Loan Note: UK investors shifting from private markets to fixed income; new manager launched in US

UK investors are shifting their allocations from private markets to fixed income, a bfinance poll finds. Plus: a new firm is launched for the US lower mid-market; and defaults are going up, including in the highly favoured healthcare sector. Here's today's brief for our valued subscribers only.

They said it

“One in seven listed companies in the global real estate sector is at risk of being classified as a zombie company, ominously mirroring the years before the financial crisis of 2008/09”

Christian Feldmann, a partner at consultants Kearney, on a report from the firm showing the rise of “zombie” companies, unable to meet growing borrowing costs.

First look

A larger slice: fixed income is back in favour among UK investors (Source: Getty)

bfinance notes shift from private markets to fixed income
In a snap poll of UK investors carried out in mid-October, consultants bfinance noted a marked change in allocation priorities, with fixed income favoured over private markets – especially for corporate pensions. The findings were sent in an email.

The poll found 24 percent of all UK investors expecting to reduce their private markets exposure over the next 18 months, compared with an equivalent figure of 4 percent for the previous month. Over the same period, those expecting to increase their fixed income exposure increased from 25 percent to 29 percent.

For UK corporate pensions specifically, 80 percent were expecting to reduce their private markets exposure over the next 18 months, with 60 percent expecting to increase their fixed income allocation.

The trend is mirrored in private debt. In early to mid-September, more than 40 percent of all UK investors were looking to increase their private debt allocations over the next 18 months, with around 20 percent looking to decrease them. By the time of the October poll, less than 30 percent were planning an increase, compared with around 35 percent planning a decrease.

The changes come amid a background of UK pensions improving their funding positions. Asked about their asset-liability balances (funding ratios), 56 percent of UK corporate pensions said these were getting better in mid-October, compared with 47 percent of UK corporate pensions and 40 percent of global investors in September.

Three veterans form Z2 for US lower mid-market
A new alternative investment management firm looking to lend to non-sponsored, lower mid-market North American businesses, launched this week.

The firm, known as Z2 Investment Management, founded by Scott Gold, Bobby Barrett and Jake Sussman, will combine debt and equity investments. Gold, managing partner, was head of corporate private investments at Arena Investors. Before Arena, he was a senior vice-president and headed the direct lending strategy at Alcentra Capital, a subsidiary of BNY Mellon.

Sussman was most recently a director of corporate private investments at Arena, where he worked with Gold. Sussman was responsible for deal sourcing. He conducted and oversaw due diligence and portfolio monitoring. Sussman’s LinkedIn profile also includes stints at ArrowMark Partners, Golub Capital, UBS Investment Bank and Chanin Capital.

According to his LinkedIn profile, Barrett was, until June 2022, a managing director of Angelo Gordon, responsible for “targeting the conventional and renewable energy markets”. Before Angelo Gordon he was a managing director and executive vice-president at Basin Holdings, a private industrial holdings company that owns and operates manufacturing and energy service companies.

Gold explained Z2’s strategy in a statement: “We saw a void in the direct lending sector serving lower middle market private companies’ needs for growth capital while maintaining their independence.” Specifically, Z2 – named for an endurance athletes’ term for the optimal zone for a heart rate – offers its mostly private portfolio companies a targeted investment size of between $10 million and $100 million.

In the current environment, with high interest rates and low growth, private companies in the lower mid-market are often forced to choose between abandoning promising avenues for growth or turning over the reins of the company to institutional equity capital, Z2 said. It offers them a third way – large proprietary sourcing channels that allow for privately negotiated direct loans and opportunistic equity investment.

Essentials

Defaults on the rise
Law firm Proskauer’s quarterly Default Index, which tracks senior secured and unitranche loans, shows an overall default rate of 1.56 percent for the third quarter, an increase from 1.18 percent in the second quarter, representing the first notable increase over the past 18 months.

The report showed a significant uptick in defaults in the healthcare and consumer goods and services sectors, the first increase in defaults seen in these sectors since Q4 2020.

“Given the cyclical nature of the economy and the uncertainty around timing and duration of a recession, we are not surprised to see an increase in the default rate, especially in consumer-facing sectors where the pressure continues to grow,” said Stephen Boyko, co-chair of Proskauer’s Private Credit Group.

Join us in Seoul and Tokyo
With the headwinds facing Western economies, Asia-Pacific is once again under scrutiny for investors considering whether to re-allocate resources to a part of the world where demand for new sources of finance is increasing.

This makes our latest Private Debt Investor events extremely timely, as we visit Seoul on 8 November and Tokyo on 10 November for our Japan Korea Week 2022. The event features our usual mix of keynote interviews, panels and presentations with industry leaders based in and outside the region. Make sure to book your place as soon as you can.

LP watch

Institution: Virginia Retirement SystemHeadquarters: Richmond, USAUM: $97 billionAllocation to alternatives: n/a

Virginia Retirement System has confirmed it committed $250 million to Apollo Global Management‘s latest finance fund in April 2022, according to its October Board of Trustees committee meeting.

Apollo European Principal Finance Fund IV is a private equity debt fund that targets the financial services sector in Western Europe. The fund was launched in late 2021, following Fund III, which closed in 2017 on $4.6 billion.

VRS’s credit strategy portfolio allocation currently stands at 14.9 percent – overallocated to a target of 14 percent. The value of the portfolio is $14.5 billion. The pension typically invests in the corporate sector with distressed debt.


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