March on $3.7 billion, will target both North American and Western European companies.

The $35.61 billion US public pension has a 7 percent current and target allocation to private debt.

SCRS’s private debt fund commitments tend to focus on North American vehicles with senior debt strategies.


Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.

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