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Loan Note: KKR charts course through inflation; AustralianSuper ramps up

KKR reveals the ways in which it's seeking to counter the challenge posed by inflation. Plus: AustralianSuper unveils growing private debt ambition and we reveal star names joining us at our PDI Germany event. Here's today's brief for our valued subscribers only.

They said it

“The Fed and other major global monetary authorities continue to lag economic reality.”

Taken from a client paper entitled “The Great Rationalization” by Arena Investors’ chief investment officer and chief executive officer Dan Zwirn.

First look

KKR on how to dodge sharks 
“Is it really safe to jump back in the water again? We sense the presence of an inflationary threat swimming just below the calm surface that should compel credit investors to reconsider their allocations.” So says the latest Credit Viewpoint from KKR, which alludes to Jaws, the 1975 thriller in which a great white shark brings terror to the beach-going inhabitants of the fictional Amity Island.

KKR suggests three main ways of combating the threat: floating-rate debt, with a high credit premium relative to interest rate premium; sectors with demonstrable stability of cashflow generation; and businesses with pricing power.

The firm reveals eight “preferred sectors” in which it has invested $30 billion of credit capital, led by healthcare equipment and services ($7.3 billion), software ($6.7 billion) and capital goods ($5 billion).

KKR also throws its weight behind asset-based finance in the current conditions. “In an inflationary environment, ABF loans typically benefit from floating-rate cashflows, relatively short maturities and, most important, diverse collateral – such as real estate or equipment – that can appreciate with inflation,” the report notes.

While arguing that there is no need for panic as the shark approaches the shore, the report also says “we are beginning to see margin pressures on our corporate portfolio and do believe we are past peak earnings for this cycle”.

AustralianSuper aims big
Australia’s largest pension fund, AustralianSuper, has announced its intention to triple deployment into direct lending and private debt, targeting A$15 billion ($11 billion; €9 billion) of investment portfolio value over the next three years.

Led by Nick Ward, the pension has growing teams in London and New York. Its recent investments include backing Stonepeak’s $2.7 billion acquisition of New York Stock Exchange-listed Lumen’s Latin American fibre network and supporting the $2 billion fundraising for Generate, the energy, waste, water and transport infrastructure investor.

Around two weeks ago, AustralianSuper announced it had appointed Eloy Lindeijer to its direct investment decision making and advisory committee for UK and European investments. Lindeijer was chief investment manager at PGGM between 2011 to 2020, where he oversaw €250 billion in pension funds under management.

Watch out for our April 2022 issue, which includes an interview with the organisation’s Mikael Limpalaer, a UK-based senior investment director. Limpalaer discusses its ambitions and current thinking on the markets.

It’s time to think about Munich
Among a cast of stellar limited partner speakers booked for the PDI Germany Forum 2022 are Sina Timm, private debt lead at Viridium Group; You-Ha Hyun, investment director at Perpetual Investors; and Sebastian Schroff, global head of private debt at Allianz Investment Management.

We also have a myriad of leading GPs represented at the event, including BlueBay Asset Management, Capital FourEdmond de RothschildMGG Investment GroupKKR and Tikehau Capital.

Topics covered in-depth at the event, which takes place on 17 and 18 May, include investor allocations across the DACH market, what debt managers need to do about ESG, how direct lenders are enhancing returns with junior debt, and sourcing special situations and distress post-covid. We’ll see you there.

Essentials

Leveraged finance defying the odds
Last year brought with it a new covid variant, growing inflationary pressures… and a thriving European leveraged finance market. Despite what on the face of it looked like adverse circumstances, the market for European leveraged loan issuance grew by 25 percent while new collateralised loan obligation issuance was up 75 percent year-on-year.

new report from law firm White & Case provides a comprehensive analysis of how the market shifted from “survive to thrive” in 2021 and what may lie ahead in the coming months. Spoiler alert: it’s looking like another strong year for issuance in 2022.

New real estate lending head at Investec 
Investec, a provider of residential and commercial development and investment finance to corporate, institutional and private clients, has appointed Jonathan Long as head of corporate lending in its real estate team.

Investec has made £705 million ($959 million; €841 million) of new commitments since April 2021 across its corporate and institutional client base. This includes £300 million of residential for rent and sale, £85 million of office and £120 million of industrial lending.

Having joined Investec in 2016, Long has since closed over £600 million of real estate loans to a mix of UK and global corporates and institutions in both the development and investment space across all real estate asset classes. Prior to Investec, he spent three years at BLME, having started his career in Ernst & Young’s banking & capital markets team.

Mount Street takes on shipping portfolio 
Mount Street Group, the London-based third-party loan servicing and credit asset management firm, has been appointed by European digital bank FIBR (previously Amsterdam Trade Bank) to manage its €211 million legacy shipping and trade and commodity finance portfolio.

The mandate coincides with the bank completing its relaunch as FIBR, a platform-based bank solely focused on the European SME market. The outsourcing agreement with Mount Street enables FIBR to switch off high-cost systems, which are currently held only for the portfolio, and concentrate on its digital SME business.

Mount Street has been selected for its expertise in shipping industry finance and its ability to provide a comprehensive solution for managing FIBR’s legacy exposure.

LP Watch

Institution: Chicago Policemen’s Annuity & Benefits Fund
Headquarters: Chicago, US
AUM: $3.01bn
Allocation to alternatives: 12.3%

Chicago Policemen’s Annuity & Benefits Fund has approved $40 million in commitments across two private debt vehicles, according to recently released materials from an October 2021 investment committee meeting.

The public pension has made commitments of $20 million each to Brightwood Fund V and Lynstone Special Situations Fund II. As has been commonplace for any CPABF investment, these funds were chosen from a four-fund shortlist that derived from an earlier RFP issued by the pension.

CPABF currently allocates $71.54 million to private debt investments, comprising 2.38 percent of its total investment portfolio. The public pension has a target allocation to private debt of 4 percent.

CPABF’s recent private debt commitments have focused on distressed and senior debt vehicles which invest in North America and Western Europe.


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