Large fund commitments from Asian investors like South Korea’s Public Official Benefit Association and Korea Teachers Credit Union in the first quarter of this year have bolstered the war chests of many of the world’s leading private debt managers. However, fundraising figures may be underestimating Asian capital inflow into private debt as investors from the region increasingly look at non-traditional LP commitments into the asset class.
Many of Asia’s most sophisticated investors began tuning their private debt portfolios in 2017.
“If we consider those LPs which have been early movers into private debt, they are seeking to further refine their allocations. How does one complement existing exposures while ideally enhancing the risk-adjusted return from their private debt portfolio?” asks Martin Donnelly, a partner at placement agent First Avenue.
For investors, a separately-managed account is typically the first step. It means a bespoke product that can guarantee an allocation to a more specific strategy than most funds can offer and gives them more influence on that strategy.
“From an investors’ perspective, they would get reassurance in their own mind that they are getting exactly the product they want,” says David Cooper, regional head of EMEA at private debt fund manager IFM Investors, who adds that it is relatively easy to end the SMA, subject to a termination fee, if the GP’s performance disappoints or market conditions change.
Yet SMAs are not yet readily available for all investors. Generally speaking, an SMA will only work if the investor is willing to allocate a minimum of $100 million, so smaller LPs might not have the cheque-writing capability – they may also feel more comfortable getting access to larger deals through a fund that has pooled investors.
“For the time being, private debt funds are still a relatively new concept to Korean LPs, so they may prefer traditional blind-pool funds,” says Dong Hun Jang, chief investment officer at POBA. “But I believe with time and experience, then maybe they can think about SMAs.”
POBA has allocated a total of $120 million to five asset managers for investment in senior debt strategies this year. As the pension fund continues to increase its private debt allocation, Jang is considering the possibility of an SMA but is concerned it would be putting all POBA’s eggs in one GP’s basket.
Damian Jacobs, a partner at international law firm Kirkland & Ellis, adds that SMAs are not being readily offered by the largest private debt sponsors.
“The traditional fund sponsors haven’t generally needed to come up with creative ways to give LPs access to the market,” says Jacobs. “A lot of Asian LPs tend to invest with the larger mega-sponsors, so it can be difficult for them to get separately managed accounts.”
An SMA requires regular communication and trust between the two partners. Not only do more customised services have to be provided, but ineffective communication between the GP and the LP can often cause a delay in decision-making.
As a compromise, hybrid structures are being used by certain fund managers. “What we are seeing is that something is being raised that looks like a traditional blind-pool private debt fund, but also has the characteristics of an SMA,” says Jacobs.
These funds are either being marketed to a limited number of LPs or formed when GPs are approached by a small group of like-minded LPs to put together a specific product for them, such as the recently closed $480 million global infrastructure debt fund raised by IFM Investors and Samsung Asset Management, which is dedicated to Korean investors.
According to Cooper, IFM, as the infrastructure specialist, provides investment services to the fund, while Samsung Asset Management provides the administrative work and day-to-day communication with the group of Korean investors.
“By teaming up with a strong local institution that has great relationships and reputation, they will really help you to navigate through the various people you need to meet and give you access to decision makers,” Cooper adds.
Another route for Asian investors to private debt has been through joint venture partnerships with investment managers. These are similar to SMAs, but in a JV an investor is expected to take on a more active role.
One example would be the $500 million JV launched by Hong Kong-based asset manager Adamas Asset Management and China’s Ping An Trust. By going down this route, Ping An Trust is not only a major capital provider to the GP, it will also leverage its resources and network to support deal sourcing. On the other hand, Adamas, as a private credit specialist, will provide its platform and leverage its experienced team to make investment decisions.
This route is proving popular among Asian managers, says Michael Henningsen, partner at First Avenue, who says most Asia-focused private debt managers are relatively new and therefore find it harder to attract institutional capital via a blind-pool fund.
Many of the largest Asian LPs can also access the Asian market using a proprietary network so tend not to invest in local investment funds as often as they invest in US or European products.
Private debt JV structures remain rare for the large part and it will be some time before traditional blind-pool funds are eclipsed as the primary route to market. But, as the market matures and investors become more sophisticated, higher demand for bespoke services will continue to grow.