Loan Note: KKR underlines need to change traditional portfolio approach; Fitch highlights sector pressures

KKR emphasises support for growing private credit portfolio allocation. Plus: Fitch finds pressure bearing down on more sectors; and Norsad and TLG launch new platform for debt investment in Africa. Here's today's brief for our valued subscribers only.

They said it

“While the institutional leveraged loan market has struggled through a challenging year for new issuance, the market has shown signs of stabilising in November”

Taken from fund manager Monroe Capital‘s latest Capital Markets Update.

First look

Wooden block cube flipping from 2022 to 2023

Out with the old, in with the new
It’s hard to believe that another year has flown by. This is the last Loan Note in 2022, with the next one coming your way on Thursday 5 January 2023. You can keep up to date with all the latest developments on our website, which will be populated with fresh content over the festive period. Much of this will involve reflections on the year gone by and predictions of what lies ahead. In the meantime, we would like to wish our readers a wonderful holiday and we look forward to catching up again on the other side.

KKR doubles down on private credit ambitions
KKR has strongly reiterated a call from last May that private credit account for 10 percent of its 30 percent recommendation to alternatives.

In the latest Insights report, Regime Change: The Benefits of Private Credit in the ‘Traditional’ Portfoliohere, Henry McVey, KKR’s chief investment officer of balance sheet and head of global macro and asset allocation, and Racim Allouani, head of portfolio construction, risk management and quantitative analysis, extol the benefits of private credit to protect investors’ pricing power in a new investing environment.

The authors made their initial recommendation in a May report, Regime Change: Enhancing the ‘Traditional’ Portfolio, that investors consider moving away from the traditional 60/40 stock and bond portfolio to a 40/30/30 equities-bonds-alternatives allocation. To construct the alternatives bucket, KKR replaced 10 percent of the traditional bond allocation with 10 percent private credit and substituted 20 percent of the public equities sleeve with a combination of 10 percent private real estate and 10 percent private infrastructure.

While reiterating the importance of increasing allocations to more inflation-resilient assets such as private credit, infrastructure and real estate to enhance risk-adjusted returns over the long-term, they noted that the case for allocating assets to private credit is even stronger now than it was earlier this year. The reasons? Private credit is benefiting from such factors as the pullback of traditional lenders, improved lending terms, higher absolute yields and access to higher-quality counterparties.

Because allocating 10 percent of the alternatives portion to private credit could take multiple quarters, the authors suggest that investors consider the current value offered in liquid credit, including collateralised loan obligation liabilities.

Institutional and individual investors may look for different ways to implement this view, they say, including through drawdown funds, business development companies, interval funds, loans and CLO liabilities exchange-traded funds.

Fitch highlights pressure on most sectors
In an outlook focusing on EMEA corporates within the collateralised loan obligation market, rating agency Fitch finds a deteriorating situation for nearly half of sectors – with an improving outlook for just two sectors.

The agency says the deterioration is from a high base and often moderate, but expects some sectors including consumer, transport and real estate to be particularly badly hit. Fitch’s view is informed by waning demand, increasing production costs, sustained – albeit moderating – supply chain issues and major macroeconomic uncertainty.

Favourable demand dynamics are seen in some sectors, such as travel, but even here pent-up demand from the pandemic is fading as the energy crisis weakens consumer spending by constraining disposable income.

Fitch says “rising interest rates will be an additional burden on corporate issuers’ earnings and cashflows in 2023”, which will be a particular concern for lower-rated companies with higher levels of indebtedness.

Norsad, TLG launch joint $400m Africa credit platform
Norsad Capital and TLG Capital, fund managers which both focus on investment opportunities across Africa, have joined forces to invest in medium-sized companies in sub-Saharan Africa through a platform with assets under management of around $400 million.

The platform will promote syndication opportunities, offer the larger ticket sizes enabled by the two firms coming together, and provide a mix of senior and subordinated debt. The two firms said they aimed to leverage each other’s structuring, legal expertise and presence across sub-Saharan Africa.

Norsad says it targets companies that can deliver strong financial returns as well as positive social impact, while TLG said it was aiming to grow SMEs into “pan-African titans”.


Cheyne invests £2bn during the year
Cheyne Real Estate Credit announced it has committed more than £2 billion (€2.3 billion; $2.4 billion) to investments in 2022, having raised £2.5 billion from investors in its Cheyne Real Estate Credit Holdings Funds VI and VII and some separately managed accounts since the pandemic.

The funds and SMAs continue the strategy of the CRECH programme launched in 2011. The strategy makes loans, which are typically senior, of £50 million-£300 million to large established borrowers in the UK and Western Europe in core plus, value-add and development real estate assets. Given the nature of these assets, the loans are expected to increase in value and de-risk over time.

CRECH VII, which closed in March 2022 at £1 billion, has already deployed almost 60 percent of its investor commitments. The fund has made 54 loans, of which 99 percent are senior, and seven have been fully realised.

Arrow makes key fundraising hire
UK-based fund manager Arrow Global Group has appointed Charlotte Gilbert as managing director for client and product solutions. The CPS team is responsible for setting Arrow’s capital formation strategy and broadening the firm’s investor set.

Gilbert will aim to build long-term relationships and solutions with investors across Europe. She has previously led capital raising across credit, private equity, lending and real estate strategies.

She joins Arrow Global from Oaktree Capital Management where she was managing director, marketing and client relations. Prior to that, she worked for Apollo Global Management, raising capital across all its asset classes.

LP watch

Institution: Teachers’ Retirement System of the State of Illinois
Headquarters: Springfield, US
AUM: $63.27 billion
Allocation to private debt: 6.7%

Teachers’ Retirement System of the State of Illinois confirmed a commitment of $100 million to Locust Point Private Credit Fund III, a contact at the pension fund confirmed to Private Debt Investor.

Incorporated in 2015, Locust Point Capital is a New Jersey-headquartered asset management firm with an office in Miami. The firm specialises in direct lending to lower mid-market senior housing and care companies throughout the US.

TRSIL has an existing relationship with Locust Point. The firm currently manages $76.4 million in TRS assets.

The US pension fund’s recent debt commitments have predominantly focused on North American vehicles investing in the corporate sector.

Today’s letter was prepared by Andy Thomson with John BakieChristopher Faille and Robin Blumenthal