LP View: More origination, less syndication please

As opportunities in the private debt market grow, it is important that they come with a USP, says Mark Hedges, CIO of the Nationwide Pension Fund.

“We have no plans to increase our exposure to private debt at present,” Mark Hedges, chief investment officer at the Nationwide Pension Fund, one of the UK’s largest pension fund schemes, tells PDI, but “we believe this is a sector that will grow”.

Hedges view is one that has been widely echoed since the majority of the UK electorate voted in favour of the uncertainty of a post-Brexit universe than the status quo of European Union membership. While the future is uncertain, the picture is not necessarily gloomy for the asset class.

PDI figures show a pick-up in fundraising in the second quarter of 2016, more than doubling the amount raised in the first quarter. Private debt funds are able to wring out institutional money and deploy at a sizeable rate, despite the unclear macroeconomic picture. Just 24 hours after the EU vote, PDI reported that Alcentra reached an interim close on its European direct lending fund of £2 billion (€2.3 billion, $2.7 billion). Earlier this month, it was found that Crescent was on track to raise £2.5 billion for its own European-focused mezzanine fund.

The Nationwide Pension Fund manages the retirement scheme for a number of employees and ex-employees of one of the UK’s largest mortgage lenders. Hedges is an experienced executive who has spent more than three decades at the firm. As CIO, he is responsible for managing the firm’s assets under management, which are north of £4 billion, working on both liquid and illiquid investments.

The fund’s portfolio covers exposures to private equity, infrastructure, private debt and real estate. Hedges says that typical investment sizes range between £25 million and £50 million. And while he is unsure how the balance of the portfolio may change as a result of Brexit, Hedges notes with confidence that UK private equity will look less attractive in a recessionary environment.

But for debt funds trying to catch Hedges’ eyes, a unique selling point is necessary. Ninety percent of the proposals that cross his desk are rejected, he says.

“We’re quite selective and we like to work with niche players. Firms that offer a unique selling point such as originating their own loans because they are able to offer high returns,” he says.

He continues: “With firms that provide syndicated products, you’re relying on the banks and I prefer to deal with people driving the deal because they are in the driving seat on the details of the transaction.”

However, he is not dogmatic about the strategy. Where the opportunity suits Hedges’ expectations, he will work with syndicated players. But he notes that there is an increasing number of new entrants into the market and the majority of them favour providing syndicated products offering returns of between 4 and 6 percent, which simply does not quench the thirst of the fund, which is seeking higher yields. “I personally just feel the risk/return and fee cost equation of these funds makes them look expensive,” he says.

French-born author Anais Nin once said that “in chaos, there is fertility” and the feeling across many GPs and LPs is that the creation of new opportunities to invest in private debt may increase as a result of the Brexit turmoil. While many in the industry were overwhelmingly in favour of staying in the EU, the talk is now of seizing the opportunities that may arise out of the situation. Distressed debt managers are said to be already licking their lips at the prospect of a downturn in the economy while others expect banks to retrench further.

As the asset class continues to grow in popularity, more firms are entering the market. But for experienced investors such as Hedges, those who go the extra mile in structuring their own loans will find themselves in the 10 percent of proposals that catch his attention.