How do you view overall conditions for private debt fundraising at the moment?
Like most of the illiquid asset classes, private debt fundraising has been a tale of two cities.
The larger, established platforms have taken a lot of the oxygen out of the room, leaving a plethora of mid- to smaller-sized managers fighting harder and longer to get airtime with allocators. Besides a strong track record and cohesive team history, timing, intelligent benchmarking, positioning and differentiation, deployment visibility and fee discounts are just some of the tools necessary to fuel the fundraising process.
This being said, overall dollars to the asset class continue to rise and we regularly uncover new programmes for private debt at the LP and consultant level. We see a real expansion across the spectrum of private debt opportunities complemented by LPs with maturing portfolios looking for more risk/return diversification. It’s a tougher process, with more GP competition for every allocation.
With this in mind, any fundraising process needs to be well planned, tactical and well informed.
Which strategies are proving popular and why?
Special situations and opportunistic credit remain in vogue and rightly so. There is a significant financing opportunity in the mid-market that falls outside the vanilla direct lending remit.
We see flavours of this in partnerships with banks, where the approach is one of risk sharing or risk transfer, as well as bank disintermediation.
Asset-backed strategies are getting increasing attention, and this stretches beyond corporate lending with asset backing. We are spending more and more time with LPs discussing infrastructure debt, real estate debt, aviation financing and royalties. The obvious driver here is a search for yielding strategies that have more tangible downside protection in the face of deteriorating economic conditions.
Private credit secondaries are also an area that deserves greater attention, and we are seeing more and more attractive opportunities that have arisen from LP portfolio management activity rather than GP restructurings. For investors in private debt, this gives immediate access to diversified, yielding portfolios with strong cashflow visibility.
Lastly, I would mention environmental, social and governance issues and impact investment. These are often glossed over when it comes to debt because of the perceived inability to influence ESG outcomes as a lender.
However, we anticipate increased focus on active ESG in debt that goes beyond ESG by avoidance.
And which strategies are investors more cautious about?
Highly levered structures and, in the same vein, strategies that need to have multiples of leverage applied to reach appropriate return hurdles. Understandably, there is increased discomfort with the use of leverage and caution around the type of leverage applied. As always, there is another side to this perspective. Is it better to use appropriately structured leverage on senior financing for established and profitable companies versus being subordinated in the capital structure on an unlevered basis? It depends.
Are there new investors showing an appetite for private debt?
We’re quite excited about the LatAm region, particularly the pensions and insurers that are increasingly looking at private debt strategies following regulatory and structural reforms. There are still meaningful AUM hurdles to overcome in this market, but we see this evolving and the depth of potential capital is significant.
What should GPs do to expand and diversify their LP bases?
First, be flexible to satisfy the ever increasing and varied requirements from your investor base, particularly terms of structures. Consider insurance solutions such as risk ratings and insurance-tailored reporting. Flexibility is the key to attracting a diverse investor type.
Second, go global! Once you have established a loyal following in your core market, move beyond your established borders. This approach can be applied to investor types. The private debt market is an ever-expanding universe with an ever-increasing level of investor proficiency and sophistication.