Loan Note: Private debt faces biggest test since GFC; the attractions of opportunistic credit

Fitch cites reasons for concern as private debt faces "biggest test" since GFC. Plus: Davidson Kempner makes the case for opportunistic credit; and RBS International finds hitting science-based targets is proving a tough task. Here's today's brief for our valued subscribers only. 

They said it

“Cautious optimism is the Monday motivation mantra, as stronger US corporate news and signs of consumer resilience help to mask ongoing worries about the knock-on effect of higher interest rates”

Susannah Streeter, head of money and markets, Hargreaves Lansdown.

First look

Fitch warns of biggest test since GFC
Ever since the global financial crisis, macroeconomic challenges for the US private credit market have proved transitory in nature and the consensus view is that the asset class has largely enjoyed tailwinds during that period. According to a report from Fitch, that’s all about to change.

Fitch acknowledges that US private credit has experienced strong growth in the past decade, beating the pace of growth in commercial bank lending. But, referring to the “first real macroeconomic test” since the GFC, Fitch says borrowers, lenders and investors now face headwinds and that “underwriting acumen” will be tested.

It says that while private credit terms were traditionally more conservative than those in the syndicated bank market, there has been some convergence due to the amount of competition in the lending market. While terms improved somewhat last year and early this year, Fitch points to concerns over the level of exposure to pre-2022 vintages with asset quality coming under pressure from rising rates and slowing economic growth.

Fitch is also concerned about higher loan concentrations in the private credit market relative to bank lenders, which could pose a threat to earnings and capital, and lead to higher losses over time. But the agency expects these risks to be mitigated by higher yields from rising rates and an expectation of a high recovery level given the secured nature of the debt and large equity cushions in deals.

A strategy for all weathers
A paper from fund manager Davidson Kempner Capital Management makes the case for opportunistic credit as a strategy that can perform well in all cycles – including the present one – and which may be seen as preferential to growth strategies, given their reliance on a favourable economic backdrop.

The reason for considering a strategic shift is the end of the “14-year zero interest rate policy”. The policy has assisted growth investors but it’s demise “requires a new investing playbook” according to Davidson Kempner.

“Investors should be mindful that what has proven successful over the past 10 years may not work as well over the next 10 years,” says the paper, highlighting the “extreme cyclicality” of growth investing. Robust returns during the 1990s and 2010s need to be balanced against the 1980s and 2000s, the paper says, when investors made “little to no money” from growth strategies.

The paper contains interesting comparative data based around relative returns, distributions and correlation for different strategies.

Science proving hard to adopt
The implementation of science-based targets by alternative investment funds appears to be sluggish, according to the latest research from RBS International.

The January 2023 study – focused on private debt as well as real estate, private equity, infrastructure and renewables – found that 43 percent of respondents had set and verified SBTs. This was exactly the same figure as in the previous survey in March 2022.

The remainder (57 percent) said they were planning to set targets at some point in the future, but RBS noted that timeframes for implementation appear to be slipping.

More than a third of those canvassed (37 percent) said the biggest issue with SBTs was the time it takes to implement them, although this was down on the 48 percent who said it was the biggest issue in the prior survey. Economic conditions was cited as a top concern by 35 percent.

Pressure from regulators was cited as the biggest reason for adoption of SBTs by 38 percent, and 41 percent expected regulatory pressure to decarbonise to increase, despite the challenging economic conditions.

SBTs are designed to provide companies and financial institutions with a defined pathway to “future proof” growth by specifying how much and how quickly they need to reduce greenhouse gas emissions.


Hunter backs Coller growth
Hunter Point Capital has acquired a minority stake in secondaries specialist Coller Capital, with an announcement of the deal citing Coller’s credit secondaries business as well as its RMB fund and expansion of its reach into the private wealth market.

The statement said the investment aimed to support Coller’s long-term growth. It added that there would be “no change in governance, the investment process or day-to-day management of Coller” and that proceeds from the transaction would be reinvested in Coller funds.

Hunter Point provides capital solutions to alternative asset managers looking to build their franchises. Last month, Hunter Point took a minority stake in consumer-focused investment firm L Catterton, which is building a private credit operation.

New EMEA head for Partners Capital
Partners Capital, an outsourced investment office managing more than $48 billion of assets for clients globally, has appointed Euan Finlay as head of EMEA. He also joins the Partners Capital executive committee.

Finlay will oversee the business across the EMEA region, including mentoring the senior investment team and the execution of strategic growth initiatives. He will continue to be a member of the global investment committee.

He joined Partners Capital from Goldman Sachs in 2009, where he worked in the investment banking division focused on mergers and acquisitions.

Finlay succeeds John Collis, who will retire after 19 years with the firm. Will Jagger will assume responsibility for the management of the London office, the largest of Partners Capital’s seven offices, with over 160 employees. Jagger joined Partners Capital in 2010 having previously worked at LEK Consulting in London and Shanghai.

CLO expert becomes Dechert global finance partner
Law firm Dechert announced that Aaron Scott has joined the firm’s global finance practice as a partner based in London.

He is the sixth partner to join the global finance practice since the start of 2022, following the additions of leveraged finance partner William Robertson (New York); commercial real estate finance partners Kathleen Mylod (New York) and Richard Pugh (London); asset finance and securitisation partner Jay Southgate and debt and acquisition finance partner En-Min Chua (New York).

Scott specialises in structured finance and securitisation with a focus on collateralised loan obligations. He advises on transactions for global financial institutions and has forged relationships with many European banks. Additionally, he advises on the EU regulatory aspects of US CLOs including risk retention and transparency requirements.

LP watch

Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $242.3 billion

New York State Common Retirement Fund (NYSCRF) has committed $15 million to Raith Real Estate Fund III, managed by Raith Capital Partners.

Founded in 2012, Raith is a New York-based asset management firm that focuses on distressed loans and commercial mortgage-backed securities across the US.

Raith’s third flagship distressed fund seeks to acquire mainly North American businesses. NYSCRF’s recent private debt commitments have been focused on North American vehicles with various strategies.

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