Ahmet Peker Rolf Dreiseidler Johannes Jasper (Hg.)
Alternative Investments 2.0
Neue Impulse für Strategien,
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Inhaltsverzeichnis
Stimmen zum Buch
Vorwort
Herausgeber
Autorenverzeichnis
Fremdkapital
Investing in Private Debt in Line with Today’s Market Conditions
Martin Progin/Ariel Goldblatt/Mark Tsang/Michael Venne/Matthias Erb
Insurance Linked Securities (ILS) – Einblicke in eine unkorrelierte Anlageklasse
Beat Holliger
Investitionen in Forderungen
Patric Wisard
Anwendung von Aktienfaktoren auf Unternehmensanleihen
Demir Bektić/Ulrich Neugebauer/Timo Spielmann
Regulatory Capital Transactions – Eine attraktive Alternative im Bereich Private Debt
Milan Stupar/Jörg Schomburg
Finding Alpha in Emerging Markets Special Situations Investing
Daniel Chapman
Eigenkapital
Private Equity – Outperformance in frühen Fondsgenerationen
Sven Czermin/Oleg Tarasov
Challenges and Opportunities in the Ever-Changing Private Equity Landscape in Asia
Marc Lau/Debbi Sutuntivorakoon/Ernest Ong
Strategien, Rendite und Risiko im Private-Equity-Sekundärmarkt
Christian Diller/Katja Baur
Überblick und Entmythisierung von Turnaround-fokussierten Private-Equity-Strategien
Patrick Pilz
The Case for Minority Equity Investing with Mid-Sized Private Capital GPs
Anthony Maniscalco
Private Equity Real Estate: Investitionen in Value-Add-Strategien – Das Renditepotenzial von Immobilienanlagen im Non-Core-Bereich
Henrik Haeußler
Nachhaltigkeit
Nachhaltigkeit als Wachstums- und Renditetreiber mit Impact – Opportunitäten im Privatmarkt
Ralph Kretschmer
Natürlich Investieren – Alternative Anlagen in Wald- und Ackerland
Weiyi Zhang/Keith Balter
Impact-Investments in nachhaltige Landwirtschaft
Oliver Hanke/Richard Focken
Hybride & digitale Innovationen
Acceleration Capital – Umsatzbeteiligungen bei Hedgefonds
Stephan Bongartz/Marcus Storr
Portfolio Risk Management Using Implied Volatility – Separating Fear from Reality
Harindra de Silva/Megan Miller
Music Royalities und Shipping als Nischen-Alternative-Investments im semi-liquiden Bereich
Flurin Grond/Thomas Kochanek/Werner Brönnimann
Digital Assets – Eine systematische Übersicht über die Token Economy
Claus Hilpold
Grundlagen des NPL-Geschäftes – 3. Auflage
Stimmen zum Buch
Stephan Buchwald – CEO/Founder, Kontora Family Office GmbH
„Alternative Investments 2.0“ – dieser Buchtitel ist auch eine treffende Beschreibung für die Investmentphilosophie von Kontora. Dabei gilt nicht „je exotischer desto besser“; die Überlegungen dahinter sind sehr rational getrieben. Daher unterstützen wir dieses Buchprojekt aus voller Überzeugung und teilen gerne an dieser Stelle einige Erfahrungswerte mit dem geneigten Leser.
Unternehmerfamilien sind per se Risk Taker. Das Abschätzen von Risiken und das Treffen von Entscheidungen unter Unsicherheit, ohne Vorliegen sämtlicher eigentlich benötigter Informationen, gehören zur DNA jedes erfolgreichen Unternehmers. Unternehmern fällt daher der Evolutionsschritt zum Investor typischerweise sehr leicht. Einmal ist die Business-Owner-Denkweise hilfreich, sprich die grundsätzliche Betrachtung des Geschäftsmodells eines Investments als Inhaber, unabhängig von dem prozentual zu erwerbenden Anteil. Zweitens wird die Renditeerwartung immer ins Verhältnis gesetzt zu den intrinsischen Risiken, denn im Prinzip suchen Unternehmer und Investoren das Gleiche: fehlbepreiste Risiken. Die Konditionierung auf eine möglichst präzise Abschätzung der Risiken ist vorhanden, zunächst wird das Verlustpotenzial eruiert und erst dann die Gewinnchancen. Und drittens ist die antrainierte Fähigkeit, Entscheidungen konsequent zu treffen, hilfreich beim Vermeiden der typischen Fehlwahrnehmungen eines Anlegers.
Genau an diesen Stellen kommen alle Investments ins Spiel, die illiquide und eher schwierig zu klassifizieren sind. Die Vorteile dieser Anlageklassen – z.B. Illiquiditätsprämien, Nicht- bzw. Geringkorrelation zu anderen Assets, außergewöhnlich gute Chance-Risikoverhältnisse durch Nischenstrategien – können nur durch Anwendung der obigen Mindsets erschlossen werden. Die Illiquidität zwingt zu Disziplin und Konzentration auf saubere Analyse – also alles was einen erfolgreichen Investor ausmacht.
Das vorliegende Werk liefert diverse wertvolle Inspirationen zu Erschließung derartiger Renditequellen und empfiehlt sich damit für jeden Investor, der bereit ist, über den Tellerrand des bereits bekannten hinauszugehen. Wir bei Kontora haben einige der in dem Buch vorgestellten Konzepte einer eingehenden Due Diligence unterzogen und uns schlussendlich für eine Investition entschieden. Von daher stehen wir nicht nur mit Überzeugung, sondern auch mit Taten hinter den Inhalten dieses Buches.
