Loan Note: Survey sheds light on covenant breaches; key findings in Ares’ results

Why there's something reassuring about an increase in covenant breaches. Plus, key highlights from Ares' latest results and the data that show Asia-Pacific fundraising standing up to the global health crisis. Here's today's brief for our valued subscribers only.

They said it

“It’s like you are in a sushi bar. When you are in an investment committee, you see the trail of food coming and never know which one you are going to pick because you don’t know what’s coming afterwards”

Jorge Quemada, a partner at private equity firm Cinven, discusses dealmaking during the pandemic and the need to take decisions now without knowing what’s going to happen in 18 months’ time, at the Spanish Venture Capital & Private Equity Association’s LPs and GPs conference on Tuesday

First look

Covenants under attack from covid
With the number of covenants in deals having declined markedly in recent years, there has been some doubt as to whether even a sharp downturn would be accompanied by a significant rise in breaches.

However, a new survey conducted by Munich-based consultancy Bluemont challenges this notion. One-third of participating debt fund managers said at least a quarter of their portfolio companies had seen covenant breaches due to covid-19. The remaining two-thirds said that anywhere between none and a quarter of portfolio companies had seen breaches.

In terms of the measures taken in response to these breaches, more than three-quarters (76 percent) said they had “supported top management with guidance”. This suggests that tough and radical measures are not normally used, at least initially. More than half (57 percent) said they had provided additional capital to soften the liquidity gap.

Some did opt for more drastic action, however. Ten percent said they had asked for an immediate return of the invested debt capital and another ten percent said they had sent in an operations team to improve profitability.

Among other key highlights from the survey:

  • Nearly half of respondents (48 percent) thought that between 10 and 25 percent of debt funds would lose money with at least one portfolio company.
  • Forty-three percent said they thought it was “likely” or “very likely” that limited partners would accept changes to target return rates. One-third thought this was “unlikely”.
  • More than three-quarters (76 percent) were of the view that private debt funds would continue to gain market share over the next 12 months, with 19 percent predicting they would lose share during that period to the banks.

Ares sets records in the third quarter
Los Angeles-based fund manager Ares Management reported that it had raised a record $12.7 billion in Q3. This helped to lift its assets under management by 24 percent to $179.2 billion during the quarter from the equivalent period a year ago. A significant portion of the capital raised, $8.7 billion, came from its fifth flagship European direct lending vehicle, its largest single first close of a fund.

The manager saw a 23 percent increase in fee-related earnings, to $106.8 million, and a nearly 50 percent surge in realised income to $146.4 million, which produced its highest fee-related margin since its IPO. It said its target of a 40 percent run rate in fee-related earnings would be achievable in three years or less.

Ares said it raised more than $28 billion in the first nine months of 2020, which puts it on track to surpass its $36 billion record of gross funding set in 2013. The manager said its flagship direct lending fund, Ares Capital, had achieved a third-quarter net return of 6.5 percent.

Michael Arougheti, co-founder and chief executive officer, said during the earnings call that there was “a lot of pent-up demand” and that things were “now pivoting to the private market,” including the buyout market.

In September, Ares said its Aspida insurance business was acquiring the reinsurance subsidiary of FGL Holdings and that it had formed a strategic partnership with FGL Holdings for a flow reinsurance agreement. This week, it announced that Raj Krishnan, formerly executive vice-president and chief investment officer of F&G Annuities & Life, had joined its Ares Insurance Solutions unit as partner and CIO.

Data snapshot

Asia-Pacific holds steady. While global private debt fundraising has been hit by covid-19 (see our fully interactive Q1-Q3 report here), Asia-Pacific fundraising has held up well. Watch out for our November 2020 Asia-Pacific report, which will investigate why investors are increasingly attracted to the region.

Essentials

Two new MDs for SVP
Strategic Value Partners, a Greenwich, Connecticut-based investment firm focused on distressed debt and private equity opportunities with $9.8 billion in assets under management, has appointed Ranji Nagaswami and Sarah Pillmore as managing directors. Both will serve on SVPGlobal’s 16-person management council.

Nagaswami joined SVPGlobal as an advisory council member in March, and transitioned to the full-time role of chief strategy and chief commercial officer in October. She was most recently chief executive and board director at Hirtle Callaghan & Co, an outsourced chief investment officer platform serving endowments, foundations and ultra-high net worth families.

As head of human resources and talent, Pillmore will lead all aspects of SVPGlobal’s human capital strategy, including talent management, development and recruiting, and its existing global human resources team. She most recently supported Oxford Sciences Innovation on all aspects of people across its portfolio and previously served as chief human resources officer at Hirtle Callaghan when Nagaswami was chief executive.

Kelly steps up at BBI 
British Business Investments, the British Business Bank subsidiary that has been a major supporter of private debt in the UK, has appointed Adam Kelly as managing director from 1 November, following the retirement of Peter Garnham.

Kelly was previously director of British Business Investments’ Structured Capital Solutions portfolio. As part of that role, he led investments in challenger banks.

After spells at Dresdner Kleinwort and JPMorgan Cazenove, Kelly joined the bank in 2013 as a senior manager in the Investment Programme, which became part of British Business Investments when it was launched in 2014.

LP watch

Institution: European Investment Fund
Headquarters: Luxembourg
AUM: €2.96bn
Allocation to alternatives: 35%

The European Investment Fund has committed to private credit funds from Idinvest PartnersAll Seas Capital PartnersTikehau Capital and Resilience Partners, according to recent meeting documents.

The system invested an undisclosed amount in Resilience Partners IITikehau Impact Lending FundAll Seas Capital I and Idinvest SME Industrial Assets Fund II.

The system’s credit asset class makes up 8.6 percent of its portfolio.

The European Investment Fund has a strong appetite for the corporate sector across Europe, and prefers to commit to funds that leverage a senior debt strategy.

Institution: New Hampshire Retirement System
Headquarters: Concord, US
AUM: $9.2bn
Allocation to alternatives: 29%

New Hampshire Retirement System has appointed Callan Associates as its investment consultant, as mentioned during its October board of trustees meeting.

The contract commences on 1 January with an initial five-year term, replacing its current investment consultant NEPC. The system issued an RFP for investment consulting services earlier this year, as reported by Private Debt Investor.

The pension allocates 6.3 percent of its full investment portfolio to private debt. Its director of investments is Lawrence Johansen.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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