Loan Note: Market views on AI’s role in private debt; secondaries appetite grows, according to study

Has the impact of AI on private debt fund management been as significant as imagined? Plus: Our Perspectives study evidences secondary market growth; and the latest key hires. Here’s today’s brief for our valued subscribers only.

They said it

“The regulatory instinct is, before it gets to $20 trillion, we’d better create safeguards so we don’t have to worry about it when it gets to that size – and that’s basically the reason for the discussion we’re having now”

Jiri Krol, global head of the Alternative Credit Council, quoted in this month’s cover story, on the regulatory attitude towards private debt

First look

The robots are coming: but maybe not just yet in private debt’s case (Source: Getty)

Humans to remain in charge? 

The year 2023 was a big one for artificial intelligence and machine learning in the business world almost as much as in pop culture. Although, two experienced professionals in the debt fund world have suggested in recent conversations that there may have been less change than meets the eye.

So what is happening with AI or, more broadly, machine learning among debt funds?

Vidrio Financial is one place to look for an answer as a provider of software and data services to institutional investors. Its website says there are $5 trillion in assets under management held by Vidrio’s clients.

Head of research at Vidrio, Gygmy Gonnot, shared his view of the current state of AI for data fund managers in a recent interview:

“Thus far, fintech has amounted to a quantitative increase in existing firepower of digital tools to process data faster and more efficiently, not the qualitative leap that some see coming. In practice, the use of robotics process automation and machine learning provide a lot of help in automating data gathering, data processing and data extraction. However the use of AI as a value-add tool in allocation and investment decision-making is just not a reality today. The human element of course remains.”

August last year saw at least two big fintech moves by Victory Park Capital. On the one hand, VPC committed a $200 million debt facility to Petal, a New York-based consumer credit and fintech concern. On the other, later in the month, it contracted with Spring Labs and Tradable for a system that will open up debt investment to new investors.

In both cases, the deals had a high-tech element. Petal is known for a proprietary cashflow underwriting technology, Tradable for a tech platform that digitises the ownership interest in private credit deals.

Don Richman, managing director at VPC, also has experience at One Main and fintech platform Avant.

Richman’s view is akin to Gonnot’s. He said: “With the large language models like OpenAI, those are providing more qualitative leaps at this point.”

But regarding private credit specifically, “I don’t think this generation of large language models is having a true quantitative leap just yet in credit underwriting. Machine learning and AI has been used for a long time to underwrite credit: nothing has really leapt massively forward in the last two years in that way. It has just been getting better and better for the last decade”.

Queuing for seconds

Investors are more switched on than ever to the opportunities available in private credit secondaries, according to Private Debt Investor’s LP Perspectives 2024 Study. In all, 21 percent of LPs now plan to commit capital to secondaries funds in private debt over the next 12 months, the highest proportion ever seen in our survey and up from 7 percent as recently as 2022.

Credit secondaries also offer LPs a different entry point into the asset class, with portfolios already fully ramped up, allowing for quicker deployment than other routes into private debt.

When asked whether they plan to buy or sell in the private debt secondaries market in the coming year, some 22 percent of LPs will be buying, 8 percent plan to sell and 2 percent expect to both buy and sell. In 2022, 10 percent of LPs said they would sell back in and 6 percent were buying, representing a sizeable uptick.

Anticipating the trend for secondaries, Ares Management paid more than $1 billion in 2021 to acquire Landmark Partners, which at the time managed $18.7 billion of secondaries in private equity, infrastructure and real estate. Ares launched its credit secondaries business last year, quickly followed by a $1 billion credit secondaries joint venture anchored by sovereign wealth fund Mubadala.

This is just one example with the likes of Apollo Global Management, Coller Capital, Pantheon and Tikehau Capital all having made major moves into the space.

One in three investors now say that they invest in GP-led secondaries funds, which are yet to emerge as a significant feature of the credit market. Some observers believe 2024 might be the year when GP-leds take off in private debt.

Essentials

Gibson joins Comvest 

David Gibson, a manager with extensive experience in direct lending to mid-market firms, has joined Comvest Partners, taking on responsibility for originating, structuring and managing debt investments for Comvest Credit Partners.

Jason Gelberd, a partner of Comvest and co-head of direct lending, said in a statement: “David is a highly regarded and seasoned credit investor who brings expertise in the entire investment management life cycle, transaction experience in Comvest’s target industries and strong relationships in the direct lending space.”

Gibson arrives from Goldman Sachs, where he has worked since 2004, most recently as director, asset management, private credit Americas.

At Goldman, Gibson was among the founders of the specialty lending group. He has held asset management roles at Twin Brook Capital, GE Commercial Finance/Heller Financial and LaSalle Bank.

StepStone Group announces promotions

StepStone Group, a private markets investment and advisory firm, has named eight new partners.

The 2024 partner class consists of: David Allen, Fabian Körzendörfer, Lisa Larsson, Matthew Roche, Brett Schlemovitz, Brad Weltler, John Wuestling and Kimberly Zeitvogel.

Allen, based in Dublin, has been with StepStone since 2021 and is the CEO of StepStone’s EU Alternative Investment Fund Manager and a member of the private debt team. Körzendörfer, based in Zurich, joined in 2016. He is also a member of the private debt team.

The list also includes one member of the portfolio management team (Larsson), one in private equity (Roche) and three in private wealth (Schlemovitz, Weltler and Zeitvogel). Wuestling is on both the venture capital and growth equity teams.

In addition to its two new partners, the private debt team has also received two new managing directors from the 2024 promotions: Dublin-based Bryan O’Dowd and David Han in New York.

As of 30 September 2023, StepStone had approximately $659 billion of total capital, including $146 billion of assets under management.

It has a wide range of clients including public and private pension funds, sovereign wealth funds, insurance companies, endowments, foundations, family offices and high-net-worth individuals.

Nordics hire for Federated Hermes

Federated Hermes has announced the expansion of its private markets sales team, with the appointment of Lisa Ravlo as private markets director for the Nordic region.

With €20 billion of assets under management, the private markets division of Federated Hermes is comprised of private equity, private debt, real estate, infrastructure and natural capital investment products.

Ravlo joins Federated Hermes in Oslo, Norway. She will work alongside the established Nordics team, including Magnus Kristensen, director, business development – Nordics and report to Jakob Nilsson who was appointed last year as head of private market sales, excluding North America.

In the newly created role, Ravlo will help in the further broadening of the distribution of private markets products across the Nordic region. Ravlo previously worked for Barclays Investment Bank in both London and Paris.

The announcement follows the appointment of Stefan Arneth as sales director – private markets, based in Munich, Germany.

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LP watch

Institution: Ohio Police & Fire Pension Fund
Headquarters: Columbus, US
AUM: $17.43 billion
Allocation to private debt: 3.06%

During its recent meeting, the Ohio Police & Fire Pension Fund revealed that it invested $50 million in Cerberus Levered Loan Opportunities Fund V. Cerberus primarily offers secured debt to core and upper mid-market US companies.

This marks the third private debt commitment for the current plan year, which started 1 July 2023, bringing the total for the commitments to $150 million. The pension’s target for the year ranges from $235 million-$285 million.

As of now, OP&F’s private credit portfolio is valued at more than $515 million, which represents 2.9 percent of the total portfolio. The pension fund has a target allocation of 5 percent for private credit.


Today’s letter was prepared by Andy Thomson, with John Bakie, Christopher Faille and Robin Blumenthal contributing