PDI Capital Structure Forum: What separates European from US LPs

Hundreds of private credit practitioners – from advisors to credit managers to limited partners – gathered at Private Debt Investor’s Capital Structure Forum in London this week to assess the state of Europe’s private debt markets, just weeks after a similar meeting in New York about the US market.

But despite having nearly identical audiences, several key differences emerged in the way European and US LPs approach private credit investments.

US investors must get ‘a premium’ to move into Europe

At the PDI New York Forum, investors expressed reticence about moving into Europe, a rather perplexing region to many American investors: after all, what’s an LP to do when the region is a complex patchwork of laws, courts and banking systems rather than the (relatively) cohesive ­­US market?

Then there’s currency conversion. Michael LeVar of Ascension Investment Management, which helps faith-based institutions with their investments, noted it was important that the firm receive “a premium” because they are a US dollar-denominated investor. At the New York Forum, one attendee said getting to move to Europe is about educating the US LPs.

Timothy Atkinson of Meketa noted that LPs often have a “home bias”, as many of them – notably those under public scrutiny such as public pension plans – want to be seen supporting the local economy. One attendee noted this can be the case in Europe; there may be a regional bias to whatever company the LP is located in.

European co-investments are rare

One large difference between US and European LPs comes to co-investments. US investors, increasingly, are taking on co-investments, while some are going even further and going direct. One US-based LP said his firm has been doing co-investments in private credit since 2012.

A big driver of this is the difficulty is the quick turnaround time required for LPs in Europe. Andrew McCullagh of Hayfin Capital Management explained that because of the competitive nature of the European market it is difficult to guarantee LPs a certain deal with given terms. Even when co-investments may be available, the LP would have a difficult time making a quick decision – sometimes within hours – with limited resources.

In the US, the New Jersey Division of Investment committed $200 million to Owl Rock specifically for co-investments in 2016, while more recently, Riverstone is raising a co-investment sleeve for its Riverstone Credit Partners II fund. In addition, there isn’t a standard practice of underwriting a loan and selling it down to other parties, including LPs, one direct lender noted.

European LPs are a driving force of ESG policies

Investors on the eastern side of the pond are a driving force behind credit managers developing ESG proposals. Katherine Taylor of THL Credit noted that European investors were a key catalyst behind her firm drawing up its ESG policies.

More European credit managers are signatories of the UN’s Principles for Responsible Investing programme, while many of the US-based large publicly traded alternative asset managers are not party to it. US investors can, however, be a positive catalyst for change: divestment from South Africa in the 1980s helped end apartheid in South Africa and, more recently, many US-based investment firms have pledged not to back firearms-related businesses amid a spate of mass shootings.