At the New York Forum, Keith Read – president, business finance and senior managing director at Cerberus Capital Management – said investors should focus more on returns than fees and also made the point that LPs are being overwhelmed by data and may be looking in the wrong places for the information they need.
I think when you talk to big pension funds and other big investors, you know, they want an absolute return. And so to compare this relative to some other class – relative to levered loans, relative to high yield – everyone’s kind of trying to compare it to something else. But this is a separate dedicated asset class and has certain risk/reward characteristics and most of the investors we talk to, they want an absolute return. They’re looking at a target. It’s a pension fund that wants seven-and-a-half, eight-and-a-half percent return. They have it in a certain portfolio. And so I still think it’s more of an absolute return class.
I know a lot of people would like to say it’s relative value but, you know, I think to compare it to a high yield bond which has no covenants and is subordinated to you isn’t the right comparison. And because there’s been so many managers come into the asset class, the way people are competing for money is just trying to drop their fees. And we’ve never going to be the cheapest in the market as far as lending to other people, we’re very commercial and we’re never going to compete just on fees.
If somebody wants an allocator who wants to allocate money just based on fees and that’s their decision, we’re the wrong guys. If they want to sit down and come talk to us about a relationship, a long-term relationship, long-term returns and want to talk about fairness, we’re totally open to that.
Well I think that investors are in a difficult situation because, as it relates to direct lending, there’s just been so many new managers come into the asset class. There’s just been so much capital coming into the asset class so they want to actually select the best managers and it’s difficult, especially I think it’s difficult for foreign investors, if you think about talking to someone in China or Korea or Germany. I mean when I go there it’s amazing that we speak in English, we don’t speak their language, and they’re asking us all these questions so I think they’re really trying to make the right decisions. And I think that just in this information era that everyone has so much data that we’re just…you know, a barrage of data.
And so people think the more data they have, the better their decisions are going to be. But I’m not sure everyone’s looking at the right data. And so all of their advisors and consultants are putting together big spreadsheets or grids trying to compare all the managers against key performance indicators. And that might be the returns, might be their fees, maybe the number of people they have, the years they’ve been in the business, what their portfolio looks like, what the defaults are and so on, and then they just put you on a grid and it’s just like okay, these are the 100 managers we can get you to. You know, a portfolio like this…and they’re really putting your portfolio in a Veg-O-Matic.