Bohill is reflecting on what he sees as the deficiencies of the private debt funds of funds model. Apart from some notable exceptions, the model has struggled to gain traction with investors – as reported in last month’s issue of PDI – and he believes this has a lot to do with the ‘double fee layer’ which is less suited to private debt, where returns generally are lower than in private equity.
“When you have the wind at your back, you can get away with that sort of thing, but it’s imperative that in private debt things should be very different. It should be about risk mitigation, seeing out cycles and making consistent allocations.”
He argues that this is particularly important now that most of the capital being diverted into private debt is coming from fixed income allocations rather than private equity. “As an investor in private debt you want investment efficiency, getting to a comfortable level of allocation quickly, defensively and safely,” he adds. “It’s incredibly fee-sensitive.”
Stepstone’s private debt business was launched last year as StepStone Private Debt when the business acquired Swiss Capital Alternative Investments. The move brought together StepStone’s global reach and institutional client network with Swiss Capital’s existing private debt and hedge fund strategies.
Bohill says that, rather than a funds of funds approach, StepStone Private Debt offers what he describes as a “network of SMAs [separately managed accounts] where we deploy large amounts of capital with selected brand-name managers”. Crucially, he says, the capital gets deployed quicker than it would through a standard fund model – generally within around 15 to 18 months.
“The capital is in the ground for longer and you get a better return. It doesn’t get distributed quickly back to the investor, we just keep topping up the commitments. If the fund managers are doing their job, investors will want to keep committing.”
He adds that investor capital is often not fully put to work, particularly given increasing use of fund finance facilities. “A lot of funds fail to reach 85 percent of capital committed, which is a material amount of leakage. Our approach is all about investment efficiency.”
And then there’s the fee issues. “With our model, there is no double fee layer,” says Bohill. “That’s very critical. Investors get diversification, access to quality managers and thorough due diligence but it’s costless versus going direct. If it wasn’t, then conversations would tend to be short.”
hill declines to state exactly how the economics work for StepStone, but insists that with the LP getting a good deal and the GP obtaining long-term, deployable capital, “there is economics in the middle of that for us”.