They said it

“A worsening liquidity environment from reduced M&A activity is noteworthy, as the average effective loan life has continued to increase” 

Taken from a summary of Cliffwater’s latest market report for Q1 2023, covering the Cliffwater Direct Lending Index and market trends

First look

Taking a flyer on aviation assets 
Two former executives at Castlelake have founded a new aviation asset management and investment company, AIP Capital, expecting to deploy both debt and equity across the sector.

The two co-founders are Mathew Adamo and Jared Ailstock. They will both work out of Stamford, Connecticut, while the firm will also have offices in Miami and Dublin, the launch announcement said.

Adamo and Ailstock are former managing directors of Minneapolis-based Castlelake, where they both spent two years. Before that, Adamo was chief investment officer for Jackson Square Aviation, while Ailstock was vice-president at Goldman Sachs for more than five years, according to his LinkedIn page.

The new firm says it will “exclusively manage aircraft and aircraft financing for 777 Partners, and its affiliated airlines”. It will also “identify and act upon emergent opportunities in the sector, including operating and finance leases, future orders and equity-linked investments”.

The website for employee-owned 777 Partners says it began life in 2016 with a management buyout from PennantPark. Aviation is just one of 777’s verticals, alongside sports, media and entertainment, insurance, fintech, litigation finance and sustainability.

First Republic’s downfall: sensitivity, illiquidity and SVB
A white paper from Trepp titled First Republic’s collapse by the numbers offered fodder for a Trepp Market Pulse Webinar.

The webinar was a round-up of private debt industry concerns, from the US debt ceiling to upcoming mortgage maturities.

The First Republic material was attention-catching though, if only because the bank was a force in the commercial real estate world. As Private Debt Investor has reported, its loan portfolio in the space was 6.08 percent of its overall portfolio, which implies roughly $10.4 billion of loans.

The Trepp paper suggests that for reasons of sensitivity and liquidity, First Republic was a natural next domino in the slow-motion banking shake-up. It was in a position of dangerous sensitivity because it held large positions in interest-rate sensitive assets including loans and securities with long maturities.

It had many high-net-worth individuals among its depositors. After the fall of Silicon Valley Bank, the HNWs (in the words of the white paper) withdrew “large sums of capital in search of a safer haven”. Consequently, First Republic saw a 41 percent decline in its deposits during the first quarter of 2023.

The webinar hosts stressed that, even before the other dominoes wavered, First Republic’s liquidity was worrisome. For example, one key indicator of liquidity is the ratio of pledged securities to total securities. Pledged securities, after all, are no longer available to be tapped for further funding as needed.

As 2022 ended, First Republic’s pledged securities were 22.82 percent. Even that was low: the very large bank average figure (VLBA) is 32.40 percent. By the end of the first quarter, First Republic had pledged virtually everything: the ratio was at 99.33 percent.

Europe deals struggle, but exceptions noted
Assets well placed to generate buyer interest despite the headwinds, plus those where a sponsor sale is necessary due to fund dynamics, will account for most of the deal activity in the short term, according to DC Advisory’s EU Private Equity Mid-Market Monitor for Q1 2023. But it expects broader sale activity to kick in from September this year.

The report says sponsors are unlikely to risk failed auctions for businesses currently underperforming in the face of economic headwinds. However, it points to a number of sectors that remain in favour, including communications and IT services, infrastructure services and business information and data.

A country-by-country breakdown found the UK suffering from a lack of debt finance and a valuation gap; high energy prices and rising inflation leading to a slowing of activity in France; and the geopolitical and economic climate heavily impacting the M&A market in the DACH region. Unsurprisingly, the CEE region is significantly impacted by the war in Ukraine, but, while M&A is down, it’s “by no means extinguished”.

The main focus of activity is on the secondaries market, where GP-led solutions in particular continue to grow.

Essentials

Senior ESG hire for Pemberton
London-based fund manager Pemberton has appointed Niamh Whooley as managing director and head of sustainable investing.

Whooley will work across all areas of the business to deliver Pemberton’s ESG commitments, develop its sustainable investments, lead dialogue with key stakeholders and work in partnership with clients globally. She will report to Harriet Steel, partner and global head of clients.

She has over 15 years’ experience in sustainable investing, having held senior roles at Goldman Sachs, PIMCO, Société Générale CIB and Fidelity International. Most recently, she was global head of fixed-income ESG research at Goldman Sachs Asset Management, working closely with investment teams across asset classes on ESG integration and with global clients to develop investment solutions to help meet sustainability objectives while maintaining regulatory alignment.

Whooley has been a consortium member of the UN Principles for Responsible Investments’ Inevitable Policy Response, and served on the PRI’s Sustainable Development Goals Advisory Committee and the Bondholder Engagement Working Group.

Mid-market and larger firms have similar recoveries
Research from Fitch Ratings shows that mid-market private companies in the US have only a slightly lower recovery rate (71 percent) than their larger peers (76 percent).

Fitch defined private mid-market companies as those with less than $500 million of debt at the time of a bankruptcy filing, while larger peers – including both public and private companies – had more than $500 million at the time of filing.

The report focused on 260 bankruptcy cases tracked by Fitch since 2003 which contained a first-lien term loan in the pre-petition capital structure. Out of the 260 cases, 55 were in the private mid-market segment and 205 the larger peer segment.

Of sectors with five or more cases, automobiles had the worst recovery rate at 48 percent, while retail, healthcare/pharmaceuticals, industrials/manufacturing and broadcasting/media had the highest recovery rate of 80 percent.

LP watch

Institution: Teachers’ Retirement System of Louisiana
Headquarters: Baton Rouge, US
AUM: $24.15 billion
Allocation to private debt: 8%

Teachers’ Retirement System of Louisiana has approved a new commitment of up to $200 million to Ares Senior Direct Lending Strategy Fund III, a contact at the pension fund has confirmed.

TRSL has previously invested in Ares Management’s Special Opportunities Fund II and its predecessor. The Ares Senior Direct Lending Fund III will use a senior debt strategy within North America focusing on the US.

The pension fund’s recent private debt commitments also tend to focus on North American vehicles typically within the corporate sector. 

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