Michael Busack – Geschäftsführender Gesellschafter, Absolut Research GmbH
Professionelle Investoren stehen nicht nur im heutigen Kapitalmarktumfeld vor besonderen Herausforderungen. In vielen Fällen legen sie das Vermögen für Dritte an, die davon ihren Lebensabend bestreiten müssen. Es kommt also drauf an, das Kapital über eine lange Zeit renditestark, aber auch stabil und sicher anzulegen. Aktien und Anleihen sind, neben Investments in Immobilien, für viele Investoren die einzigen Optionen, die in der Kapitalanlage eingesetzt werden. Dieser Fokus auf Zinserträge, die aufgrund des Niedrigzinsumfeldes schon lange nicht mehr vorhanden sind, und ständig steigende Aktienkurse, ist gefährlich. Aktien sind enorm volatil und können, wie in der aktuellen Krise wieder einmal schmerzvoll erfahren, hohe Verluste bringen.
Alternative Investments, die neue Renditequellen erschließen können, die in liquiden Märkten von steigenden und fallenden Kursen profitieren können, die in den privaten Märkten alternative Risikoprämien in eine langfristige Rendite umsetzen können, sind nicht nur aus diesem Grund eine wichtige Ergänzung für alle professionellen Portfolios. Sie tragen auch zur Diversifikation bei, damit zur Risikoreduktion und können die Ertragsprofile asymmetrisch gestalten, so dass extrem hohe Verluste vermieden werden, gleichzeitig aber Renditeoptionen erhalten bleiben. Keine einfache Aufgabe, aber notwendig in dieser herausfordernden Zeit.
Das vorliegende Buch ist deshalb von großem Wert, da die Herausgeber die komplexe Materie strukturiert aufbereiten und die Autoren über ihre Fachkompetenz Licht ins Dunkel so mancher Strategie bringen. Mehr Wissen ist wichtig, die Alternative Investments weg vom Mainstream führen, auf einen diversifizierten Weg für die Investoren, die sich nicht alleine auf steigenden Kurse an den liquiden Märkten verlassen wollen und die ganze Welt der Kapitalanlagen für sich oder ihre Kunden erschließen wollen. Neue Perspektiven im besten Sinne. Ich wünsche dem Buch viele Leser und beglückwünsche die Herausgeber zu dieser inspirierenden Lektüre.
Daniel F. Just – Vorstandsvorsitzender, Bayerische Versorgungskammer
Gerade in Krisenzeiten zeigt sich, dass der beste Schutz für Investoren eine breite Diversifizierung des Anlage-Portfolios ist. In der nun schon langanhaltenden Niedrigzinsphase, die durch die aktuelle Pandemie jetzt wohl noch länger anhalten wird als vielleicht zunächst befürchtet, müssen institutionelle Investoren nachhaltig neue Wege gehen, um ihren Renditeanforderungen auch in der Zukunft risikoadäquat gerecht zu werden. Der Trend zu noch mehr Anlagen in Substanzwerte zu Lasten von Nominalwerten wird sich weiter fortsetzten. Damit sind wir im Kapitalanlagemanagement unseres Hauses in der Bayerischen Versorgungskammer gerade auch in Krisenzeiten gut gefahren und diese Transformation sehen wir heute weltweit bei vielen Anlegern.
Das Herausgeberwerk von Ahmet Peker, Rolf Dreiseidler und Johannes Jasper bietet hierzu praxisorientierte Lösungsansätze an und zeigt neue Anlagemöglichkeiten auf, die wertvolle und zugleich spannende Anregungen für international tätige Kapitalanleger liefern. Dabei gehen die Autoren auch explizit auf das immer wichtiger werdende Thema der Nachhaltigkeit der Kapitalanlage ein und geben auf verschiedenen Feldern zeitgemäße Ratschläge, sich auch in diesem Bereich substanziell weiterzuentwickeln. Den Autoren ist es in diesem Buch auf exzellente Weise gelungen, wissenschaftlich fundierte Beiträge zu liefern ohne dabei die Leser mit theorielastigen Ausführungen zu überfordern.
Was der Praktiker im Segment der Alternativen Investments heute braucht, wird er hier finden, wenn er mehr will als nur den Mainstream. Die einzelnen Beiträge von erfolgreichen Asset Managern bilden ein hochaktuelles Kaleidoskop, dass eine Pflichtlektüre für jeden erfolgreichen und innovativen Marktteilnehmer im institutionellen Geschäft darstellt. Ich wünsche allen Lesern viel Spaß bei der Lektüre, gewinnbringende Erkenntnisse für seine tägliche Arbeit und viele praktische Anregungen für das eigene erfolgreiche Management.
William J. Kelly – CEO, Chartered Alternative Investment Analyst (CAIA) Association
Wir befinden uns in einer Zeit, in der Kapitalströme und Wertschöpfung zunehmend auf den Private Markets zu finden sind, da die nominalen Renditen für Anleihen weiterhin nahe Null liegen. Die Anlageformen als „privat“ zu bezeichnen wird zunehmend unhaltbar, da die Renditedifferenz zu traditionellen Anlagen für weiter steigendes Interesse sorgt.
Auch institutionelle Investoren müssen daher zunehmend über die weniger liquiden und ineffizienten Ecken des Marktes nachdenken. Dieser Prozess muss mit Aufklärung und Weiterbildung beginnen, um einen qualifizierten Auswahlprozess für Anbieter/Produkte und ein klares Verständnis der ihnen zugrundeliegenden Strategie zu entwickeln und innerhalb der Due Diligence einsetzen zu können. Transparenz und Renditepotenziale können schwer fassbar sein, und der informierte Investor sollte diese Faktoren niemals als selbstverständlich ansehen.
„Alternative Investments 2.0 – Neue Impulse für Strategien, Assets und Nachhaltigkeit“ ist ein Investorenleitfaden für die Beurteilung von Rendite-Risikochancen für einige dieser spezialisierten Strategien. Das Buch stellt eine breite Auswahl dieser Anlageformen vor und schafft gleichzeitig eine Wissensgrundlage für Praktiker.
