Loan Note: PGIM study makes investor recommendations; Deloitte charts ups and downs in deal market

In a new paper, PGIM considers what priorities private market investors should have in a changed world. Plus: Deloitte notes a strong first half of the year for European deals, as the second half looks tougher; and Angelo Gordon and Precis Capital add to their teams. Here's today's brief for our valued subscribers only.

They said it

“Investor confidence has jumped this month, but before you get too optimistic about the outlook it is worth noting the context. September was the worst month on record for investor confidence”

Emma Wall, head of investment analysis at Hargreaves Lansdown, a UK financial services company.

First look

A new dawn: PGIM ponders how private markets are positioned for the near future (Source: Getty)

PGIM points way forward for private markets
A new paper from PGIM draws attention both to how fast private markets in general – and direct lending in particular – have grown, and also how they need to position themselves to prove their sustainability in a changed economic environment.

A couple of attention-grabbing numbers highlighted in the New Dynamics of Private Markets paper: private market assets have tripled in size since the global financial crisis, accounting for more than 35 percent of all new capital raised in the bond and equity markets overall last year; while the direct lending market has grown from $10 billion in 2006 to $400 billion last year, an astonishing 40 times larger.

But this rapid growth from cottage industries to asset classes of huge scale has come against a generally favourable economic backdrop over the years. Today, the question is whether they can adapt to adverse circumstances.

“With the rising possibility of hard landings in the US, Europe and emerging markets, this will be the first test since the global financial crisis of whether non-bank financial institutions have diversified risk and brought better market judgment, or created new, hidden concentrations of risks,” says Shehriyar Antia, head of thematic research at PGIM.

The paper sought to identify the key challenges through conversations with more than 40 investment professionals within PGIM as well as over a dozen academics, investors and sell-side researchers. Some of the talking points were:

  • The need for new entrants to the private credit market to prove themselves, as “many newer entrants… haven’t been tested across a credit cycle and may not have the workout and recovery skills of more experienced firms”.
  • Question marks over the viability of AI-powered fintech lending platforms offering unsecured loans and then securitising those loans into asset-backed securities. Will they be damaged by higher funding costs for some ABS issuers?
  • The ability, or otherwise, of direct lenders to look beyond the larger end of the market “where capital is ample and competition is fierce”. The paper identifies bespoke underwriting and building relationships with mid-market business owners as “potentially attractive”.
  • The increasing need to straddle public and private markets “due to the growing overlap and interplay between the two segments”. With portions of the same loan now often finding a home in syndications, CLOs or private debt funds, the paper thinks there may be less diversification benefit from investors allocating separately to public and private debt.
  • With US pensions having doubled their private markets allocations over the past decade, the need to develop a deeper understanding of their liquidity profiles and how they can use the secondary markets as a portfolio management tool.
  • How newer segments of private credit, such as infrastructure debt, might offer better return opportunities in a “challenging macro environment” with possible earnings stresses and a bubble in “overheated” private equity markets.
  • Why defined contribution plans in the US, UK and Australia should consider opportunities for private market investments, in the way that defined benefit plans have already done.

Deal market strong in H1, concern over H2
European private debt deal activity stayed at a high level in the second quarter of 2022 despite growing fears about the state of Europe’s economies, according to the latest Deloitte Private Debt Deal Tracker.

Q2 2022 saw 216 deals completed, up 39 percent on the second quarter of 2021. It marks the third-greatest number of deals in a quarter since Deloitte began recording figures in 2012. Appetite for deals has been so strong that the four highest quarters recorded were all seen in the past 12 months.

The UK remains the largest market with 63 deals, but has lost market share to other parts of Europe. UK deal share was at 29 percent for the second quarter running, the first time the UK has made up less than 30 percent of the market across a six-month period. France has seen a resurgence in activity and recorded 52 deals in the quarter. Market share for private debt funds in France also increased, up from 19 percent in Q2 2021 to 24 percent.

Safe sectors such as telecoms, business and professional services, and healthcare continue to dominate, accounting for 60 percent of deal activity between them.

Acquisition finance remains a major driver for direct lending activity, with 43 percent of deals being leveraged buyouts, while 26 percent were to fund bolt-on M&A and 15 percent were growth capital deals.

Deloitte says fund managers appear to be taking a more “risk-off” approach in H2, which may lead to cooling deal activity in the second half of the year. With the war in Ukraine appearing unlikely to be resolved in the near future and growing warnings that Europe may see energy rationing to deal with disruptions to supply, managers are facing a challenging macroeconomic backdrop.


Angelo Gordon brings in insurance specialist
Angelo Gordon, the New York-based credit and real estate investing firm, has appointed Matt Heintz, former head of North America at JPMorgan Global Insurance Solutions, as managing director and head of insurance in the client partnership group.

Heintz will lead the expansion of Angelo Gordon’s focus on investment management solutions for the insurance sector, reporting to Alan Isenberg. Isenberg joined the firm in April to lead its global client and product functions, including new business development, client coverage, product development and management, and client service.

JPMorgan Global Insurance Solutions is a division of JPMorgan Asset Management specialising in managing the assets of insurance companies across traditional and alternative asset classes. Prior to his role there, Heintz was a managing director and partner at Cardinal Investment Advisors, where he was an investment consultant to multiple insurance companies.

Double hire for Précis
Précis Capital Partners, a London-based real estate development lending platform, has bolstered its credit team through the appointments of Ben Lynch as senior director, credit, and Benoit Fesquet as associate director. Both will report directly to David Jerrard, Précis Capital’s chief credit officer.

Lynch joins from Kinetic Capital, where he was director of credit. He previously worked as director, credit at Urban Exposure and has also held roles at Pluto Finance, OakNorth Bank, Santander, Clydesdale Bank and HSBC. He has been involved in credit underwriting, due diligence, deal execution and portfolio management of loans across the residential, hotel, retirement living and purpose-built student accommodation sectors.

Fesquet also joins from Kinetic Capital, where he worked as a senior associate. With over a decade of experience in real estate finance, he has previously held positions at Urban Exposure, CBRE and GE Real Estate.

The hires supplement a credit team focused on structuring capital for a range of real estate assets and underwriting large, complex transactions. Since launching in March 2021, Précis Capital has originated and arranged loans in excess of £1.26 billion ($1.41 billion; €1.44 billion).

LP watch

Institution: New York State Common Retirement FundHeadquarters: Albany, USAUM: $246.3 billion Allocation to alternatives: 27.1%

New York State Common Retirement Fund (NYSCRF) has committed $350 million to Blackstone Green Private Credit Fund III (BGREEN III), according to materials from its board meeting.

BGREEN III, managed by Blackstone, will invest in subordinated/mezzanine debt across North America.

NYSCRF’s recent fund commitments have predominantly targeted North American vehicles focused on a variety of sectors. In 2022, NYSCRF has committed around $1 billion to debt.

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