Loan Note: Private debt’s growing muscle; Cliffwater issues return forecasts

How private debt firms are gaining market share at the large end of the market; Cliffwater issues its latest return forecasts; and caution surrounds real estate. Here's today's brief for our valued subscribers only. 

They said it

“Relief that inflation is finally past its peak is palpable, and there has been a rash of data showing central bank policies aimed at dampening down demand appear to be working”

From a press comment by Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, the UK financial services company.

First look

Breaking in: private debt is making its presence felt in the issuance market (Source: Getty)

Private credit muscles into large deals
The private credit market has become “the primary outlet for issuers to raise debt”, displacing the institutional market, according to a new report from technology-focused investment bank Union Square Advisors.

The report says that borrowers and sponsors have increasingly turned to private credit as a “true alternative” to the institutional markets, which have become dislocated due to banks’ over-extended balance sheets (because of hung financings) and depressed secondary activity.

According to figures quoted by Union Square, the private credit market priced $116 billion in total volume in 2022 compared with $110 billion in 2021, outperforming the institutional market on a year-on-year basis.

Private credit providers have been able to gain market share as a result of offering flexible, bespoke solutions to issuers. Until recently, private credit’s role in large deals tended to be restricted to challenging situations or second-lien financing in buyouts.

“Dry powder for private credit remains strong and, given favourable performance of the asset class during historical periods of volatility, many investors continue to see it as a shelter in the storm,” the report notes.

Cliffwater issues returns forecasts
The latest Asset Allocation Report from investment and advisory firm Cliffwater also paints a healthy picture for private debt, indicating expected returns for direct lending of 7.05 percent and 9.25 percent, respectively, on an unlevered and levered basis.

Since the inception of Cliffwater’s Direct Lending Index in September 2005, it has delivered an annualised return equal to 9.32 percent with modest volatility.

The report also highlights that business development companies were attractively priced at the end of last year, delivering an 11.11 percent dividend yield. BDC yield has been “well above other yield-oriented asset classes” over the past nine years.

At the end of last year, the BDC yield spread to high-yield bonds was 4.28 percent, with Cliffwater forecasting an 8.85 percent long-term return for a portfolio of public BDCs – nearly 2 percent above the 6.9 percent forecast for high-yield bonds.

Among other highlights:

1. The long-term expected return on the so-called “alternative asset trilogy” of private equity, real estate and private debt is 9.17 percent.

2. An 8.25 percent long-term return can be expected from an alternatives-driven portfolio consisting of 30 percent stocks, 20 percent private equity, 20 percent private debt, 15 percent fixed income, 10 percent real assets and 5 percent hedge funds.

3. Private debt, real estate investment trusts, hedge funds and treasury inflation-protected securities are considered the best long-term inflation hedges.


Two promoted to partner at AlbaCore
London-based fund manager AlbaCore Capital Group has promoted Zeynep Tumer Bayazid and Micaela Kelley to partner.

The additions bring the firm’s total partner ranks to six, joining founding partners David Allen, chief investment officer, Bill Ammons, portfolio manager, and Matthew Courey, chief operating officer, along with Deborah Cohen Malka, portfolio manager, who was named partner last year.

Bayazid has overseen the business development function at AlbaCore since 2017, and was promoted to managing director of investor relations in 2019. During her time leading the team, AlbaCore has increased its assets under management to $9.2 billion across multiple strategies and regions.

Kelley joined AlbaCore in 2021, helping to streamline governance operations and improve efficiency, while “incorporating a risk-based approach and facilitating deeper collaboration across the firm’s functions”. She has been involved in the firm’s efforts to build out its investment platform and diversify its product offering.

UK SME lender targets record year
White Oak UK, a UK non-bank lender, has pledged to provide £500 million (€571 million; $618 million) to UK SMEs and mid-sized corporates in 2023.

If it delivers on the target, it would beat the firm’s record £465 million of funding in 2022 when businesses in London and the South East had the greatest demand for funding (32 percent), followed by the North of England (20 percent) and Scotland (15 percent).

White Oak supports businesses with a range of funding products. Tax lending – including VAT finance – assisted 1,300 clients by spreading the cost of their tax bill over 12 months and reached a value of £200 million over the year. Asset-based lending reached £175 million, accounting for 40 percent of total White Oak loans.

The firm is looking to target tax lending of £225 million and asset-based lending of £200 million through 2023.

Caution rules in real estate
The number of investors wanting to increase allocations to real estate between 2023 and 2024 (27 percent) is only slightly ahead of the number wanting to decrease allocations (25 percent), according to the 2023 Investment Intentions Survey published by the Asian Association for Investors in Non-Listed Real Estate Vehicles, the European Association for Investors in Non-Listed Real Estate Vehicles and the Pension Real Estate Association.

The survey found European investors to be the most cautious, with 37 percent planning to decrease allocations during the period, compared with 20 percent in North America and 5 percent in Asia-Pacific.

The prevailing mood has seen a return to core investing, with 57 percent of European investors opting for core. They also have the lowest appetite for opportunistic strategies at 8 percent. This is a shift, albeit slightly less dramatic, than the one seen in 2008-09. Asia-Pacific investors, by contrast, have a substantially increased appetite for opportunistic strategies.

LP watch

Institution: Teachers’ Retirement System of Louisiana
Headquarters: Baton Rouge, US
AUM: $23.3 billion

Teachers’ Retirement System of Louisiana has committed $125 million to BC Partners’ latest distressed debt fund, a contact at the pension confirmed.

At the pension’s January board meeting, TRSL announced it will invest $125 million in BC Partners Credit Special Opportunities Fund III. The fund, which is targeting companies in Europe and North America, is seeking distressed debt returns. Its predecessor closed in December 2021 on $1.2 billion, exceeding its $750 million target.

The Baton Rouge-based pension’s recent private debt commitments have tended to focus on Europe or North America-based vehicles targeting a variety of returns.

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