Martina Nitschke, Prokuristin und Abteilungsleiterin Kapitalanlagen, VGV Verwaltungsgesellschaft für Versorgungswerke GmbH
Die Welt von heute ist aus der Perspektive von gestern eine der größten Herausforderungen. Ein neues Denken erfordert Mut, Neugierde, eine Haltung und immer wieder einen Perspektivwechsel. Was wird uns die Zukunft abverlangen? Trifft das Wort „Mainstream“ den Massengeschmack des Jahres 2020 und 2021 oder werden diese Jahre in die Geschichte als „COVID-19“ oder „Klimawandeljahre“ eingehen? Wir wissen es nicht, eine Unbekannte im Labyrinth zu einer sozialökologischen Transformation.
Wir alle kennen die 17 Ziele für nachhaltige Entwicklung (Sustainable Development Goals (SDGs)). In einer großen Präsenz werden sie präsentiert, analysiert und dennoch bleibt eine Einordnung auf einzelne Asset-Klassen schwierig bis unmöglich zugleich. Es sind die Intransparenz der Daten, die mögliche Messbarkeit von Impact und die Tragödie des Zeithorizontes, die uns Einiges abverlangen. Eine gewaltige Investitionslücke baut sich hier von Jahr zu Jahr auf.
Und genau da kommen institutionelle Anleger ins Spiel, denn mit dem Blick auf ein Portfolio 2020/2021 – im Niedrigzinsumfeld – braucht es neue Impulse und Ideen für eine auskömmliche Rendite bei einem händelbaren Risiko. Institutionelle Investoren sind anspruchsvoller geworden, haben das Know-how und den Wissenstransfer in den eigenen Häusern weiter ausgebaut und wünschen sich von ihren Geschäftspartnern eine Kommunikation auf Augenhöhe. Ist das Alternative-Investment-Portfolio ein Medikament der Zukunft?
Alternative Investments in Private Equity, Private Debt, Timber, Infrastruktur usw., egal in welcher Verpackung, sind die Treiber in den Portfolien professioneller Anleger. Genaue Analysen der Assets sind notwendig, um einen wirklich messbaren Impact zeigen zu können. Es ist unsere Verpflichtung hinzuschauen.
Mein Fazit: Für die Zahlen/Daten/Faktenanalyse gibt es Berater und unabhängige Finanzexperten, für die Entscheidung, in eine Asset-Klasse zu gehen, braucht es Verständnis, Kooperation und eine Haltung. Das Buch bietet einen sehr guten Beitrag zur Aufklärung dazu – viel Spaß beim Lesen!
Achim Pütz – 1. Vorsitzender, Bundesverband Alternative Investments e.V. (BAI), Partner, Luther Rechtsanwaltsgesellschaft mbH
Mehr denn je suchen institutionelle Investoren aber auch vermögende private Investoren nach Anlagemöglichkeiten, die in einem Niedrigzinsumfeld auskömmliche Renditen generieren. Vor diesem Hintergrund stehen Alternative Investments bereits seit einigen Jahren im Fokus nahezu aller institutionellen Investoren. Bisherige Investitionstätigkeiten beschränkten sich dabei im Wesentlichen auf langjährig etablierte alternative Anlageklassen und -strategien, vornehmlich Private Equity, Infrastruktur und in der noch etwas jüngeren Vergangenheit auch Private Debt.
Das vorliegende Herausgeberwerk löst sich von diesem Mainstream und zeigt auf spannende Weise auf, wie facettenreich die Welt der Alternativen Investments tatsächlich ist. Investoren finden hier äußerst wertvolle und zeitgemäße Inspirationen für Investmentopportunitäten, die u.a. aufgrund geringerer Kapitalströme sowie ihrer spezifischen Eigenschaften sehr attraktive risikoadjustierte Renditen sowie vorteilhafte Diversifikationseigenschaften bieten. Die einzelnen Beiträge finden dabei inhaltlich eine ausgezeichnete Balance zwischen dem notwendigen Tiefgang ohne dabei zu technisch zu werden. Die jeweilige Berücksichtigung der Implikationen durch COVID-19 macht dieses Buch zudem auch aus dieser Perspektive hoch aktuell und lesenswert.
Peter Willner – Head of Pension Asset Management, Siemens AG
Alternative Investmentstrategien sind ein wesentlicher und bedeutender Bestandteil eines stabil diversifizierten und renditestarken Portfolios – diesen Ansatz verfolgen wir schon seit geraumer Zeit für das Pension Asset Management. Die jüngste Vergangenheit hat wieder einmal verdeutlicht, welchen erkennbaren positiven Einfluss die Beimischung von alternativen Investmentstrategien auf ein Portfolio hat.
Durch die weltweit hohen Zuflüsse von neuen Investorengeldern hat die Alternative-Investment-Branche in den vergangenen Jahren ein beachtliches Wachstum erlebt. Die damit verbundene Standardisierung von Anlagestrategien, die Institutionalisierung von Asset Managern, die verbesserte globale Regulierung, oder auch die zunehmende Berücksichtigung neuer ESG-Standards zeigen, dass die Branche sich als ein fester Bestandteil im institutionellen Anlageuniversum etabliert hat. Dennoch haben alternative Investmentstrategien nicht an Dynamik verloren und die Vielfältigkeit von Anlagemöglichkeiten, sei es aufgrund veränderter Marktgegebenheiten oder auch technischer Innovationen, ist nach wie vor für Investoren sehr hoch und vielversprechend.
Vorwort
Alternative Investments sind bereits seit vielen Jahren auf dem Vormarsch. Insbesondere durch das anhaltende Niedrigzinsumfeld, aber auch durch den Wunsch der Investoren, Portfolio-Risiken durch Diversifikation zu reduzieren, hat sich dieser Trend in den letzten Jahren signifikant verstärkt. Es ist davon auszugehen, dass dies mit Blick in die Zukunft weiterhin der Fall sein wird. Denn zumindest so lange die Notenbanken an ihrer gegenwärtigen Zinspolitik festhalten, sind Investoren gefordert, neue Renditequellen zu erschließen, um ihre Verpflichtungen weiterhin erfüllen zu können. Dabei spielen Alternative Investments in ihrer Gesamtheit eine große, wenn nicht sogar eine zentrale Rolle.
