Loan Note: How ESG has claimed the spotlight in debt; ELFA aims for term sheet transparency

Five trends in responsible lending from our newly published special report. Plus: ELFA calls for more transparent term sheets and a chart shows the unstoppable rise of private debt's top fundraisers. Here's today's brief for our valued subscribers only.

They said it

“We’re spending to support our economies, while we’re failing to vaccinate the whole world. As a result, the world really is not looking better”

Laurence Boone, chief economist of the OECD, quoted in The Guardian.

First look

Five steps forward to a more responsible future
In our timely Responsible Investing report, coming on the heels of the United Nations Climate Change conference, we consider the ways in which private debt is being transformed by the necessities of a more responsible and sustainable age of investing. The report’s editor, Graeme Kerr, identifies five key trends:

Private debt has moved from the back to the front seat: Conventional wisdom had private debt managers lagging behind their private equity counterparts in their commitment to responsible investing. With systematic and scaled approaches to ESG proliferating among debt managers, that is no longer the case.

The soaring popularity of sustainability-linked lending: An ever-growing number of deals now feature ESG-linked financing, often including margin ratchets as a means of rewarding the hitting of ESG targets. Sustainability-linked subscription lines for credit funds are also becoming more commonplace.

LP interest in ESG has grown exponentially: “Investors have moved from limited questioning on ESG to a deep dive approach,” Permira Credit chief executive James Greenwood tells us. Once a focus of pre-deal analysis and screening, ESG is now also a key part of post-investment engagement and monitoring, as well as investor reporting.

SFDR takes things up a notch: The European Union’s Sustainable Finance Disclosure Regulation, which came into force in March, is ushering in a new level of granularity when it comes to disclosure of information by fund managers. “Firms are really grappling with how to cope” with this, according to Paul Ellison, a partner at law firm Clifford Chance.

The huge potential of impact investing: Debt financing is beginning to make its presence felt in the impact investment market, in particular for the financing of low carbon assets. Both the SFDR and increasing use of margin ratchets have helped move private debt to the point where providing impact products becomes a more natural step.

ELFA aims for greater term sheet transparency
Still on the topic of ESG, the European Leveraged Finance Association has issued an update to its best practice guide for term sheet completeness. The guide has a particular focus on ESG provisions and aims to make sure that material ESG terms are included at the term sheet stage. ELFA hopes this will increase investors’ ability to scrutinise key documentary terms and more easily determine whether to commit to new deals in the market.

Data snapshot

Beyond $1 trillion. The world’s largest debt fund managers raised more than $1 trillion over the past five years, according to figures from the PDI 100 ranking of top fundraisers. In total, the 50 biggest fund managers raised $1.05 trillion, with steady growth indicating those at the top have little problems raising larger funds year-after-year.

Essentials

Churchill closes $750m mid-market CLO
Churchill Asset Management said it had closed a $750 million collateralised loan obligation in early November. Churchill Middle Market CLO III has a four-year investment period, with a collateral pool comprising a diversified portfolio of senior secured loans, 90 percent of which were accumulated as of the closing date.

CLO III features seven classes of notes rated AAA through BB- by Standard & Poor’s, including one fixed-rate tranche. Churchill, an affiliate of Nuveen with a 15-year track record as a CLO manager, has $1.5 billion of CLO assets under management and what it describes as a “robust” pipeline of additional transactions; it is targeting one to two deals a year. Nuveen parent TIAA holds the majority of the CLO’s subordinated notes.

Arkkan targets dislocation in China 
Arkkan Capital, a Hong Kong-based fund manager, has posted a first close of its China real estate recovery fund on $245 million. The closed-end fund will target stressed and distressed opportunities arising from the dislocation of the China high yield bond sector and will invest in loans and bonds in the primary and secondary markets.

“The dislocation in China real estate high yield credit has created a compelling investment opportunity that we expect to play out over the next two to three years,” said Jason Brown, chief investment officer of Arkkan Capital. “Current pricing implies historically high default rates and suggests a systemic crisis which policymakers are unlikely to permit, given the economic significance of the real estate sector.”

Two new hires for private investor adviser 
Connection Capital, the UK-based private client investment business, has appointed Lucy Merson as investment manager and Laura Scott as investment executive, as appetite from private investors for access to private equity and private debt investments continues to increase.

Merson joins from BDO, where she qualified as a chartered accountant before working in audit and then corporate finance, focused on advising high-growth businesses seeking funding. Scott joins from Grant Thornton’s corporate finance team, where she specialised in providing transaction advisory services to SMEs on the buy side and sell side in a wide range of sectors.

Debt funds major recipient of BBI capital
The annual report of British Business Investments, the British Business Bank subsidiary, shows that it made a record £473 million ($628 million; €556 million) of commitments to funds and financing programmes in the UK – a 19 percent year-on-year increase. Debt funds accounted for five new commitments worth a combined £210 million.

LP watch

Institution: California Public Employees’ Retirement System
Headquarters: Sacramento, US
AUM: $490.18bn
Allocation to alternatives: 21.6%

California Public Employees’ Retirement System committed $750 million to Ares Senior Direct Lending Fund, according to the pension’s November board meeting document.

CalPERS devotes 21.6 percent of its full investment portfolio to alternative assets. The pension’s recent commitments have been to mezzanine, distressed and senior debt vehicles targeting investments in North America and Europe.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Michael Haley