‘Private debt funds are highly adaptive’

There’s no doubting the challenge posed by covid-19, but the pandemic is demonstrating the resilience of the asset class, says Doug Hart, CEO of Alter Domus.

This article is sponsored by Alter Domus

With much of the world in various stages of lockdown, the fallout from the closure of large parts of the economy in many countries is creating both challenges and opportunities for private debt funds. A recent Proskauer survey of 112 private credit clients found that 97 percent of respondents would be prepared to provide additional capital to existing borrowers and that 86 percent are seeking new lending opportunities. This – combined with ongoing LP information requests and continued fundraisings, albeit at much lower levels than in recent years – means fund administrators are being kept busy.

We caught up with Doug Hart, CEO of Alter Domus, to discuss how his firm and its clients have moved towards business as usual and what we might see over the longer term.

Doug Hart

How has your business adapted to the new environment?

As an international business with a growing Asia-Pacific presence, our offices there offered us a window into what would be needed elsewhere. These offices were impacted up to 90 days earlier than our US and European bases. Our IT teams had to work quickly to move staff to remote working – that meant buying monitors, ensuring laptops had good remote access to our systems and making sure our internal communications were robust. The situation there meant we had a real-life test of how the operating environment needed to be designed, and we learned lessons from that.

Like many of our clients, we never anticipated that over 90 percent of our staff would need to work remotely, that borders would be shut down across our European footprint or that the situation in the US would be managed on a state-by-state basis. It meant we had to get an understanding of the impact of this quickly to see how the different capabilities and products we offer would be affected in different jurisdictions. Each of the 30 countries in which we operate has responded slightly differently, and each US state also has a different response. This was complex to manage early on, but actually it has shown us that our infrastructure is stronger than we had thought. We accomplished the shift to remote working with minimal hiccups and continue providing business-as-usual client service.

This has happened concurrently with your rebrand. Can you tell us about this?

We’ve had a soft launch of rebranding the Cortland Capital Markets business since the merger with Alter Domus in 2018, as we have connected the two businesses using a light touch. However, this year, we have accelerated the process so that all teams will be working under the Alter Domus brand by the end of 2020.

We’ve taken this two-step approach because the Cortland brand is very well recognised in the debt capital markets and has permeated this part of the market for the past 10 years, so an immediate rebrand wasn’t appropriate. Yet, at the same time, the brand is not so distributed in other parts of the market – in private equity, for example.

This year’s rebrand will bring together all our capabilities under one roof – the Alter Domus brand – and that will help clients across different segments take advantage of our full range of capabilities. This should be helpful for those firms seeking to consolidate the number of service providers they use.

Private debt fundraising is sharply down this year. How are you seeing this in your business?

There is no doubt that fundraising for private debt funds has been down quite sharply during 2020, and what comes next really depends on the type of recovery we see. We are engaging with our clients and there are differing views as to whether we’ll see a V, a U, an extended U or even an L-shaped recovery.

Most of our clients are multi-sector and I think there will be a big divergence between how different industries come out of the crisis. If we compare energy with manufacturing, for example, both are currently having a difficult time, but their respective recovery trajectories look very different.

Yet all this is happening against a backdrop of a private debt industry that has raised significant amounts of capital over the past few years. Many funds have a lot still to deploy and we didn’t really see deployment reduce in the early part of 2020. That said, we are working with some clients on new fund launches and I think what we’ll see for some time to come is the larger, proven firms looking to raise bigger funds, while fewer new managers emerge.

So what are you seeing in terms of deployment in the current situation?

It’s still a little too early to spot any trends in the current crisis, but it is clear that private debt funds are highly adaptive as a lending source. Many firms are able to come up with creative solutions to issues borrowers may face and they can move quickly to address challenges. The fact that the private debt market has grown and matured significantly over the past few years means it now has the infrastructure in place to execute deals in full force even in difficult times – it has the capital, the networks, and the ecosystem of lawyers and due diligence providers, so the industry is now often seen by borrowers as the go-to source of loans.

Are you seeing firms look to distressed opportunities?

Private debt players have a full range of capabilities and many of them are able to pivot towards distressed opportunities. Firms are assessing potential new deals based on the DNA of the market, the sector and the borrower with a view to potentially shifting the company’s strategy or looking at different lending structures.

That’s one of the big advantages of private credit – funds can be flexible in the options they offer companies in different stages of health or stress, and there is now a deep pool of providers in the market with a variety of strategies.

In what shape do you think private debt will emerge from today’s crisis?

I’ve lived through many crises, from the savings and loans crisis in the US, the Russian rouble crisis and the dot.com bust through to the global financial crisis. There have been lessons to learn from each of these, even where the events haven’t directly touched the business in which you operate. Yet you also see the creation of new firms and organisations from these kinds of crisis. Some of the great firms of the 1990s, many of which are still with us today, sprang from the savings and loans crisis. Similarly, post-GFC, private debt firms did a phenomenal job of getting deeper into the lending market to become the significant force they are today.

Our clients are resilient and it’s highly likely that they will emerge stronger once the dust settles. Private debt’s capacity to adjust to opportunities means it will be well-positioned for the recovery when it comes. I think there may be some rapid changes to come and it’s not evident yet what form they will take, but it is clear that private debt is in the right space to provide creative solutions that will stem from today’s situation.