Diese Entwicklung wird aber auch durch die fortschreitende Professionalisierung der Investoren (z.B. Etablierung der CFA- und CAIA-Charter) sowie durch die zunehmend umgesetzte vertikale Integration von Asset-Klassen verstärkt. Alternative Investments sind in dieser Betrachtungsweise keine eigene Asset-Klasse, sondern vielmehr Varianten von Eigen- oder Fremdkapitalanlagen. Eigenes und gesellschaftliches Bewusstsein für die Art und Weise der Renditegenerierung (Stichwort: Nachhaltigkeit), aber auch die Digitalisierung und die einhergehende Transparenz von Finanzdienstleistungen sowie deren spezifischen Mehrwert flankieren dabei als wesentliche Einflussgrößen die konkrete Implementierung von Alternative Investments.
Die zunehmende Akzeptanz und Bedeutung von Alternativen Investments in der Asset-Allokation von Investoren und die damit einhergehenden steigenden Mittelzuflüsse führen jedoch unweigerlich zu verschiedenen Problemen: So ist davon auszugehen, dass zukünftige Renditen die historisch erzielten Werte wohl nicht mehr erreichen werden und/oder mit höheren Risiken einhergehen werden. Neben diesen nachteiligen Effekten auf das Rendite/Risiko-Verhältnis ist ebenfalls davon auszugehen, dass die Diversifikationseigenschaften kompromittiert werden und nicht zuletzt auch Anlagekapazitäten fehlen werden. So lag im September 2020 gemäß Informationen des Datenanbieters Preqin das Dry Powder, also das von Investoren in Privatmarktanlagen zugesprochene, aber von den Asset-Managern noch nicht investierte Geld, mehr als doppelt so hoch wie noch zu Zeiten vor der Finanzkrise 2007/2008. Den dominierenden Anteil machen dabei die „klassischen“ Anlagekonzepte der jeweiligen Segmente aus.
Mit vorliegendem Buch wollen wir interessierten Lesern spannende und innovative Investitionsmöglichkeiten aus der Welt der Alternative Investments aufzeigen, die abseits des Mainstreams sind. Diese Nischen- und Spezialstrategien ermöglichen den Zugang zu neuen attraktiven Renditequellen und könnten daher für Investoren zukünftig eine größere Rolle spielen. Dabei haben wir großen Wert daraufgelegt, Fachbeiträge erfahrener Praktiker zusammenzuführen. Dem Leser und Investor soll damit ein praxisrelevantes Basiswissen an die Hand gegeben werden, welches eine Entscheidungsgrundlage erlaubt, ob ein derartiges Investment in der Kapitalanlage weiterverfolgt und in der Folge einer tieferen Due Diligence unterzogen werden soll.
Dabei verstehen sich die einzelnen Themen nicht als konkrete Investitionsempfehlungen der Herausgeber, sondern vielmehr als Anstoß für eine gedankliche Öffnung für Neues sowie als Wegweiser in die noch weniger bekannten, aber durchaus interessanten und aussichtsreichen Segmente der vielfältigen Welt der Alternative Investments.
Wir bedanken uns bei allen Autoren dieses Buches, die mit großem Engagement dazu beigetragen haben, neue Perspektiven für Investoren aufzuzeigen. Des Weiteren danken wir dem Frankfurt School Verlag, insbesondere Herrn Dr. Thomas Lorenz, für die Möglichkeit sowie die tatkräftige Unterstützung bei der Umsetzung dieses Projekts. Unser weiterer Dank gilt der FERI Trust, der POLARIS Investment Advisory AG sowie allen weiteren involvierten Unternehmen für die Unterstützung dieses Buches. Einen abschließenden und besonderen Dank möchten wir an unsere Familien und Freunde richten, die uns sowohl mit emotionalem, aber auch fachlichen Beistand während des gesamten Projekts begleitet haben.
Frankfurt am Main/Zürich/München, im Januar 2021
Herausgeber
Ahmet Peker
Ahmet Peker ist Leiter Institutionelle Kunden Deutschland bei der FERI Trust GmbH. In dieser Funktion ist er gesamthaft für die Beratung und Betreuung von Institutionellen Anlegern verantwortlich.
Zuvor war er rund zehn Jahre bei der Deka Investment GmbH tätig, zuletzt als Senior Portfolio Manager. Vor dieser Tätigkeit hat er als Consultant bei der Ernst & Young AG mehrere Kapitalverwaltungsgesellschaften in der Prozessoptimierung beraten.
Ahmet Peker ist seit 2009 Chartered Alternative Investment Analyst (CAIA) und leitet seit 2015 ehrenamtlich das Germany Chapter der CAIA Association. Er ist Autor verschiedener Bücher und Artikel und war Mitglied in Arbeitsgruppen bei nationalen und internationalen Verbänden.
Rolf Dreiseidler
Rolf Dreiseidler ist Managing Partner bei dem in Zürich ansässigen Fundraising-Spezialisten POLARIS Investment Advisory AG. Zuvor war er rund zehn Jahre für die Man Group plc tätig, zuletzt als Head Institutional Clients Germany. Weitere berufliche Station von Rolf Dreiseidler umfassen die Leitung Dach-Hedgefonds bei der Deka Investment GmbH sowie die Leitung der Geschäftsstelle des Bundesverbandes Alternative Investments e.V. (BAI).
Rolf Dreiseidler besitzt einen Abschluss als Diplom-Volkswirt der Universität Bonn. Er ist CFA-und CAIA-Charterholder sowie Dozent an der EBS Executive Education.
Seit über zehn Jahren ist Rolf Dreiseidler zudem stellvertretender Vorsitzender im Bundesverband Alternative Investments e.V.
