Loan Note: Private debt responds to questions over stability; green guidance for property lenders

The industry responds swiftly to concerns around direct lending’s ‘veneer of stability’. Plus: UK property lenders are given some green guidance on valuation; and Stonepeak makes a special situations hire. Here’s today’s brief for our valued subscribers only.

They said it

“In light of current macro challenges, we believe it is critical for private credit investors to look under the hood at an investment’s ‘cushion’ – namely, fixed-charge and interest coverage, variable versus fixed costs, and leverage ratios”

Taken from fund manager PineBridge Investments’ 2023 Midyear Private Credit Direct Lending Outlook: Durability to Weather Challenges

First look

Out of the shadows: private debt fights to shake off image problems (Source: Getty)

Private debt’s PR scrap
It was fully 18 years ago that private equity practitioners in Germany discovered how damaging negative public relations can be when senior politician Franz Muentefering dubbed them heuschrecke (locusts). It was a tag that the industry in that market faced an almighty struggle to shake off.

Private debt has, overall, not faced the same level of PR challenge as private equity over the years – although the term “shadow banking” has always been viewed as an unhelpful characterisation of non-bank lending. But a recent Bloomberg article by columnist Nir Kaissar prompted a swift response from a private markets industry body.

In the article (registration required), Kaissar said direct lending to small and mid-sized firms had only a “veneer of stability that could easily be punctured by higher rates and a downturn” and that the attractions of direct lending were probably “too good to be true”. OK, none of it was a blow to the solar plexus on the scale of the locust debacle, but the swiftness of the response from the Washington, DC-based Managed Funds Association (the self-labelled voice of the alternative investment industry) was telling.

In a letter to the Bloomberg editor, Bryan Corbett, president and chief executive officer of the Managed Funds Association, argued that “without the critical capital provided by credit funds, small and mid-size businesses would struggle during already stressed situations”. In response to the suggestion that private credit may now be “too big to fail” and thus pose systemic risk, Corbett claimed contagion risk, taxpayer risk, liquidity risk and concentration risk were all absent from the asset class.

Only a skirmish perhaps, but you never know whether things may escalate – better to rehearse your arguments thoroughly than risk becoming today’s locusts.

How green is your lending?
While the majority of Europe’s real estate property requires upgrading to the latest environmental standards, least of all to avoid obsolescence, there is not yet an industry-wide approach to valuing assets in relation to how fit-for-purpose they are in this context, report our colleagues on Real Estate Capital Europe.

However, a group of large UK commercial lenders has attempted to build one with the publication of a draft ESG framework, designed to help valuers and lenders fulfil their sustainability obligations.

The guidance, which was released on 3 July in collaboration with the UK professional standards association, the Royal Institute of Chartered Surveyors, is a list of what RICS calls the “key considerations” valuers should consider in a valuation report, and includes factors such as green certification and leases, flood risk and an energy-inefficient property’s suitability for secured lending. Describing this as a “useful starting point”, RICS wants feedback from lenders and valuers on how to further develop its ideas.

Earlier this month, the ULI published guidelines on how to incorporate the costs of transitioning assets into property valuations, having warned of a “carbon bubble” in pricing.

Secondaries not going cheap
Private debt secondaries are commanding only small discounts according to research from Jasmin Capital, a Paris-based private markets advisory firm.

The firm said strong buyer appetite for private debt during the economic downturn means that both large generalist buyers and specialised private debt players are pricing the asset class at low double-digit discounts.

The survey found that 53 percent of private debt secondaries buyers had an expectation of a 10-20 percent discount, while 32 percent expected zero to 10 percent, and 15 percent expected between 20-30 percent.

This was a similar outcome to infrastructure, where 56 percent are expecting discounts of 10-20 percent only, due to the asset class’s predictability of cashflows over the long term.

By contrast, 75 percent of investors in venture capital and growth would expect a discount of between 50-70 percent “on the back of high uncertainties about asset valuation”.


