Loan Note: The rise of the non-sponsored market; economic changes for continuation funds

Our April cover story examines prospects for the non-sponsored market. Plus: the drop in fees for continuation vehicles; and growing demand for private debt from insurers. Here's today's brief for our valued subscribers only. 

They said it

“Family offices need to deliver stable and predictable income and that is driving increased interest in private debt”

Ben Churchill, chief operating officer at Aeon Investments, commenting on a survey by the firm that found 90 percent of respondents expected family offices to increase demand for illiquid assets such as private debt over the next two years

First look

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First and foremost, we would like to wish all our Loan Note readers an enjoyable and relaxing holiday period. We will not be running our Monday edition of Loan Note next week – we’ll return on Thursday 13 April.

In the meantime, you will find plenty to contemplate in the April edition of PDI, including a cover story examining the greater interest being shown in the non-sponsored market. Due to the somewhat ‘below the radar’ nature of some non-sponsored transactions, there is a view that the data doesn’t provide an accurate picture of their prevalence. If you took that data at face value, you’d conclude that the non-sponsored market is only around one-10th of the size of the sponsored market.

But whatever its current size, there’s no doubt that – as the M&A market slows – it’s set to become bigger. With banks once again struggling to meet demand for financing from growing companies, private debt funds are looking to step up – even though, as the feature makes clear, non-sponsored deals make unique demands that not all funds will be able to easily accommodate.

Continuation funds see fees drop
Continuation vehicle fees are being driven down according to the latest report from the secondaries team at law firm Paul Hastings.

In its evaluation of CVs it advised on between Q1 2022 and Q1 2023, the firm found that most such vehicles charged a management fee between 0.5 percent and 1.0 percent. In its inaugural report last year, it transpired that 68 percent of CVs had a management fee of 1.0 percent or higher. Furthermore, fewer CVs are now paying so-called “super carry” to their sponsors – carry of more than the traditional 20 percent maximum.

“Market dynamics have shifted somewhat… with secondaries funds investing in CVs being more selective,” said Ted Craig, private investment funds partner in Paul Hastings’ London office. “Terms – and economic terms in particular – have moved in their favour.”

Paul Hastings found that the average term of a CV had increased slightly over the last year from 5.2 years to 5.3 years – increasing to 7.2 years and 7.9 years when extensions were included.

Insurers gravitate to debt
Insurance companies are set to inject more capital into the private debt market in the coming year. Just over 40 percent of 343 insurance company CIOs and CFOs plan to increase their allocations to private corporate debt over the next 12 months, according to a report by Goldman Sachs Asset Management.

A further 30 percent plan to maintain their allocation. A majority, 51 percent of respondents, said they will look to increase their allocations to private assets in the next year, with 29 percent indicating they plan to allocate more to private equity in particular.

Despite market uncertainty, GSAM believes there are particular opportunities in credit “where increasingly attractive yields in fixed income have lured back insurance investors”, Michael Siegel, global head of insurance asset management and liquidity solutions, said in a statement. The firm also expects insurers to continue building their positions in private asset classes, including private equity, “as they seek to diversify portfolios and take advantage of expanding illiquidity premiums”.


Curing European inflation proves costly
Persistently high inflation means interest rates in Europe will also remain at high levels for potentially two more years, according to a study from S&P Global Ratings (login required).

The report says that pressures on the European economy have grown due to the lack of confidence in the banking sector following the regional banking issues in the US and the forced takeover of Credit Suisse. Tighter financing conditions could uncover pockets of financial vulnerability and make refinancing difficult for some companies, according to S&P.

S&P says other threats to Europe’s credit quality include the possibility of recession if consumer confidence falls and unemployment rises, and the possible expansion and escalation of the Russia-Ukraine conflict.

Antares brings in liquid credit MD
Fund manager Antares Capital has announced the appointment of Andrew Stern as managing director, including serving as a portfolio manager and trader for the firm’s liquid credit strategy. He also becomes a member of the firm’s liquid credit investment committee.

Stern has more than two decades of experience overseeing trading activities and managing senior secured loan, high yield bond and distressed debt strategies. He most recently served as managing director, portfolio manager and trader at Apex Credit Partners, part of the asset management platform of Jefferies Finance, where he was responsible for managing more than $5 billion across 18 collateralised loan obligation vehicles and various warehouse facilities.

Madhok heads to New York for global Citi role
Rajat Madhok, formerly the Asia-Pacific head of Citi Commercial Bank, is the new global head of Citi Commercial Bank Credit Risk, according to a statement from the bank.

Madhok, currently stationed in Hong Kong, is relocating to New York. He will have broad risk management oversight, including wholesale credit risk, for Citi Commercial.

This is part of a wider trend. Citi has moved at least three other of its Asia-based senior bankers to global/US-based roles. Valentin Valderrabano, formerly the executive vice-president of consumer banking in South Korea, headed to New York in 2022 to serve as chief operating officer of Citi Global Wealth. Anand Selva, who spent much of his Citi career in India, and Singapore, in 2022 became the CEO of Citi’s Personal Banking and Wealth Management, in New York. Gonzalo Luchetti, former consumer bank head of Asia and EMEA for Citi, in 2021 became the CEO of US Consumer Bank.

Madhok first joined Citi in 1996 in India. He held a number of roles there, becoming head of Citi Commercial Bank in India in 2011.

He became Asia-Pacific head in 2019. That post involves conducting business across 11 markets. In a statement, Citi credits him with delivering “consistent growth for the firm despite the challenging operating environment over the past few years”.

Citi was a leading player (with Deutsche Bank) in a consortium that, in February, launched the first five-year commercial mortgage-backed securities conduit deal.

LP watch

Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $242.3 billion

New York State Common Retirement Fund (NYSCRF) has committed $15 million to Raith Real Estate Fund III, which is managed by Raith Capital Partners.

Founded in 2012, Raith Capital Partners is a New York-based asset management firm focused on distressed loans and commercial mortgage-backed securities across the US.

Raith Capital Partners’ third flagship distressed fund seeks to acquire mainly North American businesses. NYSCRF’s recent private debt commitments have been focused on North American vehicles with various strategies.

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