Johannes Jasper
Johannes Jasper ist als Senior Investment Manager im Pension Asset Management bei der Siemens AG tätig und betreut in seiner Rolle primär die Hedge-Fund und Multi-Asset-Investments. In seinen vorherigen beruflichen Stationen war er als Portfolio Manager für liquide Investments bei einem Single Family Office in Frankfurt am Main tätig und betreute zuvor bei der Bayerischen Versorgungskammer die Hedge-Fund- und Commodity-Investments.
Autorenverzeichnis
Keith Balter
Director of Economic Research, Hancock Natural Resource Group, Boston
Katja Bauer
Chief Financial Officer (CFO), Montana Capital Partners AG, Baar
Dr. Demir Bektić
Head of Quant Fixed Income, Deka Investment GmbH, Frankfurt am Main (bis 30.11.2020)
Stephan Bongartz
Investment Manager, FERI Trust GmbH, Bad Homburg
Werner Broennimann
Investment Analyst, Progressive Capital Partners Ltd., Zug
Daniel Chapman
Chief Executive Officer (CEO)/Chief Investment Officer (CIO), Argentem Creek Partners, New York
Sven Czermin
Co-Head of Private Equity, FERI Trust GmbH, Bad Homburg (bis 30.09.2020)
Harindra de Silva
Ph.D., Chartered Financial Analyst (CFA), Portfolio Manager, Analytic Investors/Wells Fargo, Los Angeles
Dr. Christian Diller
Managing Partner, Montana Capital Partners AG, Baar
Matthias Erb
Partner, StepStone Group, Zürich
Richard Focken
Chief Executive Officer (CEO)/Geschäftsführer, 12Tree Finance GmbH, Berlin
Ariel Goldblatt
Director, StepStone Group, New York
Flurin Grond
Deputy Chief Investment Officer (CIO), Progressive Capital Partners Ltd., Zug
Henrik Haeußler
MRICS, Senior Director Client Portfolio Management, Invesco Asset Management Deutschland GmbH, München
Oliver Hanke
Chief Sustainability Officer (CSO)/Chief Marketing Officer (CMO), 12Tree Finance GmbH, Berlin
Claus Hilpold
Chartered Financial Analyst (CFA), CAIA, Co-Founder, Senior Advisor L1 Digital AG, Zürich
Beat Holliger
Head of Product Management, Schroder Secquaero, Zürich
Dr. Thomas Kochanek
Chief Risk Officer (CRO)/Chief Operating Officer (COO), Progressive Capital Partners Ltd., Zug
Ralph Kretschmer
Gründer, Managing Partner, EBG Investment Solutions AG, Zürich
Marc Lau
Partner, Axiom Asia Private Capital Pte Ltd., Singapur
Anthony Maniscalco
Managing Partner/Head of Strategic Capital Group, Investcorp, New York
Megan Miller
Chartered Financial Analyst (CFA), Portfolio Manager, Analytic Investors/Wells Fargo, Los Angeles
Dr. Ulrich Neugebauer
Sprecher der Geschäftsführung, Deka Investment GmbH, Frankfurt am Main
Ernest Ong
Analyst, Axiom Asia Private Capital Pte Ltd., Singapur
Patrick Pilz
Partner, Lafayette Mittelstand Capital Fund Manager SARL, Luxemburg
Martin Progin
Analyst, StepStone Group, Zürich
Jörg Schomburg
Leiter Sales Alternatives Germany & Austria, AXA Investment Managers, Frankfurt am Main
Timo Spielmann
Head of Quant Corporate Bonds, Deka Investment GmbH, Frankfurt am Main
Marcus Storr
Head of Alternative Investments, FERI Trust GmbH, Bad Homburg
Milan Stupar
Co-Leiter Bank Capital Solutions Team & Specialty Finance, AXA Investment Managers, Paris
Debbi Sutuntivorakoon
Vice President, Axiom Asia Private Capital Pte Ltd., Singapur
Oleg Tarasov
Investment Manager, FERI Trust GmbH, Bad Homburg
Mark Tsang
Director, StepStone Group, London
Michael Venne
Senior Associate, StepStone Group, La Jolla
Patric Wisard
Partner, Swiss ALP Asset Management GmbH, Vaduz
Weiyi Zhang
Natural Resource Economist, Hancock Natural Resource Group, Boston
Investing in Private Debt in Line with Today’s Market Conditions
Martin Progin/Ariel Goldblatt/Mark Tsang/Michael Venne/Matthias Erb
1
Introduction
2
Investment Case
2.1
Introduction to Private Debt
2.2
Corporate Direct Lending (Core Strategy)
2.2.1
Overview
2.2.2
Risk-adjusted Returns
2.2.3
Key Advantages for Borrowers
2.2.4
Investment Risks and Considerations
2.2.5
Outlook
2.3
Opportunistic Lending
2.3.1
Overview
2.3.2
Market Growth
2.3.3
Risk-adjusted Returns
2.3.4
Investment Considerations
2.3.5
Outlook
2.4
Co-Investment and Secondaries in the Corporate Private Debt Space
3
Return Drivers of Private Debt Investments
3.1
Base Loan-related Factors
3.2
Direct Lending Specific Factors
3.3
Portfolio Positioning through the Credit Cycle
4
Risk Mitigation and Success Factors When Investing in Private Debt
4.1
Market & Loan Level Data
4.2
Investment Control
4.3
Lender of Record
4.4
Deployment
4.5
Flexibility
4.6
Diversification
4.7
Workout Capabilities
4.8
Economies of Scale
Bibliography
1
Introduction
Private debt is a fascinating and rapidly evolving asset class. In market penetration and maturity, it is quickly catching up with its older sibling, private equity. It is also following many of the historical trends around fundraising and evolution of co-investments and secondaries in the private equity asset class.
