Why is private debt still top of mind for a lot of institutional investors?
One simple answer: it produces results. Really good results. In 2017, assets under management globally by private debt funds reached $638 billion with aggregate capital raised which surpassed the $100 billion mark.
Four private debt managers offered their prescriptions and remedies as delegates were treated to the latest developments in asset-back debt, direct lending and alternative credit — all measures designed to increase absolute performance while limiting duration risk and interest rate sensitivity.
Terri Troy, President of Troy Advisory Services, the moderator, told the audience that, based on a Prequin study, 91% of private debt investors felt their performance expectations were met or exceeded last year.
The biggest threat?
Some 50% saw rising interest rates as the biggest threat to returns, followed by high valuations, increased competition and lack of deal flow stemming from increased deal flow from increased competition.
But . . . the figures also show that 95% of these investors are looking to increase or maintain their private debt allocation over the long term.
Private debt has certainly attracted intense interest from investors.
Why? Ms. Troy’s four panelists gave the answers. While each of them had different solutions, they had all good news for investors: private debt produces good results — if you know what you’re doing.
Will Palmer, Managing Director of Crestline Inc. from Fort Worth, Texas, heads a credit team with roughly $4 billion that invests in private debt. One of his funds targets 8 to 11% annually — a return that came from technology-oriented businesses as well as investments into health care.
The same with Ian Fowler, Managing Director of Barings in North America. His company’s global private finance is about $20 billion with boots on the ground in North America, Europe and Asia. His investing formula? About 20% of the company’s capital is its own and the remaining 80% comes from institutional investors in 20 different countries.
Theresa Shutt, the CIO of IAM Private Debt Group, targets a 6% fixed return — with investment grade risks. Her comments were echoed by Stephane Legrand, a Partner in LGT European Capital, who also targets 7-8% a year, most of it being distributed in cash every quarter.
Mr. Palmer targets his direct lending product at 8-11% and, on levered returns, that generally translates to 10-13%.
Fees? As Mr. Fowler pointed out, fee structures are really important “because not all fee structures are created equal.” And that, he warned, has a big impact on net returns.
And the biggest challenges for private debt?
Interest rates. Interestingly enough, every speaker agreed. And the real question was whether the rate being charged adequately reflected the risk an investor was taking on.
But . . . the real question is where the best private debt investments to be found.
But, just like fish in a pond, investors need to be guided by capable and knowledgable asset managers skilled in private debt. That is the tricky part — and Mr. Palmer described it as more of an “art than a science, viewing each borrower on its own merits.”
He feels most comfortable in going after companies in the lower middle market area. In his experience, investments in those companies produces better returns.
But there were defaults — in energy and auto retail. “We’ve learned a lot of lessons and have found that if a lender is investing in the direct market and wishes to force the sponsor to put more money into their company, they will need a covenant; otherwise, nothing can be done.
But private debt, if done properly, produces results these days.