Private debt’s need for speed

Funds seeking to take advantage of the dislocation opportunity don’t need to have flashy bells and whistles.

Dislocation funds are all the rage but there’s much for investors to consider before diving in and making commitments. Here is a summary of some recent conversations we’ve had with the market on this increasingly hot topic.

As little innovation as possible, please: When we approached a legal expert to ask them about the new generation of funds set up to take advantage of market dislocation, we’ll admit it was in the expectation of hearing about new-fangled structuring wizardry. Instead, we were told such an approach would hinder the speed required to get these vehicles up and running. Because dislocation is an opportunity that may be fleeting, managers are keeping fund terms and structures as simple and as familiar as possible to encourage investors to sign on the dotted line quickly. In keeping with this emphasis on brevity, the funds are often backed by just a single investor – or a few at most. It’s all designed to get money in the ground fast…

…And invested fast too: As well as fundraising periods, investment periods are also short – often just a year or two. Again, this is in recognition of what is expected to be a near-term opportunity set. If it turns out to be around for longer, then expect follow-on funds with a similar time horizon. It’s not orthodox and may not be appealing to all LPs, but for those keen to get exposure to private debt but not so keen on long lock-ups, this could be what they’ve been waiting for.

Why FOMO is a dangerous acronym: “Fear of missing out” should not be driving investor behaviour, but sources tell us they think it could be a factor. It is entirely appropriate that LPs should spend much of their time analysing their current portfolio and how it is weathering the storm rather than chasing new opportunities. They should not succumb to pressure to put money to work before they know how the performance of current investments is likely to pan out.

Stay in the comfort zone: A related point is that investors should not simply jump on the dislocation bandwagon because it appears to offer the potential for juicy returns and may not be around for very long. It’s important to understand how these strategies work and also how they fit with the current portfolio mix. Can a dislocation strategy be genuinely additive to what you already have? It’s important to keep a cool head and not be swayed by what could be a passing fad.

The best opportunity may be hiding: “The global financial crisis was very specific in terms of the sectors hit,” an advisory source tells us. “The opportunity set was more obvious.” Today, stress and distress is impacting – or may be set to impact – a wide range of businesses large and small, across industries and in different regions of the world. There appear to be almost limitless opportunities, and for investors therein lies the challenge. What’s the right one?

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