They said it
“Barring another major bank failure, we expect policymakers to focus on inflation and raise rates by another 25 basis points at their next meeting on 3 May”
Taken from a Schroders Talking Point article by Keith Wade, chief economist and strategist, and George Brown, economist, entitled “Fed turns the tide in war on inflation, but it’s too early to declare victory”
Today’s trend: the hunt for capital
The well-worn phrase “hunt for yield” – used to describe investors’ hunger for yielding asset classes like private debt – needs replacing with “hunt for capital” according to the Q4 2022 Market Review from KKR.
Not that the change of phrase is bad news for private debt: in fact, it appears to be equally as good. As the banks continue to pull back in the current market cycle, financing is becoming extremely scarce. In this environment, private lenders can demand better terms and higher discounts.
“With more flexibility and certainty of execution, we think private credit will continue to take market share from syndicated markets as it becomes more of a mainstay option for borrowers,” says the report.
KKR says its optimism around private lending is partly based on its view that the issues in the banking sector relate to a liquidity crisis rather than a credit crisis. “Banks were essentially in a position of hunting for capital that didn’t materialise quickly enough,” the report notes.
Two surveys reveal encouraging levels of investor confidence in alternative assets.
Research from asset management firm Managing Partners Group found that 97 percent of professional investors – comprising wealth managers and institutional investors – increased their allocations to alternatives over the last year. While 96 percent said they had become more positive about alternatives, 33 percent said they were much more positive.
Reasons for optimism included greater transparency in reporting (cited by 58 percent), improved track records (54 percent) and more strategies to choose from (40 percent). The leading benefits associated with alternatives included: attractive yield (58 percent), a hedge against inflation (52 percent) and strong growth in valuations (42 percent).
Meanwhile, a survey from services provider Ocorian of 130 family office investment managers found 42 percent strongly agreeing that family offices were involved in a long-term switch to alternative assets.
More than a third (34 percent) of those canvassed by Ocorian said they would increase their allocations to real estate by 50 percent or more, while 33 percent said the same of private debt. Strong performance, diversification and transparency were all cited as reasons why.
All the mid-market trends
Our recently published Mid-Market Lending 2023 report considers a range of themes relevant to private debt’s investment heartlands, including the impact of inflation, the rise of distressed debt, how the M&A market is evolving, and ways in which the landscape is changing as the banks further retrench. The report also explores the key US LPs targeting the mid-market, the emerging markets moving into the spotlight in Europe and Asia-Pacific, and whether firms are doing enough to meet the DE&I challenge.
Waterfall fund targets commercial mortgages
At a time when a record number of commercial mortgages are near expiration, New York-based investment adviser Waterfall Asset Management has closed its Waterfall Atlas Fund, a vehicle designed to invest primarily in commercial real estate via distressed loans and bonds as well as in equity.
The fund held a hard close on $485 million in equity commitments, including co-investment vehicles.
Waterfall was founded in 2005, adopting a relative value approach for sourcing and investing. In a statement on the hard close issued Tuesday 11 April 2023, the firm said it has pursued a CRE equity strategy since 2017 under the leadership of managing directors Patti Unti and Zachary Leibmann, and that it has invested $499 million across 33 assets in that pursuit.
Meanwhile, as a Waterfall spokesman pointed out in an interview with PDI, roughly $270 billion in commercial mortgages held by banks are set to expire in the next year, according to Trepp (out of $448 billion in total). Over the next five years $1.4 trillion held by banks is set to expire ($2.56 trillion total.) These unprecedented numbers create both uncertainties and opportunities.
Unti said she believes Waterfall’s fund is “well-positioned to capitalise on growing dislocations in the market, which are primarily driven by the combination of rising rates, a tightening credit market, shifting demographics, consumer preferences and over-levered assets.”
Waterfall has offices in London, Dublin and Hong Kong, as well as New York
Polestar adds new investors to impact fund
Dutch impact investor Polestar Capital has secured four new investors for its impact debt fund, bringing total capital committed to the fund to €187 million.
The Polestar Capital Circular Debt fund previously received €100 million from pension fund Detailhandel for its strategy of backing circular economy projects working on innovating in waste reduction, recycling and reducing dependence on fossil fuels.
Dutch state impact investor Invest-NL, insurers Onderlinge s‘Gravenhage and De Hoop, and the Province of Limburg have all backed the fund, with each saying they aim to achieve a positive social and environmental impact as part of the Dutch government’s ambition to have a fully circular economy by 2050.
Direct lending shows return resilience
The Cliffwater Direct Lending Index – based on around 12,000 directly originated mid-market loans worth a combined $263 billion – demonstrated a return of 2.04 percent in the fourth quarter of last year and 6.29 percent for 2022 as a whole. This compares with 8.29 percent over five years, 8.89 percent over 10 years and 9.31 percent since inception in September 2004. The figures are unlevered and gross of fees.
Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $242.3 billion
New York State Common Retirement Fund (NYSCRF) has committed $15 million to Raith Real Estate Fund III, managed by Raith Capital Partners.
Founded in 2012, Raith is a New York-based asset management firm that focuses on distressed loans and commercial mortgage-backed securities across the US.
Raith’s third flagship distressed fund seeks to acquire mainly North American businesses. NYSCRF’s recent private debt commitments have been focused on North American vehicles with various strategies.
Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing