Loan Note: Performance in the spotlight in LP study; new valuation guide published

Our LP Perspectives 2022 Study is out, revealing generally positive investor sentiment but with some concern over future performance. Plus: ELFA attempts to guide firms through the valuation maze and Australia's Epsilon shows how private debt could boost super funds' portfolios. Here's today's brief for our valued subscribers only.

They said it

“Asia’s milder inflation outlook comes down to one simple factor — trade surpluses. Economies in the region were able to maximise export production through much of the past two years”

A “market note” from Manulife Investment Management notes the rather different economic situation Asia finds itself in relative to Western markets

First Look

Investor doubts creep in
There remain plenty of grounds for optimism for private debt, but the latest annual version of our LP Perspectives 2022 Study reveals there are one or two concerns as well. The study asks the opinions of investors on a range of issues, allowing us to take the temperature of the market. Here are five of the key findings:

    1. There is still strong confidence in making new allocations, with half of LPs canvassed saying they are planning to increase their allocation to private debt over the next year.
    2. Past performance has been impressive, with 90 percent of investors saying private debt investments had exceeded their benchmarks over the past 12 months.
    3. There is less optimism about future performance, with only 21 percent expecting private debt to outperform benchmarks over the next year. At the same time a year prior, the figure was 31 percent.
    4. The most popular strategy is direct lending, with 40 percent of LPs wanting to invest more in the strategy in the coming 12 months than they did in the previous 12 months. For distressed and special situations, the equivalent figure is just 14 percent.
    5. There is a growing appetite to diversify fund manager relationships, with 66 percent wanting to add new managers compared with 44 percent two years ago.

ELFA’s helping hand through the valuation maze
In an op-ed just before we broke for the holidays in December, we reflected on the issue of valuation in private debt and how the pandemic, and ensuing dislocation in markets, had challenged notions that the value of loans would necessarily remain steadier and more predictable than other types of investment. We also noted differences in valuation methodologies between North America and Europe, albeit amid signs that some managers were blending the approaches of the two regions.

As it has done in a range of different areas, the European Leveraged Finance Association is attempting to bring best practice and consistent standards to valuations. It has produced a new Technical Guide for Valuation of Private Debt Investments – part of the ELFA Diligence series – in association with Houlihan Lokey, which describes all the different valuation techniques and indicates when a particular method is the most appropriate. Well worth some of your time, we think.


Study: private debt could boost super fund performance
A study has been undertaken by Melbourne-based fund manager Epsilon Direct Lending in association with Atchison Consultants into the impact of adding private debt exposure to the fixed income performance measurement benchmarks typically used by Australian superannuation funds. Until now, such benchmarking has not included debt assets – including private credit – worth an estimated one-third of the overall bond and debt market.

Epsilon found that the addition of exposure to private debt would prospectively generate an increased return of up to 1.0 percent per annum (with a marginal tracking error of up to 0.6 percent) over rolling eight-year periods with “no material impact on credit expected losses”.

First close for Danish loan fund
Polaris Private Equity, the Nordic buyout firm, has announced the first close of its Polaris Flexible Capital fund. The fund has so far raised DKr500 million ($77 million; €67 million), half of its DKr1 billion target.

PFC was launched by Polaris last year to make investments in subordinated loan capital (such as junior capital) and minority shareholdings. The fund will make capital available to companies that need financial backing,
while allowing management to maintain control of their business, and is expected to begin deploying capital this quarter.

PFC’s lending is targeted at companies that need capital for succession, investments, geographical expansion or acquisitions, while the geographic focus will be Nordic, with a particular focus on Denmark and Sweden. The
fund will operate “side by side” with Polaris’s private equity funds, the firm said.

New credit MD for Pemberton 
Pemberton, the London-based pan-European fund manager, has appointed Matthew Kirsch as a managing director in its 10-strong credit team, led by chief credit officer Nicole Gates.

Kirsch has more than 15 years’ experience in the European leveraged finance market as a credit analyst and originator. At Pemberton, he will join the company’s independent credit team, advising on the credit risk associated with new opportunities and existing investments.

He previously spent more than three and a half years at Apollo Global Management, where he was the founding member of the firm’s European private credit team, focusing on the origination and execution of investments in support of mid-market private equity-backed transactions. Prior to Apollo, he was a director at Sumitomo Mitsui Banking Corporation Europe and GE Capital’s leveraged finance team.

Allianz hails €20bn mark for infra debt platform
Allianz Global Investors has marked €20 billion of infrastructure debt investments since it launched its infra debt business in 2012.

Over the past decade, the firm has made more than 100 investments in 20 countries across three infra debt strategies. The majority of deals were inaugural investments into companies, and a further six were upsizing or tap investments from existing borrowers.

The firm said it was able to continue investing through the pandemic due to its sourcing capabilities. It added €2.2 billion of investments in 2020 and a further €2 billion in 2021.

Deals include greenfield and brownfield projects, acquisition financing and corporate refinancing, covering all infrastructure subsectors. Projects include Ireland’s largest bridge, hybrid ferries in Norway and one of Chile’s largest solar plants.

LP Watch

Institution: Chicago Policemen’s Annuity & Benefits Fund
Headquarters: Chicago, US
AUM: $3.01bn
Allocation to alternatives: 12.03%

Chicago Policemen’s Annuity & Benefits Fund has approved $40 million in commitments across two private debt vehicles, according to recently released materials from an October 2021 investment committee meeting.

The public pension has made commitments of $20 million each to Brightwood Fund V and Lynstone Special Situations Fund II. As has been commonplace for any CPABF investment, these funds were chosen from a four-fund shortlist derived from an earlier RFP issued by the pension.

CPABF currently allocates $71.54 million to private debt investments, comprising 2.38 percent of its total investment portfolio. The public pension has a target allocation to private debt of 4 percent.

CPABF’s recent private debt commitments have focused on distressed and senior debt vehicles that invest in North America and Western Europe.

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