Part of the strong growth of private debt is driven by the inflow of capital from institutional investors identifying higher yields in a low-interest-rate environment, finding a product that mitigates the J-curve for their private equity investments and concluding that debt funds solve a financing gap left by banks. This trend is further driving the migration of capital and talent from public to private markets.
However, we believe the asset class is still in its early days. The near-to mid-term market challenges implied by the COVID-19 outbreak will prove a true stress test for General Partners’ (GP) track records and for the performance of different strategies. Such dislocations, though unlikely to change the fundamentals supporting the long-term growth of private debt, will have a significant impact on the evolution of the asset class, for existing GPs and prevailing strategies.
This contribution aims to provide the reader with some helpful insights about successful private debt investing. The analyses presented hereafter should help investors to construct robust portfolios and navigate through stressed periods comfortably. We make use of a large proprietary database to add colour to some of the concepts presented in this contribution and to demonstrate the value of data in what remains an opaque asset class. Partnering with GPs and other market participants proves to be a valuable strategy for private debt investors. Besides being a precious source of information, these relationships can also provide the investors with investment opportunities reserved for a limited number of participants.
2
Investment Case
2.1
Introduction to Private Debt
Until recently, banks were the primary provider of debt capital to corporations. Using an “originate to distribute” model, a single bank underwrites an entire loan facility and finds other lenders (a syndicate) to share the risk. Since the Global Financial Crisis (GFC), the number of commercial banks in the United States has fallen by more than a third, from 7,200 to less than 4,450.[1] Congress passed major reforms that limited the amount of risky assets banks could have on their balance sheets. The combined effect of fewer commercial lenders and more stringent capital requirements left a significant void in global capital markets. The middle market, consisting of companies with EBITDA below USD 75 million, was particularly affected, as banks turned their attention upmarket. Institutional lenders, in search of attractive yields, filled the gap left by banks. Lower capital supply as well as higher demand from investors and more flexible terms for issuers explain the growth of private middle market direct lending since the GFC.
Over the last decade, corporate private debt in the middle market – also referred to as direct lending – has matured into an institutional-quality asset class. In 2018, 182 private debt funds raised USD 119 billion. Not only have more funds been raised but deal sizes and volumes have also grown markedly. Private debt managers put more than USD 145 billion of capital to work across 1,345 transactions in 2019.[2] However, these numbers are probably understated; we estimate the overall middle market in the United States to be USD 1.25 trillion. With an average loan life between three and four years, this results in annual issuance of more than USD 350 billion. The European market is approximately a third of the US market, totaling around USD 410 billion.[3]
Private debt covers a large and diverse universe of strategies in the three main asset classes: corporate, real estate, and infrastructure. This universe has broadened to encompass the burgeoning field of specialty finance. Exhibit 1 serves as an extract of some of the main private debt strategies, comparing gross asset yield levels with public credit on a risk-adjusted basis. On that basis, the attractiveness of direct lending becomes obvious.
Exhibit 1: Indicative gross and loss-adjusted returns across various credit asset classes
Source: Bloomberg Barclays Indices, Credit Suisse, Thomson Reuters Quarterly MM Private Deal Analysis, StepStone Calculation as of June 2020
2.2
Corporate Direct Lending (Core Strategy)
2.2.1
Overview
Corporate direct lending is the core strategy within private debt. It is responsible for most of the asset class’s growth over the last decade. Private debt AuM has grown globally, likely surpassing the USD 1 trillion mark several years ago.[4]
Numerous trends have driven the growth of the direct lending market in the US and Europe:
Bank constraints: After the GFC, banks were subject to regulatory reforms that required them to hold greater levels of capital reserves. Subsequently, banks had to deleverage their balance sheets and deploy their capital more deliberately. The general trend for banks was to focus on large corporate and investment-grade lending, creating a vacuum in financing for middle-market companies.
Exhibit 2: Number of Global Private Debt Deals; Banks vs. Private Debt Firms
Source: Preqin, as of July 2020
Private equity: Private equity sponsors, particularly in the middle market, have increasingly used debt funds to finance their investments due to the speed of execution and the flexibility of financing solutions that direct lenders can offer relative to banks. During the GFC, when it would have been needed the most, private equity sponsors lost support from banks as underperforming loans were passed to recovery units. Private equity firms were forced to bear significant losses, which harmed their relationships with banks and accelerated the growth of direct lending.
Borrower education: As the direct lending solution developed, the transaction ecosystem supported its growth through education of borrowers. Management teams of corporations typically have more conservative attitudes with entrenched preferences for borrowing from banks. To win them over, debt advisers, lawyers, and accountants have presented the advantages and risks of direct lending compared with traditional bank financing structures. Gradually, CEOs and CFOs have come to understand the benefits of working with both debt funds and banks to grow their businesses.
Investor appetite: Debt funds’ clear and coherent investment thesis for direct lending has resonated with investors. Direct lenders have been able to raise significant amounts of capital, which in turn supports their ability to compete against banks, further driving the asset class’s growth. As the fund sizes increase, direct lenders have improved their ability to vie for larger transactions as an alternative solution to capital markets.
2.2.2
Risk-adjusted Returns
To understand direct lending’s performance profile, it is important to analyse the returns through a cycle. Exhibit 3 underlines the resilience of direct lending as it has maintained at least a 7.2% loss-adjusted return over the last 14 years.
Exhibit 3: US first-lien[5] Corporate Direct Lending gross and loss-adjusted yields through the cycle (by vintage)
Source: StepStone Private Debt Internal Database, based on 5,600 US first-lien loans
2.2.3
Key Advantages for Borrowers
To better understand the market dynamics behind the growth of corporate direct lending, it is important to highlight the advantages for borrowers. These characteristics sustain the continuing uptake of direct lending by middle-market companies:
Control: Direct lenders will maintain close relationships with sponsors and management teams of borrowers after originating the transaction. Even if the loan experiences difficulties and defaults, a direct lender will continue to work closely with the borrower for a resolution. This stands in stark contrast to how banks operate. When a loan underperforms, banks send it to an internal workout team, which aims to remove the troubled asset from the bank’s loan portfolio, and not to help the borrower restructuring the business.
Speed of execution: The private equity landscape is increasingly competitive, and many sponsors are pre-empting sales processes to gain an advantage over other bidders. Therefore, sponsors are seeking direct lenders that can move quickly alongside them in submitting binding offers for investment targets. As direct lenders have smaller teams and more flexible investment approval processes than banks, they can offer the speed of execution that sponsors need in competitive sales processes.
Structural flexibility: Direct lenders have less rigid policies in place compared with banks and can provide more flexibility in structuring customised financing solutions. For example, direct lenders have shown flexibility in capital repayment, typically structuring a “bullet” profile so that 100% of principal is repaid at maturity. This allows the borrower to use its free cash flow to grow the business as opposed to repaying principal. Direct lenders also exhibit more flexibility than banks in the negotiation of key terms in loan agreements. Greater flexibility can also be provided during the life of the loan would the issuer face an adverse situation as demonstrated during the COVID-19 crisis. For instance, direct lenders quickly agreed to suspend or postpone interest payments for companies confronted with liquidity issues.
Business partners: In the case of non-sponsor transactions (i.e., with no private equity firm involved), direct lenders can provide support to management teams in addition to debt capital. Like private equity firms, direct lenders can give management teams access to their relationship networks to access more customers, sector expertise, more supplier relationships and operational experts supporting the companies’ financial and operational performance.
2.2.4
Investment Risks and Considerations
When assessing direct lending strategies, investors should not neglect the investment risks particularly toward the end of an economic cycle.
During the last 10 years, valuation multiples gradually increased with the expansion of the economic cycle. In turn, sponsors steadily pushed leverage levels up in line with pre-GFC peaks to compete in sales processes and meet valuation expectations. Even though leverage levels were steadily increasing in line with valuation multiples, sponsors increased their equity cheque at a faster rate over the period. Hence, the cash equity cushion below the debt in the capital structure typically remained in excess of 45%, in line with post-GFC figures.
Key terms such as “covenant headroom” and “EBITDA adjustments” are gaining importance in borrower-friendly environments. The importance of data as well as deeper analysis of direct lenders’ term sheets and financing structures is critical to understanding the genuine risk profile investors are taking. Covenant headroom can be compared to a margin for error granted to borrowers when defining the covenant level. It is formally the relative difference between the level of a financial metric at origination and the agreed covenant level.
In most cases, covenant headroom decreases over time, as covenants tend to be stricter over the life of the loan. EBITDA adjustments, or the practice of taking credit for cost savings and other pro forma adjustments, became popular in the past few years. By overestimating a company’s profitability, these adjustments skew the valuation calculus, making companies seem less expensive than they really are. In turn, it becomes much easier for a sponsor to lever up the company. While private equity sponsors have become more creative in how they define EBITDA, direct lending GPs (and co-investors) must rely on a quality of earnings report. Published by reputable accounting firms, these reports help the sponsor and lender determine which adjustments should be added back to EBITDA and which should be excluded.
Exhibit 4: Average covenant headroom for first-lien Direct Lending deals
Source: StepStone Private Debt Internal Database, based on more than 8,000 US and EU first-lien loans
Exhibit 5: Average EBITDA adjustments for first-lien Direct Lending deals
Source: StepStone Private Debt Internal Database, based on more than 8,000 US and EU first-lien loans
During economic downturns, banks often have little or no ability to underwrite syndicated leveraged loans causing a liquidity shortage for middle-market companies. Direct lenders with ample dry powder to invest are well-placed to fill the gap left by banks. Due to the reduced competition, lenders should be able to negotiate more lender-friendly terms, such as higher pricing, lower leverage, more covenants, less covenant headroom or EBITDA adjustment. Although the consequences from the COVID-19 crisis are still uncertain, some first observations can already be drawn. After a massive reduction of deal flow, one could observe more lender-friendly terms in the first post-crisis transactions. StepStone observed a pickup in pricing combined with lower leverage level, price multiple, covenant headroom and EBITDA adjustment.
2.2.5
Outlook
The rise of corporate direct lending may have coincided with perhaps the longest economic recovery ever, but this success is here to last. Even though it is too early to gauge the consequences of the COVID-19 outbreak on direct lending, we believe the asset class will continue to capture market share from banks for several reasons:
Continued bank disintermediation: Traditional banks appear likely to continue focusing on large corporations, shying away from borrowers at the lower end of the market. This allows direct lenders to remain focused on small and middle markets, prolonging the trend of banking disintermediation.
Direct lenders’ ability to execute larger transactions: As GPs raise more capital, they will eventually compete with the leveraged loan market for larger deals. In Europe, we have already seen some GPs pursue billion-euro transactions.
Sponsor preferences for direct lenders: As previously stated, direct lenders can offer more flexible terms than traditional lenders. Private equity GPs have taken note and increasingly turn to credit managers to finance acquisition bids. Direct lenders also know borrowers more thoroughly than banks do, gaining greater insight into each borrower’s idiosyncrasies as a result. In this way, direct lenders are better able to help private equity GPs recapitalize their portfolio companies if needed.
Non-dilutive growth capital: Family- and founder-run businesses are gradually developing an appreciation for private debt. They used to view direct lending as just a more expensive lending solution but have come to regard it as a non-dilutive source of capital to increase valuation to an exit.
Migration of talent: During private debt’s rapid maturation, there has been a gradual shift of talent from banks to debt funds. We believe this trend will continue, further undermining banks’ ability to compete for market share.
2.3
Opportunistic Lending
2.3.1
Overview
Opportunistic lending covers a broad spectrum of credit strategies. A simplified approach to visualizing this market segment would be to compare it with more mainstream strategies and products, as shown in this section.
