Directing the way

As more limited partners get into the business of deploying capital directly, it’s important to make sure it’s a win-win for both GPs and LPs, Andrew Hedlund writes

The Alaska Permanent Fund Corporation has joined a growing number of limited partners doing direct credit investing, with the sovereign wealth fund having announced the creation of a $1 billion portfolio and a $500 million co-investment vehicle.

The direct investment effort, dubbed Alaska Direct Alternative Credit, will include a liquid book of internally managed, non-investment grade, high-yield exchange-traded funds, individual bonds and cash, as well as a private portfolio of co-investments made alongside APFC’s private credit managers.

The development represents a maturation of the asset class. LPs acting as general partners isn’t new – many of Canada’s largest pension plans play both roles – but in the US, the effort is not as developed, at least in credit.

APFC has been a direct investor for years, taking stakes in companies and acquiring real estate. Notably, it took a stake in Seattle-based Juno Therapeutics with Celgene in a deal that valued Juno at $9 billion. After the deal closed in March, APFC reported a $599 million realisation, according to documents from the sovereign wealth fund’s May meeting.

The growth of LPs bypassing private credit managers has benefits for both general partners and the ultimate loan borrowers. For the former, there’s more potential partners for joint ventures, and, for the latter, there are more potential lenders.

The University of California’s board of regents ventured into direct private credit investing in 2014 when it formed a $200 million partnership with Goldman Sachs BDC, each investing $100 million. UC created a similar partnership with Owl Rock Capital Corporation last year. The portfolios for the JVs stood at $92.1 million and $408.7 million fair value, respectively, as of 31 March.

GP lookalike

More LPs going straight to potential borrowers means more financing sources for businesses. The State of Wisconsin Investment Board lends to businesses based in the state and invests in both senior and junior debt. In fact, SWIB’s webpage detailing its loan product looks like something found on a GP’s site. The pension fund’s portfolio has a market value of $512.98 million.

It’s not just corporate credit, either. The New York State Teachers’ Retirement System is a large real estate lender. Moreover, the Albany-based pension fund isn’t writing small cheques – PGIM Real Estate and NYSTRS each invested $550 million to bankroll a portfolio of 146 industrial properties. The direct mortgage portfolio is $3.24 billion.

One credit manager sounded a note of caution, though. This person’s firm has been approached by LPs wanting to “partner” in a manner that would involve the firm originating deals and the LP making the full investment. Broken down, the LPs would essentially siphon dealflow from the firm, thus making the partnership element somewhat questionable.

This piece has been adapted from a PDI contribution to The Lead Left, a weekly industry newsletter distributed by Randy Schwimmer, a senior managing director and head of origination at Churchill Asset Management