Loan Note: The challenges facing Australian GPs, the equity managers mulling debt and a surprisingly upbeat survey

Why professionals in Sydney are fearing a second wave – not of covid, but of problems facing portfolio companies. Plus, why more equity-focused GPs may consider adding debt, and some heartening findings from a Partners Group survey. Here's today's brief for our valued subscribers only. 

He said it

“Fast down and slow up: to me that’s no V. I prefer to think of it as a checkmark”

Howard Marks, director and co-chairman of Oaktree Capital Management, takes issue in his latest memo with the notion that a recovery from the current crisis could be considered “V-shaped”, as is often posited. The contraction was fast, and there are too many things slowing the pace of recovery for it to come back at the same rate.

First look

Can kicking Down Under

What’s going in Australia’s private debt markets? You’ll pick up some invaluable insights from not one but two podcasts conducted with professionals in the country by our Hong Kong-based reporter, Adalla Kim.

In the first (click here), Skye Capital Advisory founder Kelly Morton describes how some of the issues with portfolio companies have been dealt with on a temporary basis only, and – rather like covid-19 – may come back to haunt the market in a second wave:

“A lot of the solutions in the first stage of covid to do with cashflow solutions and covenant waivers, etc. were short-term solutions, so they were kicking the can down the road,” says Morton. “Most companies will have to see where they’re at at the end of this year – ironically when government funding is supposed to come to off – and work out if they’re in a situation that they’re fine to keep trading through or will need to go back and talk to their lenders about solutions.”

The podcast also features Andrew Lockhart, founding partner of fund manager Metrics Credit Partners.

The second podcast (click here) is with Bruce Tomlinson, head of alternative strategies at super fund Sunsuper, and Bev Durston, founder and managing director of consultancy Edgehaven. They discuss the distressed cycle and how this one may be different from past cycles.

Doubling up: The equity GPs mulling debt

Do equity and debt financing belong under the same roof? Some managers have long since concluded they they do – think of the likes of KKR, Apollo Global Management and Ares Management in the US, as well as CVC and Permira in Europe.

Nonetheless, successfully combining the two types of finance in one organisation can be a delicate mission due to potential conflicts of interest. Our conversations with market sources indicate, however, that more private equity managers are seriously considering moving into debt as a way of solving portfolio companies’ short-term liquidity issues. See here for our opinion piece on the topic.

Are things looking up?

Partners Group finds a surprising degree of bullishness in the US loan markets in the latest edition of its quarterly loan market commentary, covering Q2 this year.

“A combination of improving investor sentiment, massive governmental market intervention and some promising medical advances toward covid-19 treatment and vaccines prompted a surprising ‘risk on’ mentality to sweep through the US loan market,” the report found.

For more of the report’s findings, click here.

Essentials

DC’s larger slice of smaller pie

M&A bounced back in July for London-based investment bank DC Advisory, as it noted a record 17 mandates in the month as deals put on hold in March and April finally reached completion. However, it estimated that covid-19 has reduced the ‘transactable universe’ by a whopping 70-80 percent. Find out more here.

Proskauer beefs up team 

Proskauer, the New York-based law firm, has added four partners to its private credit practice as it sees strong activity in the business development company market. Frederic Ragucci, Michael Mezzacappa, Marc Friess and Ji Hye You have all joined (see here) as the firm also announced it had advised on more than $1 billion of BDC deals in the first half of 2020.

New recruit for Pemberton

Also adding to its ranks is Pemberton, the pan-European fund manager, which now has an 11-strong credit team thanks to the recruitment of credit analyst Christopher Ellerker. Pemberton recently completed what might suitably be described as a ‘topical’ deal, backing Vernacare in its acquisition of Frontier Medical’s infection prevention business (see here).

LP Watch

Institution: Texas County and District Retirement System
Headquarters: Austin, Texas
AUM: $29.06bn
Allocation to alternatives: 46.7%

Texas County and District Retirement System has agreed to commit $100 million to Atalaya Asset Income Fund V, according to the pension’s July 2020 meeting minutes.

The $29.06 billion US public pension has a 25.0 percent target allocation to private debt that currently stands at 23.9 percent.

The pension fund’s recent commitments are to funds focused on the corporate and real estate sectors within the North America region.


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

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