As alternatives have gone mainstream, so has the idea of permanent capital. What kind of asset manager wouldn’t like a readily available pool of capital reliably generating fee income and serving as a stable AUM base?
Permanent capital is one of the reasons business development companies have become popular among alternative lenders in the US. There are currently more than $110 billion of assets held by US public and private BDCs. For some credit managers, it’s the centrepiece of their direct lending product, rather than commingled private funds.
“There’s a general recognition now that there is this permanent capital alternative out there which has become much more prevalent in the last few years,” Julie Corelli, partner at law firm Pepper Hamilton, told Private Debt Investor in our September Deep Dive. “We’ve set up numerous permanent-capital vehicles for our clients – more in the last five years than in the whole prior 10 years.”
There are also interval funds, which are a way of giving investors periodic liquidity but still enabling them to access alternative assets. These vehicles can invest in different assets, from real estate to credit. Among the managers to have adopted such a vehicle were The Carlyle Group and OppenheimerFunds, which launched a joint venture interval fund targeting high-net-worth investors.
Yet the permanent capital play is about more than fees and asset-gathering.
If private credit is to grow it will need to tap new constituencies, and the next one will be retail investors. Given the access that interval funds and BDCs bring, permanent capital can be an avenue through which private debt can grow.
The Cliffwater Corporate Lending Fund is one example. The vehicle, managed by LP advisory firm Cliffwater, will partner with credit managers from across the corporate mid-market lending spectrum.
“Convenience is a big part of it,” chief executive Steve Nesbitt said. “This is particularly true with the investor group we are seeking.
In the US, the Investment Act of 1940 regulates both types of vehicles, which means there is likely to be quite a bit of compliance work. But the benefits could outweigh the regulatory costs.
Private credit has become an institutional asset class. Korea’s POBA is searching for five direct lending managers; and, in July, northern California’s Alameda County Employees’ Retirement Association became one of the latest institutions to establish a private credit bucket.
Headaches aside, permanent capital is more than just a fee-generating pool of ‘forever’ capital. It’s a way to access a new investor base.