Comment: The Agent

So far this year, more private debt managers have had to give up fundraising than have actually closed new funds. Something has to change, writes James Newsome.

The private debt market is here for good. But that doesn’t mean it is yet a good market. There are too many managers with unrealistic expectations chasing confused investors. All of us need to make some changes to the way we work if this market is going to clear its enormous log-jam.

The demand for corporate credit in the developed and emerging markets is so great and banking systems are so shaken that new transmission mechanisms for capital are urgently required. 

Many of the new fund-based transmission mechanisms will, if they grow sustainably, prove to be more appropriate for borrowers and capital providers than the highly leveraged banks of the west and Asia have proved to be over recent decades.

But right now our market is labouring under a severe disequilibrium. So far this year more private debt managers have had to give up fundraising than have actually closed new funds. For investors this means confusion and many are still wondering how to invest in our sector even though funds have been earmarked.

All of us need to take a step back, have a think and adapt to the realities of what it takes to build trust in this new era.

First, advisors and placement agents like myself need to serve both our investor and asset manager clients better if we are going to help build this market. Private debt has so many myriad subsectors – unitranche, second lien loans, sponsored mezzanine, growth debt, to name but a few – and so many geographical quirks that a placement agent cannot serve either buyers or sellers unless he or she knows their way around this landscape. That’s why we have chosen to specialise.

But as well as having comprehensive knowledge, placement agents need to have well-thought-out opinions about where the market is going and which strategies make sense. Otherwise they add no value and do not deserve to be paid the kind of fees that we have become accustomed to. In a nutshell, we don’t deserve a reputation if we don’t put that reputation on the line.

GPs also have to think about how they approach the market. The sense of entitlement that the asset management industry started to give off in the noughties has upset everybody. First, managers have to remember the assets they manage are actually their clients’ funds, not the financial instruments they buy.

To build a dialogue with investors that leads to a well-subscribed and closed fund, the manager needs to show a passion and intensity for what they do – whether it’s lending money, selecting loans, negotiating buyouts or designing turnarounds. They need to show the team they have selected is made up of the best possible people for that job and they live and breathe the market on a daily basis.

Investors also need to adapt to the dynamics of this new market. One of the temptations of investors in such a buyers’ market is to resort to “box-ticking”. This may lead an investor to commit only to managers with a certain level of AUM. The danger is they may end up doubling exposures to the same group of large buyout deals. If they look at sector-based managers in healthcare debt or energy and infrastructure debt, but make sure they are dealing with best-in-class teams then investors will build a more resilient and higher-returning portfolio.

Watching managers come to the private debt market right now is like seeing hundreds of leaping salmon at a waterfall. The strong, skilful and lucky few that win investor commitments quickly enough to make it over the top are encouraging whole schools of others to attempt the leap. Unless we all make changes, many new managers and some established firms with billions under management will fail to negotiate the waterfall, and will return exhausted to running existing portfolios and seeking bespoke accounts. Many will have to shut their doors.

James Newsome is managing partner of placement agent Avebury Capital Partners.