Study finds pressure on preferred return
In the era of ultra-low interest rates, private credit managers were able to push the preferred return – the minimum return to be achieved before the payment of carried interest is permitted – down to between 6 and 7 percent from a prior level of 8 percent.

In the new era of rising interest rates – from which managers stand to benefit from floating rates in many cases – there is increasing pressure from limited partners to move back to the 8 percent level, according to an inaugural study of fees in private credit from investment consultants Callan. The median preferred return moved up to 7 percent last year from 6 percent in 2021. Carried interest in private credit is typically around 15 percent.

The study, which covered 330 funds and had an 86 percent bias to North American and global strategies and a 62 percent bias to direct lending, found that the median management fee during a fund’s investment period was 1.15 percent between 2016 and 2022. The median stood at 1 percent in 2016, rising to 1.25 percent last year.

The highest median management fees were found in opportunistic, distressed, multi-strategy and asset-based lending funds while the lowest were in direct lending (partly due to the fees being charged on a larger capital base) as well as real assets and niche strategies where funds were often newer and smaller and needed to price competitively to attract new capital.

The study also identified moves to tiered pricing depending on fund leverage and commitment amounts, and the increasing popularity of first-close discounts. Sixty percent of managers made a GP commitment to the fund of between 1 percent and 1.49 percent.

Moody’s calls US property markets fragile
Moody’s Investors Service has published its quarterly assessment of US property markets, also known as its Red-Yellow-Green scores, and the overall credit worthiness of those markets has fallen three points, from Q4 2022 to Q1 2023.

The RYG is a 100-point scale in which the middle zone (yellow) occupies the range above 33 and below 67. In less quantitative terms, yellow is defined as “on the cusp of imbalance and therefore fragile”. The overall score, 67 in Q4, fell to 64 in Q1.

Retail and industrial property both remain green (at 85 and 67, respectively). The other segments of the property market fall at various points within yellow terrain: multifamily, 66; hotels, 64; central business district offices, 40; and suburban offices, 37.

The multifamily score sustained a full six-point drop, from 72 to 66, and this comes as a follow-up to a greater drop from Q3 to Q4. Indeed, multifamily (like industrial) has now fallen in each of four consecutive quarters, with both markets hit by high vacancy rates.

The office sector has taken notable hits in recent years. The pandemic forced the closure of many offices and since then work-from-home arrangements, in industries where such arrangements are most feasible, have undermined the demand for office leases. In recent quarters the office score has stabilised in the low yellow range. It may drop further, into red, as longer-term leases come up for renewal.

Eiffel adds to sustainability toolkit
Paris-based fund manager Eiffel Investment has partnered with climate-focused data solutions provider Carbon4 Finance to introduce a new evaluation methodology that it says will allow it to enhance the investment, governance and climate strategies of companies.

“This methodology will help us make investment decisions that are even more enlightened and to direct our capital towards companies that have made a firm commitment to sustainability,” said Antoine Maspétiol, head of the private debt strategy at Eiffel.

Founded in 2019 and viewed as a pioneer of impact debt investment in Europe, Eiffel has incorporated around 150 “Covenants d’Impact” into its deals – covenants that move the interest rate paid up or down depending on a portfolio company’s success or otherwise at meeting environmental and/or social targets.

The firm is currently raising its Impact Debt 2 fund, an SFDR Article 9 vehicle that aims to contribute to the transition to a low greenhouse gas economy. The fund has so far raised almost €650 million on its way to an €800 million target. 

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