Institutionalisation continues apace

Legal & General’s investment in private debt group Pemberton Asset Management earlier this month was a statement of the increasing importance of illiquid debt to large institutional investors. It’s also a sign that private debt funds, especially those keen on direct lending, need a helping hand to make inroads in a market to which banks are slowly returning.

The deal, which saw L&G take a 40 percent stake in Pemberton as well as provide a €250 million initial commitment, follows several other recent tie-ups between private debt funds and large institutions, including Amundi Asset Management’s investment in Tikehau Group.

L&G is, arguably, somewhat behind the curve. Fellow insurer Prudential has been active in direct lending for many years through its M&G Investment Management affiliate.

But late or not, and as we’ve said before, private debt is a logical fit for institutional LPs, particularly insurers. Liquidity is less of a concern, but yield very much is, and with traditional fixed income products underperforming relative to expectations, investors have increasingly looked elsewhere.

Private Debt Investor spoke with Pemberton’s founder and managing director Symon Drake-Brockman about the deal. Drake-Brockman’s background is interesting – he was global head of debt market at RBS, and turned the bank’s fixed income team from an also-ran into a market-leading operation.

He spoke of his ambition to do something similar with Pemberton, by building out its client base not just amongst financial sponsors but also in the corporate community.

Pemberton’s ambition is certainly lofty, as Drake-Brockman says. “We want to establish ourselves as a large scale institutional direct lender in Europe. We spent a considerable amount of time speaking to pension fund and other institutional investors, but ultimately settled on L&G.

“We want to be perceived as a genuine alternative to banks. Family-owned companies tend to be very conservative, so it gives them reassurance to have a well-known, conservative group behind us,” he added.

That last point is an interesting one – for as Drake-Brockman correctly identifies, the SME community can be very reluctant to embrace new sources of funding. Germany’s Mittelstand, for example, has always been notoriously resistant to the charms of private equity, and from a debt perspective, has a seemingly unbreakable bond with the country’s Landesbanks.

Partnering with large institutions with established brands like L&G then is a savvy move, provided of course the firm can retain a degree of autonomy in its investment activity. Drake-Brockman insisted that while L&G’s stake is a sizeable one, its main concern would be on governance rather than day-to-day dealmaking, and with 60 percent of the firm’s equity still in its management team’s hands, it very much remained an independent firm.

Nigel Wilson, chief executive of Legal & General Group, also chimed in. “Bringing together our financial and investment resources with the specialist skills of Pemberton enables us to grow another much-needed asset class. Creating an institutional private placement market for growing mid-caps – as already exists in the US but not here – brings new diversity to corporate funding as well as delivering good risk-adjusted returns for investors.”

While it’s undoubtedly another positive move forward for the development of a thriving alternative funding market in the UK and Europe, the deal also perhaps represents an admission that while private debt funds have enjoyed a period of negligible competition from the banking community – at least as far as the mid-market is concerned – that is starting to change.

“The banking system has certainly stabilised and they’re being more proactive now,” admits Drake-Brockman, who nonetheless believes that Europe’s banking community is still too large and will continue to contract.

“The private debt markets in Europe will take some time to recalibrate their yield and return expectations [in response to the current interest rate environment] and demonstrate to borrowers that it is a reliable source of financing.”

So while Pemberton’s tie-up with L&G is one respect an aggressive move, it’s very much a defensive play on the other. PDI has argued before that private debt funds must either find themselves a fertile niche to occupy, or build significant scale (and do so relatively quickly) in order to thrive. Pemberton, it seems, has chosen the latter route.