PDI Forum highlights the nuances of a growing asset class

LPs and GPs at the second annual Private Debt Investor Forum in New York agreed that private debt is increasingly becoming a permanent part of institutional portfolios. Now it’s time to get to work on the details of how it works and where the risks lie.

Speakers at the PDI Forum in New York this week agreed that private debt is becoming a permanent part of institutional portfolios, not just an opportunistic play. As such, limited partners (LPs) need to do the work on how the asset class, and its various underlying strategies, works; where the risks lie and how to look for managers.

As with any growing sector, LP views’ on strategy preferences, how they can access the asset class and what they look for in managers diverges. Several large Canadian institutions speaking on a panel yesterday (30 September) had contrasting opinions on how to tap into the asset class. Ontario Power Generation, for instance, recently began investing in private debt as an offshoot of its real assets portfolio and is building up its allocation to the sector. The Caisse de Depot et Placement de Quebec, on the other hand, has had a leveraged finance group in-house doing direct deals for 18 years. While others, like the Ontario Teachers Pension Plan and Ascension Investment Management, look for managers as part of their fixed-income or private equity portfolios.

Speaking on a panel about ‘The New Face of Middle-Market Lending’, Ted Koenig, chief executive of Monroe Capital, said investors are increasingly funding private debt allocations from their fixed-income buckets, and many are forming private debt allocations quickly. “Today private debt is its own asset class, not just a subset of a private equity portfolio, that’s a huge change,” Koenig said.

Unitranche has become such a popular instrument in the private debt landscape that it garnered its own panel at this year’s PDI Forum, with Bill Brady, a partner at law firm Proskaeur, moderating a panel on “Understanding Unitranche,” with speakers from Sankaty Advisors, GSO and the Goldman Sachs BDC. The managers discussed the many guises of a unitranche agreement, and the way they benefit lenders, borrowers and sponsors. “A lot of it is about: whose deal is it? Who is bringing whom into the room and who can kick whom out?” Brady said, explaining that not all unitranche partnerships are created equal, as PDI also noted in a feature on joint ventures in the October magazine issue.

While unitranche has been all the rage, mezzanine has fallen out of favor amongst many private debt practitioners. In a poll question that asked which sector in private debt looks the least attractive right now, mezzanine came in at 60 percent. However, there are still many managers handling the strategy that tell PDI they can find plenty of investment opportunities. Some of these managers are going to take the stage on a mezzanine panel today and try to banish the bad rap mezzanine has gotten of late.

Other speakers and managers that talked to PDI on the sidelines are concerned about how late we are in the credit cycle, and how to accurately pivot their portfolios for when it turns.

Several panelists and attendees also brought up concerns about the continuing of falling valuations in BDC stocks and what this means for the sector. Several big-name firms, including representatives from Ares, TPG, KKR and Goldman Sachs are going to take the stage today to address the issues in the BDC space, in a panel moderated by Wells Fargo’s Jonathan Bock.

And for a US event, the questions and topics turned to Europe so many times to make it clear that it’s not a bifurcated world or asset class. Many US managers are also handling European strategies, or looking for investors there, and vice versa. Later this month, the European experts will take the stage at the Capital Structure Forum in London to discuss the private debt investment landscape. Stay tuned for more coverage of these and other events.