They said it
“While the threat of shrinking interest coverage is real, lenders won’t sit waiting for a default”
Taken from The New Paradigm (Second of a Series), the latest Lead Left newsletter from Randy Schwimmer of Churchill Asset Management
First look
S&P: Warning signs for mid-market private debt
An analysis of mid-market private debt issuers (login required) by S&P Global Ratings has found credit metrics could reach “precarious” levels in a scenario of increasing stress.
The study of 2,000 credit issuers representing more than $400 billion of aggregate outstanding debt found that most borrowers are highly leveraged and median credit metrics would reach precarious levels when put under moderate or severe stress.
Some issuers generally given a B-rating could show characteristics of a CCC rating and may be at risk of downgrades, “potentially increasing the proportion of CCC assets in middle-market collateralised loan obligations”.
S&P also expects less than half of issuers to generate positive free operating cashflow in a mild stress scenario but does add that overall liquidity appears supportive in the near term.
S&P thinks debt maturities appear manageable over the next 12 to 18 months but a sustained higher interest rate environment would “cripple” many issuers ahead of a heavier maturity schedule beginning in 2025.
There are also concerns around defaults: “Although default rates have remained low, recent downgrade trends point to vulnerabilities in the middle market.”
Is APAC opening up?
Here’s a puzzle. According to research on 25 years of private credit – Find the gap, mind the gap, fund the gap – by Hong Kong-based fund manager ADM Capital, Asia-Pacific accounts for one-third of global GDP and two-thirds of global growth… but only around 7 percent of global private credit assets.
The firm also points out that, in the 14 countries where ADM operates, total GDP has grown by 589 percent over the last 25 years to almost $2.25 trillion, a growth rate 184 percent above the global average. Why the sluggish evolution of private debt?
A major part of the reason has been the dominance of the banks – relatively speaking, far more lending is accounted for by traditional debt providers in APAC than in North America or Europe. But ADM reckons things may be changing with tightening bank lending standards creating a funding gap, especially for small and medium-sized enterprises.
China’s private debt market has seen challenges of late but ADM points to opportunity ahead: “We expect a growing number of opportunities to emerge as the government prioritises increasing domestic consumption, securing technology self-reliance and social sectors like eldercare. Given the ongoing difficulties in the property sector, pockets of opportunity in the distressed space could begin to look interesting.”
Private debt maintains its allure
Based on requests from its clients for new manager searches, consultancy Bfinance finds private debt interest continuing to be strong even as searches for private markets managers are in general decline.
Bfinance, in its latest Manager Intelligence and Market Trends report, finds that private market asset classes accounted for 48 percent of all new manager searches in the 12 months to 30 September 2023 – still at a high level, but down on the 61 percent recorded in the previous 12 months. Searches for equities managers rose by 7 percent over the same period.
Maintaining its popularity, private debt accounted for 40 percent of all new private markets searches while real estate was only the fourth most sought-after asset class, dropping from 28 percent to just 13 percent. Infrastructure climbed from 10 percent to 21 percent over the period.
Bfinance also found a preference for global and developed markets, with developed market searches rising from 14 percent to 21 percent. Another net gainer was hedge funds, rising from 36 percent of “diversifying strategies” manager searches to 45 percent.
Essentials
Adams Street closes 2023 Global Fund Program
Chicago-headquartered Adams Street Partners, which has more than $58 billion in assets under management, has held the final closing of the Adams Street 2023 Global Fund Program with $820 million in committed capital.
The Global Fund Program is a private markets portfolio spanning all of Adams Street’s investment strategies, including primaries, secondaries, co-investments, growth equity, and private credit, across North America, Europe and Asia.
Investors in the programme include public, corporate and Taft-Hartley pension plans, along with high-net-worth individuals, insurance companies, foundations and endowments.
Adams Street first implemented the Global Fund Program in 1996. It aims to outperform public equity markets by 3-5 percent through a highly diversified global portfolio that incorporates each of Adams Street’s strategies.
Nuveen affiliate Churchill gets two new principals
Churchill Asset Management, an affiliate of Nuveen, has brought on board two new principals for the origination, senior lending team: Paul Sadlowski and Pranai Cheroo.
Sadlowski will work out of the Chicago office and Cheroo out of the Los Angeles office of New York-headquartered Churchill. Sadlowski was formerly an executive director at JPMorgan, where he led leveraged finance transactions, including M&A financings, for clients.
Cheroo comes to Churchill from Carlyle Group where he was an originator for the direct lending platform.
Sadlowski and Cheroo will report directly to Kevin Meyer, managing director, head of origination, senior lending. Meyer said in a statement: “We are excited to welcome seasoned originators Paul and Pranai, who bring decades of experience and relationships to the firm, to help us capitalise on today’s highly attractive investment environment and ultimately deliver strong risk-adjusted returns for our investors.”
Churchill has $47 billion of committed capital, and its senior lending business has $27 billion. Cheroo’s hire supports its expansion of its West Coast business: it opened its California office in May 2022.
Versana makes two new hires
Versana, a New York data and tech company for the syndicated loan and private credit world, has hired a new head of product, Christine Scaffidi, and a new head of sales, Christopher Fonte.
Each will report directly to Versana’s chief executive officer, Cynthia Sachs, who founded the company last December.
Scaffidi has experience on both the banking and vendor side of fintech. She was senior principal product manager for corporate and syndicated lending at Finastra and has also served as head of commercial lending services at Commerzbank.
Fonte will be charged with leading the sales organisation. He worked most recently at Amazon in global relationship management. Before that, he was head of regulatory sales – Americas, at Bloomberg. He has also worked at Barclays and IBG.
Versana and its founding investors, Bank of America, Citi, Credit Suisse and JPMorgan, are working to address the operational inefficiencies and technological fragmentation in the broadly syndicated loan and private credit markets.
LP watch
Institution: Ente Nazionale di Previdenza ed Assistenza per gli Psicologi
Headquarters: Rome, Italy
AUM: €2.4 billion
Allocation to private debt: 0.9%
Ente Nazionale di Previdenza ed Assistenza per gli Psicologi (ENPAP) is underallocated to private debt, a source at the pension fund has confirmed with Private Debt Investor.
The pension aims to more than triple its allocation from 0.9 percent (€21.7 million) to 3.5 percent. It mainly focuses on investments in private debt through fund of funds in North America and Western Europe and has a bite-size range of €50 million to €100 million.
Founded in 1996, ENPAP is an Italy-based pension fund that implements social security and welfare protections for psychologists.
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
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