Trail blazers of New York

There's much to do in terms of educating LPs and capitalising on the sheer enormity of the private debt opportunity globally, but as befits a market that's no stranger to entrepreneurialism and hard work, the US is leading the way.

A month on from hosting a roundtable in London to discuss the European market, Private Debt Investor chaired round two on the other side of the Atlantic to gauge opinion from leading figures in the US. 

Now we wouldn’t want to give too much away – for the full write-up, you’ll need to read the next issue of the magazine – but there were some key themes that became apparent, echoed in other recent meetings throughout the week in New York.  

Developmentally, the US is well ahead of the European market in terms of private debt– three years at least according to one practitioner. But a number of industry figures, including the roundtable panelists, believe investors in the US (and indeed worldwide) still have a long way to go before being entirely comfortable with the asset class.  

If you’re manager of, or investor in, a private debt fund, then pricing the illiquidity premium is perhaps the key challenge facing you. Debt fund investor Gapstow’s Chris Acito pointed out that LPs were looking carefully at the balance of liquid and illiquid assets in their portfolios – many got burnt in 2008 because of their substantial allocations to illiquid assets, and there’s been lingering reluctance to tie up capital for long periods since then.  

Despite this, private debt is growing in popularity as investors look away from traditional fixed income products in search of yield. But it is a broad asset class, and one that proves hard to categorise.  

A question we often ask managers is, “How do your investors categorise an allocation to your fund?” The answer is invariably, “It varies”. As you move to each end of the credit spectrum, classification becomes easier – senior debt has much in common with traditional fixed income so it sits more easily within that bucket, whereas mezzanine sits nicely in an alternatives classification.  

But investors are getting there, and there was an enormous level of enthusiasm for the asset class during meetings this week. Factors playing in its favour range from regulatory change to underperformance in traditional low-risk assets.  

There’s a great deal of innovation and experimentation too as befits an entrepreneurial culture like the US. People are channeling years of investment banking experience through far more nimble, focused and progressive businesses, with greater personal involvement in the deal process, greater transparency, and greater flexibility for borrowers. KKR’s Eric Falk, for example, spoke of KKR Asset Management being a “big firm with a small firm mentality”, of people taking ownership of deals and being passionate about pitching them rather than devolving decision-making to bloated credit committees.  

There’s so much still to be done though, a fact that came across repeatedly. Whether it’s educating investors as to the attractiveness of the asset class, or working out just what the most appropriate fee structure for a debt fund should be, private lenders are constantly having to interrogate their business models. Much of the required innovation is happening in the US, which not for the first time is laying an important blueprint for financial markets around the world to follow.