Loan Note: Muzinich on why ESG is key; the higher-risk property loans struggling for finance

Why Muzinich & Co believes good management and ESG compliance go hand in hand. Plus, the challenge of raising finance for higher-risk property deals and the latest from the fundraising front. Here's today's brief for our valued subscribers only.

They said it

“Today, it seems to me that most assets are offering expected returns that are fair relative to their expected risk, relative to everything else. But the prospective returns on everything are about the lowest they’ve ever been.”

Taken from the latest memo penned by Howard Marks of Oaktree Capital Management, entitled ‘Coming into Focus’

First Look

Why ESG will not take a back seat

Will covid-19 shift the private equity industry’s focus squarely onto business viability at the cost of environmental, social and governance compliance? “No”, says the chief operating officer, Europe at credit shop Muzinich & Co.

Speaking at the CFOs & COOs Forum Europe, Ersilia Molnar said that ESG compliance tends to reduce the overall risk of a portfolio, making it more important now than ever.

“It’s a proxy for good management, because if management is aware of the big issues – resource efficiency, social pressures and their impact on top line growth, if the management team has purpose and is able to attract better talent – these are all elements that will improve performance and ultimately will help investors’ returns.”

Muzinich is in the process of agreeing its first loan with terms contingent on ESG key performance indicators, she added.

Risk’s out of fashion in property 

In recent years, owners of commercial property in Europe have been able to count on a healthy supply of debt, reports our sister title Real Estate Capital

With a line-up of banks, insurance companies, debt fund managers and other specialist lenders all looking to write loans against real estate, borrowers could usually find someone willing to finance most properties – within reason.

However, the covid-19 crisis has led lenders to become far more risk-averse. Many banks, although not under the same strain they were between 2007 and 2008, are limiting new business to core clients and low-risk assets. Non-banks have plenty of dry powder. But some are finding they can earn the same returns as before the crisis by taking significantly less risk.

The H1 2020 UK lending report published this week by the Business School at City, University of London (previously known as Cass Business School), provides a glimpse into financing conditions. Lending activity was down by 34 percent compared to the same period in 2019, in line with the lack of investment activity. Almost 30 percent of new lending was concentrated in the residential sector, which is seen by many as a defensive part of the market. It also revealed that 22 percent of lenders surveyed did no lending in the first half of the year.

This suggests that, while this crisis unfolds, some borrowers will face difficultly sourcing finance for assets that lenders consider to be higher risk than the norm. You can read more about property’s defensiveness here (registration required).

Data snapshot

Fundraising not immune, but bearing up. Global private debt fundraising has weathered the crisis reasonably well through the first three quarters considering how much the markets have been disrupted although volume is less than in prior years and the number of funds announcing closes has continued its sharp decline. Investors have gravitated towards the perceived safe haven of senior debt. For more analysis, click here.


No in-person meetings? No problem

Who said virtual due diligence made it harder for GPs to raise capital? Certainly not Strategic Value Partners, which has closed a new $1.65 billion dislocation fund (or “custom mandate”, as it has described it). The firm raised the money in just four months from 15 institutional investors – all on the basis of virtual meetings. Read more about it here.

Pension funds’ climate challenge

“[There is] An immature infrastructure around climate-aware investing, such as inconsistent definitions and language, as well as limited or poor-quality data or lack of investment products with a full range of necessary characteristics,” says the Pensions and Lifetime Savings Association in a report. These are some of the barriers that stand in the way of pension funds being able to take the issue of climate change as seriously as they would like to. PLSA has made some key recommendations on the subject, which can be read here.

LP Watch

Institution: Iowa Public Employees’ Retirement System
Headquarters: Des Moines, US
AUM: $35.4 billion
Allocation to alternatives: 22.69%

Iowa Public Employees’ Retirement System has issued a request for proposal for managers who can assess and allocate up to $850 million in opportunistic private credit products, according to an October 2020 press release from the system.

The move comes after the IPERS investment board revealed that it plans to increase investments in the asset class by 5 percent, moving capital from its core fixed income asset class to private credit.

Investments will be made in private credit strategies, such as multi-strategy, real asset credit, mezzanine lending, special situations and specialty finance.

Managers must have at least five years’ experience managing an opportunistic private credit strategy, according to the request for proposal.

IPERS will issue additional RFPs in the coming months as a response to the new allocation plan. The deadline for submission is 10 November 2020. It is unclear when the IPERS investment board will choose a manager.

Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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