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Loan Note: Private debt’s six biggest challenges; what diversification really means

Our May 2022 issue brings you thoughts from the market on the biggest challenges facing private debt. Plus: an Arena paper questions assumptions about diversification and the asset class gets a thumbs-up from investors. Here's today's brief for our valued subscribers only.

They said it

“Today’s policy dynamic has led many commentators to suggest that the likelihood of an economic recession in the US has increased pretty drastically, but while this possibility bears watching, we think it’s currently overdone”

Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the BlackRock global allocation investment team.

First look

The talking points: what’s troubling private debt investors? (Source: PDI)

Private debt’s six biggest challenges
In the turbulent world we see around us in 2022, it’s clear there are plenty of concerns and anxieties for all of us. But what are the major worries of private debt investors as they survey the investment landscape? That’s the question we asked six leading asset class professionals and, in the newly published May 2022 edition of Private Debt Investor, you can find their responses. You can see a few of the chosen topics in our cover image above – we’ll leave you to discover the rest.

A challenge to diversification assumptions
Full marks to any of our readers already familiar with this publication: Some Studies on the Variability of Return on Investments in Common Stocks. Produced by Fisher and Lorrie in 1970, it’s one of the most influential contributors to the ’30 stocks’ theory whereby approximately 30 investments is held to be the optimal number for portfolio diversification. Although most commonly associated with equity markets, the theory is also held to be applicable to the yield-oriented market as well.

A new paper produced by Arena Investors challenges the assumptions behind the 30 stocks theory and is a compelling read on the crucial topic of diversification. In brief summary, it argues that more than 30 stocks are needed for diversification – with one argument being that this number should be close to 100 in the credit world. “Curious then, that in illiquid and privately negotiated investment strategies, the diversification is less, not greater, than that of public markets,” the paper concludes.

Investor thumbs-up for private debt
“In our experience, investors tend to overestimate the amount of portfolio liquidity they need, potentially sacrificing better risk-adjusted returns by underinvesting in private assets,” says Nuveen’s Global Investment Committee Q2 2022 outlook paper.

The paper recommends mid-market direct lending as offering “healthy levels of income with low volatility” amid unprecedented demand to finance private equity deals (with $1.78 trillion in unallocated private equity capital in February this year).

In an institutional investor survey, Nuveen found that private debt had seen the biggest year-on-year increase in allocations across alternatives, with 72 percent of institutions having a private credit exposure – up from 62 percent last year.

Furthermore, 31 percent of investors planned to increase their allocations to private credit over the next two years. Senior mid-market debt was cited as the favourite area of the market for allocation by 55 percent of investors, with 44 percent citing infrastructure debt.

Essentials

Fund launch for CBRE
CBRE Investment Management has launched its evergreen UK Senior Credit Fund. The vehicle will aim to make loans secured against high-quality, income-producing real estate located in the UK.

The size of loans will be between £7.5 million ($9.4 million, €8.9 million) and £30 million for durations of between two and seven years, and at a loan-to-value of up to 65 percent. “We see strong market appetite for efficient decision making and execution in this part of the market,” said Alexandra Lanni, chief investment officer and co-head of EMEA credit strategies at the firm.

AEA teams with women-led Amateras
AEA Investors, a fund manager specialising in mid-market equity and debt, has formed a joint venture with Amateras Capital, a women-led investment firm focused on junior capital solutions in private equity and debt.

AEA-Amateras will be led by Amateras’ co-founder Alexandra Jung and will be majority owned and led by the women in the Amateras business, with AEA taking a minority stake. Jung has also been appointed head of AEA Private Debt and a member of AEA’s management committee, succeeding founding partner Scott Zoellner. Zoellner moves to a new role as head of capital markets for AEA’s private equity groups.

Australian mandate for Schroders
Schroders Capital, the private markets investment arm of Schroders, has won a private debt mandate from an unnamed Australian superannuation fund.

The A$250 million ($178 million, €169 million) mandate covers corporate, real estate and infrastructure debt and targets a 4.5 percent return over the Bloomberg AUSBOND Bank Bill index benchmark.

“This is an important milestone in the build-out of our private assets business in the region,” said Sam Hallinan, Schroders’ chief executive officer for Australia.

Originations hire for BridgeCore
US commercial real estate lender BridgeCore Capital has hired Kristan Latham as director of loan originations. Latham will be responsible for loan originations in commercial real estate throughout the markets the bridge lender serves in the US.

Based in Denver, Latham has 16 years’ origination, underwriting and asset management experience in banking, mortgage brokerage and private lending. He will report to BridgeCore founder and principal Elliot Shirwo.

LP watch

Institution: South Carolina Retirement SystemHeadquarters: Columbia, USAUM: $41.65 billionAllocation to alternatives: 20.1%

South Carolina Retirement System has confirmed a $50 million commitment to KKR Lending Partners IV, according to minutes from the pension’s April 2022 commission meeting.

Fund IV, managed by KKR, is targeting corporate senior debt opportunities in North America, Europe and the Asia-Pacific region. The fund launched in March 2022. The pension also invested $215 million in the fund’s predecessor, which closed in November 2018.

The $41.65 billion US public pension’s private debt fund commitments tend to focus on corporate North America vehicles targeting senior, subordinated or mezzanine debt.


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