Loan Note: Venture debt on the rise in Asia-Pacific; managers optimistic about fundraising

Aletheia notes the growth of venture debt in Asia-Pacific. Plus: the Ocorian survey that's optimistic about fundraising; and why pensions favour private alternatives for their long-term strategies. Here's today's brief for our valued subscribers only. 

They said it

“Throughout the last 12 months, client demand for private market strategies has remained very high – despite the ‘denominator effect’ – although appetite for real estate declined from mid-2022 onwards” 

Kathryn Saklatvala, head of investment content at consultant Bfinance, following the firm’s latest quarterly Manager Intelligence and Market Trends report

First look

Aletheia makes case for venture debt in emerging markets
Venture debt is at the heart of private debt opportunities in the near future in east Asia, and in the world’s emerging markets more generally, according to Hong Kong-based investment advisor Aletheia.

Aletheia (a name taken from an ancient Greek term for truth, or disclosure) has posted a Private Credit Sector Report. Aletheia lists several of the main players in venture debt in  emerging markets, including Genesis Alternative Ventures, of Singapore, which launched Genesis Alternative Ventures II, with a focus on east and southeast Asia, last year.

As a case study in the potential of venture debt in Asian markets, the paper cites PayTM, (its name an acronym for “pay through mobile”) a company that it says is now “one of the largest fintech companies in the world”.

PayTM is an India-based digital payments company founded in 2010. It showed initial promise but by 2016, had stagnated. It addressed its difficulties with the aid of an infusion of $30 million in venture debt.

At the time of that infusion, PayTM’s valuation was $4.8 billion. With the money received, it hired new employees and expanded its research and development.

PayTM held its initial public offering in November 2021, raising $2.2 billion for 11 percent of its equity: in other words, at a valuation of $20 billion. The difference between $4.8 billion and $20 billion is a measure of the potential of private debt in general and venture debt in particular.

PayTM could increase its 2016 value by more than four times in five years because venture debt allows the managers of a firm to receive vital new capital without diluting the managing group’s ownership and control, and without the costs of a full equity raise.

Survey indicates fundraising revival
Existing concerns about the fundraising environment were further fuelled by this year’s first-quarter figures, which showed fundraising down across the alternative assets universe. While the decline in private debt was not as steep as elsewhere, it was nonetheless the least fruitful first quarter for many years. But, if a new survey from fund administration specialist Ocorian proves well-founded, the downturn should only be a brief blip.

The firm’s survey of alternative fund managers found 81 percent predicting that fundraising levels would be higher over the next 18 months than the last 18, with 69 percent expecting a slightly higher level and 12 percent dramatically higher. Only 1 percent tipped the level to be lower, while 18 percent thought it would be about the same.

An almost unanimous number (98 percent) said they were confident in the ability of alternative fund managers to successfully launch new funds over the next 18 months, with 52 percent very confident and 46 percent quite confident. Another overwhelming number – 91 percent – thought there would be more alternative asset fund launches this year than last year.

Asked to predict which asset classes would benefit the most from fundraising over the next 18 months (more than one could be picked), 73 percent said private equity, followed by infrastructure (68 percent), real estate (65 percent), private debt (59 percent) and hedge funds (49 percent).

Pensions’ long-term switch to private alternatives
Continuing the fundraising theme but considering longer timeframes, research from investment and advisory firm Cliffwater reveals the remarkable growth of pensions’ illiquid private asset allocations in recent years.

It finds that the $3 trillion US state pension market has increased its exposure to alternatives by 10 percent over the last five years to account for 41 percent of total state pension assets by the end of June last year.

But it also reveals the starkly different fortunes of private and public markets with the likes of private equity, real estate, real assets and private debt rising by 11 percent over a five-year period, while liquid alternatives such as hedge funds, commodities and managed futures declined by 1 percent.

This is none too surprising when performance is considered. According to Cliffwater, state pensions saw private alternatives deliver 11.9 percent in the 10 years ending June last year, while public markets delivered 6.8 percent and liquid alternatives 2.7 percent.

“Even if liquid alternatives reduce short-term risk, the give-up in long-term return may be too high a price for institutions,” Cliffwater notes.

It goes on to add: “The emergence of private debt within institutional portfolios, while still at modest 3.6 percent allocation levels, has perhaps the greatest potential for growth because of its high and persistent yields and lack of interest rate risk.”


Pietrzak takes reins at KKR credit unit as Boulanger leaves
Dan Pietrzak has become global head of private credit at KKR following the departure of Matthieu Boulanger, who the firm said was leaving “to pursue other opportunities”. Pietrzak and Boulanger had previously been co-heads of private credit.

Pietrzak has more than 20 years of investment experience and is also co-president and chief investment officer of FS KKR Corp, the publicly traded business development company. The private credit business has grown from $8 billion in assets under management to $76 billion since Pietrzak joined KKR in 2016.

In addition to Pietrzak’s new role, KKR announced that Michael Small, a London-based partner who is a portfolio manager in the firm’s global junior debt strategy, will take additional responsibility for managing KKR’s direct lending activities in Europe.

Small has more than 20 years of investing experience and was a partner at Park Square Capital before joining KKR in 2021.

Italy’s Europa brings in former Pillarstone exec
Europa Investimenti, a Milan-based fund manager specialising in non-performing exposures and distress, has appointed Roberto Rondelli as head of going concern strategies for Italy.

He will head up the going concern division, which supports companies struggling from a financial and operational point of view but which have viable and sustainable business models.

A specialist in private equity, special situations and turnarounds, Rondelli worked at various banks and advisory firms in London and Milan before joining KKR in 2015, where he helped create restructuring platform Pillarstone, leading the origination and execution of investments in credit and turnarounds as well as managing portfolio companies.

He was a member of the Pillarstone investment committee, board of directors and board member of numerous companies and investment vehicles.

As part of his role, Rondelli will develop Europa’s “unlikely to pay” single-name investment strategy. Supported by senior manager Alessandro Zattini, he will grow the team to address the needs of what is perceived to be an expanding market.

Europa is the adviser to UK-based fund manager Arrow Global’s Arrow Credit Opportunities I and II funds. The former closed on €1.7 billion in November 2023 while the latter closed on €2.75 billion in March this year.

LP watch

Institution: Arizona Public Safety Personnel Retirement System
Headquarters: Phoenix, US
AUM: $18.7 billion
Allocation to private debt: 12.5%

In a recent board meeting, Arizona Public Safety Personnel Retirement System (PSPRS) proposed an aggressive private debt pacing plan for 2023. By Q1 2024, it projects an estimated 20 percent target allocation to private debt.

As of 31 March, its private debt allocation was 12.5 percent, with a target allocation of 13.9 percent.

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