Stonepeak adds special situations veteran
Stonepeak, a New York-based asset management firm with a focus on real estate and infrastructure, has brought Michael Leitner on board as a senior managing director.

Leitner most recently was co-head of the direct lending and special situations investment practice at BlackRock. Before that, he was a managing partner at Tennenbaum Capital Partners, a specialist private performing credit and special situations manager with $9 billion of committed client capital. BlackRock bought Tennenbaum in 2018, and Leitner came with it.

Stonepeak is headquartered in New York, though it also has offices in Houston, Sydney, Hong Kong, Singapore and London. Leitner will work out of New York, and will lead what the firm expects to be the growth of its credit investing capabilities.

Stonepeak received a capital infusion from Blue Owl Capital on 11 July. Its total AUM, according to Private Debt Investor data, is $55.7 billion.

The announcement concerning Leitner added that the Stonepeak team “has been actively investing in infrastructure credit since 2018”.

Stonebridge shuffles the pack
Stonebridge Financial Corporation, a Canadian financial institution and investment management firm in ESG-orientated private credit, has announced executive leadership changes with Cam Di Giorgio and Daniel Simunac appointed co-chief executive officers.

In addition, Cormac MacLochlainn has been appointed executive vice-president and Robert Colliver, the firm’s original co-founder, will transition to the role of executive chairperson, while continuing to oversee Stonebridge’s existing debt funds and separately managed accounts.

Di Giorgio joined Stonebridge in 2009 and has moved through the ranks, most recently as executive vice-president. He leads the firm’s project finance business in the areas of renewable power, infrastructure and long-term care in the seniors housing sector. He has over 35 years of industry experience including prior roles at Sun Life Financial, CIT Structured Finance/Newcourt Capital and Canada Life.

Simunac joins from Raymond James Bank, where he served as principal officer and country head for Canada, a platform he founded in 2012. He specialised in lending to commercial and institutional borrowers across Canada and the US focusing on real estate and REITs, renewable power and infrastructure, and founder-owned, publicly traded and sponsor-backed businesses.

MacLochlainn also joins from Raymond James Bank Canada, where he was senior vice-president, corporate and real estate banking, focused on lending to mid-market and large-cap borrowers across commercial, corporate and private equity-backed industries, together with covering the renewable power and infrastructure, and speciality finance sectors.

Prolific H1 for PGIM
PGIM Private Capital said it provided nearly $6.7 billion of senior debt and junior capital to more than 120 mid-market companies and projects globally in the first half of 2023.

PGIM Private Capital is a private debt provider for public and private companies and is the private capital arm of PGIM, the $1.27 trillion global investment management business of Prudential Financial.

“This year has seen continued high demand for private credit solutions as other sources of finance have become more scarce. The ability to originate loans directly with companies gives us a unique insight into the condition of mid-market companies, and it’s clear that the need for private credit is significant and growing,” said Matt Douglass, senior managing director and head of PGIM Private Capital.

The firm made $4.5 billion of investment-grade investments in the first half, $1.8 billion of below-investment-grade investments, and $352 million of mezzanine and private equity investments. Fifty-one new issuers across a range of industries were added to the portfolio and 78 existing borrower companies returned for further funding.

LP watch

Institution: Government Employees Pension Service
Headquarters: Jeju-do, South Korea
AUM: 6.28 trillion won
Allocation to alternatives: 34.91%

Government Employees Pension Service (GEPS) has issued a request for proposal from global real estate debt fund managers.

The firm aims to commit $35 million to two managers, whose funds should allocate at least 80 percent to North America and/or Europe. Funds that allocate to a single sector, as well as distressed funds and funds with 50 percent or more allocated to mortgage-backed securities, will be excluded.

The funds will have a target size of at least $500 million at final close, and the firms should have run their business for least five full years. The fund manager should have at least $10 billion in private debt AUM, of which $5 billion is in a real estate debt strategy.

The 6.28 trillion won ($4.69 billion, €4.25 billion) South Korean government employees pension has a 34.91 percent allocation to alternative investments.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

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