Private debt’s Darwinism: Canadian investors show a path for managers to evolve

Managers should differentiate themselves by being flexible investment partners to their investors, as a Canadian bank’s research demonstrated this week.

If you’re a GP looking for fertile ground for new investors, look no further than Canada. The country’s institutional investors are more likely than the world’s other LPs to increase their allocation to alternative assets, according to a new survey from CIBC Mellon.

Some 58 percent of Canadian investors plan to up their allocation to private markets, slightly more than the rest of the globe’s 53 percent. The remaining 42 percent of Canadian investors plan to maintain that allocation and none plan to decrease it (compared to 35 percent and 12 percent, respectively, for the rest of the world).

Beyond the headline numbers, the survey highlights something much more important: being willing to evolve with your investor base.

The opportunity set in Canada gives credit managers a reason to think beyond the traditional fund structure, in which only 54 percent of respondents said they invest. Some 70 percent of respondents are invested in funds of funds vehicles and 68 percent make direct investments.

Certainly, a fund of funds model is mainly relevant to private equity, but given its popularity with Canadian investors, there’s a good chance private debt fund of funds vehicles would garner LP interest.

As an example of embracing rarer fund structures, Toronto-based Northleaf Capital Partners recently announced the successful fundraise of an evergreen senior debt fund that was catered to investors who might not favour a drawdown fund model, like mutual funds.

The CIBC survey also suggests managers should fully embrace ESG, which has not been among the highest priorities for US LPs – at least compared to investors from other parts of the globe. Almost eight out of 10 Canadian investors said ESG was very important, compared with only two-thirds of the rest of the world’s LPs.

For an example of the importance of ESG in private markets investments, we can look south to the Windy City and the Chicago Teachers’ Pension Fund. The retirement plan chose not to make an infrastructure commitment to Blackstone or Brookfield because of a lack of diversity in the firms’ personnel.

Bank of New York Mellon’s Cynthia Shaw-Pereira, lead business development consultant, noted in the study that it was once held that businesses and firms had to be focused on social and ethical matters or produce a profit – they couldn’t do both. “Today, such is not the case,” she concludes.

And life could be particularly good for North America-focused credit managers. Of the surveyed investors, 89 percent of those in Canada said they want to increase their exposure to the continent for their private debt allocation.

So, according to the survey, if you’re a North American credit manager open to new investment structures and are ready to up your ESG game, Canada probably has a warm welcome for you.

As the private debt world grows, high-quality dealflow will no longer be the main competitive differentiator that it was even a few years ago; evolving with your investor base will also curry favour and generate goodwill with them.

As investors have become more familiar with the asset class, their sophistication has led it to move from the straightforward options such as mid-market direct lending to the niche sector-focused funds or rather esoteric investment strategies. That likely will serve true for fund structures and other aspects of fund management as well.

Many managers may think of consolidation as the natural selection of the asset management world, but catering to your investors could be even more important: it may well be easier for a firm to achieve scale than rectify a dwindling investor base.