In a panel this week entitled “Investors’ Top Priorities”, moderated by Proskauer partner Sean Hill, some leading asset class representatives on the LP side shared their thoughts on a range of issues – from fees to fund size and stress management.
Mark Katz, director in the alternative investments group at Ontario Teachers’ Pension Plan, discussed his organisation’s gravitating towards deeper relationships with fewer managers as the asset class matures. OTPP’s average ticket size, he said, was now up to around $250 million, meaning it was typically looking at funds around the $1.5 billion mark.
Bigger funds, Katz pointed out, are more likely to have the resources necessary to be seen as credible substitutes for the banks. “Direct lending GPs are perceived as a bank alternative and that’s fine but you need to be as good as the banks in terms of your platform, your infrastructure, your team, and your ability to structure and monitor deals,” he said. “This tends to take you in the direction of the bigger platforms.”
He added that bigger funds also tended to have more experience in stressed and distressed cycles, something which many of the newer private debt funds lack.
On the topic of fees, Katz said managers were “range bound” with management fees typically between 1.0 and 1.5 percent with carried interest at 15 percent. He expressed a preference for fees on invested rather than committed capital but conceded there was a risk of money being put out as quickly as possible and that you needed “alignment and discipline” from your manager.
He added that, for OTPP, every decision on whether to back a manager had to be taken in the context of whether it would be better for the organisation to invest directly.
Vaughn Brock, investment committee chairman for the Veritas Family Partners family office, said his organisation was not big enough to command discounts on fees, but had a preference for a bigger take on the carry rather than front-end fees. Devitt added that the Policemen’s Fund had aggregated proposals with other Chicago plans to get a group rate.
On the subject of stress, Aoifinn Devitt, chief investment officer of the Policemen’s Annuity and Benefit Fund of Chicago, said a key consideration is how managers react at the first sign of adversity. “Before you get to a level of stress, you want to know about any problems very early and how managers are responding to any early sign of trouble,” she said.
“We have seen from past crises that returns can fall precipitously,” she added, underlining the importance of getting to know a firm’s managers – and their likely levels of resiliency. “I like to visit managers’ offices and look them in the eye and not outsource that to consultants.”
Todd Silverman, a principal at Meketa Investment Group, said investor return expectations had moderated due to the large inflow of capital into the asset class and increasing competition. He also said there was increasing education around the risks in direct lending beyond simply illiquidity – which included possible exposure to idiosyncratic loan risk and underlying volatility.