Exhibit 6: Opportunistic Lending
Currently there is a market opportunity in the financing gap for borrowers seeking funding at a cost of capital of 10 to 15%. An increasing number of private debt funds are raising capital to provide a solution for these borrowers. The COVID-19 pandemic has created a favourable environment for opportunistic lenders as many borrowers are expected to go through challenging times. For managers with sufficient dry powder, short-term market volatility may also present interesting opportunities.
The sub-strategies include:
direct lending into complex situations such as growth capital, refinancing of overleveraged balance sheets, time-sensitive events, shareholder restructuring, challenging sectors and hung syndications inter alia;
acquiring loans at a discount to par sourced both privately and on public markets (secondary purchase).
2.3.2
Market Growth
For direct lending into complex situations, transactions are sourced directly from middle-market companies both in the US and in Europe. We anticipate that a certain percentage of middle-market firms will experience a complex situation requiring an opportunistic credit solution. Under normal circumstances, an estimated 5% of middle-market borrowers will require customized opportunistic financing, leading to a market size of more than USD 80 billion, potentially increasing during an economic downturn.
For secondary situations, market opportunities arise in the syndicated loan market. Based on a market size of USD 1.61 trillion,[6] and assuming that on average 22% of loans trade below 80% of par during a recession, as demonstrated in the GFC, we estimate the market for opportunistic lending to be approximately USD 350 billion. To profit from secondary opportunities, managers must have sufficient capital at hand and be able to act swiftly.
There are several drivers supporting the growth of the opportunistic lending market:
Borrower experience of private debt: Given the increasing prevalence of direct lending in the middle market, borrowers (in certain complex situations) are gaining a more detailed understanding of non-bank financing and becoming more open to opportunistic lending, especially given the lack of other options.
Post-COVID-19 environment: The borrower-friendly environment prevailing before the COVID-19 outbreak pushed leverage to pre-GFC levels; most leveraged loans were covenant lite. The increased uncertainty about future economic conditions as well as liquidity concerns could trigger further downgrades and exacerbate outflows of capital, particularly from CLO investors, in the leveraged loan market. This would lead to some value dislocation from credit fundamentals and present investment opportunities on the secondary market for selective managers.
Bank deleveraging balance sheets: Within Europe, regulatory reforms through Basel III have increased capital requirements for banks. As sub-investment-grade corporate risk attracts the highest capital charges, banks are motivated sellers for these assets to meet the capital requirements. In 2016, European banks held an estimated EUR 700 billion in non-core corporate loans.[7] This represents a significant source of potential deals for opportunistic lenders.
2.3.3
Risk-adjusted Returns
Below is a simplified method to understand the return drivers for different transaction types within the opportunistic lending segment in 2020.
Table 1: Return Drivers by Transaction Type
Transaction Type
Upfront Fees/Discount to Par
Margin
Hold Period
Gross IRR
Direct Lending into Complex Situations
Upfront fees: 2 to 3%
700 bps +
6 months to 3 years
10% +
Secondary
Discount to Par: 15 to 20%
350 bps +
6 months to 5 years
13% +
Source: StepStone estimates
The key levers behind the target IRR for the opportunistic deal flow are (i) upfront fees/discount to par, (ii) margin and (iii) hold period. Other factors that can boost the IRR are triggering call protection, exit fees, and preferred equity/warrants as part of the structure.
The return range will also vary depending on where the investor focuses in the capital structure. For example, the return for first-lien transactions will be at the lower end of the range, with returns increasing as you descend the capital structure to second-lien transactions.
Our expectation is that loss rates will largely reflect the syndicated loans, first-lien and second-lien direct lending of 0.7%, 0.8%, and 1.6% respectively, with an additional premium of 0.3% to 0.5% for complexity.
2.3.4
Investment Considerations
We observe that the deal volume for direct lending into complex situations is relatively consistent through an economic cycle with a potential uptick during a downturn. Complex situations arise through idiosyncratic as opposed to systemic risk. For secondary transactions, the deal volume will significantly increase during periods of market volatility and is heavily timing dependent.
For the reasons exposed above, we deem it important to diversify across different credit strategies within opportunistic lending to achieve target returns throughout the cycle, while accessing enhanced deal flow and returns during a market downturn.
2.3.5
Outlook
As investors build up experience and expertise within the private debt asset class, they will try to diversify their portfolios with other sub-strategies. Opportunistic lending offers a more attractive risk-adjusted return profile for investors looking to expand their portfolio beyond a pure play on direct lending. The COVID-19 crisis will provide an extended opportunity set and could serve to demonstrate the relevance of this strategy in a well-diversified portfolio.
Opportunistic lending is also likely to attract private equity investors seeking double-digit returns but with a lower risk profile and the downside protection provided by debt financing structure, especially in a late-cycle environment with high valuation multiples.
2.4
Co-Investment and Secondaries in the Corporate Private Debt Space
For most of its limited history, private debt (direct lenders in particular) provided facilities to companies in the lower and middle markets, where loans are typically too small to be of interest to a lending syndicate. As the asset class has grown, however, some private debt managers are seeking partners so they too can lend to the upper end of the market.
There are two primary options when it comes to finding partners:
The first option follows the co-investment model that has become popular among private equity investors. Here, the GP identifies one or two like-minded partners – often a Limited Partner (LP) – to provide the capital necessary to close out a deal.
The second option is the club deal whereby the private debt manager looks to put together a small syndicate made up of four to six co-lenders. Club deals are attractive because they can accommodate larger deals than co-investments can.
However, because the syndicate is often made up of competitors, club deals can be complex, resulting in greater governance risk. In fact, lack of alignment is one of the reasons private equity managers soured on club deals and moved toward the co-investment model. By some estimates, co-investments make up approximately 20% of the private equity market. In contrast, the co-investment market in private debt is significantly smaller. While co-investments have been around in private debt since well before the GFC, they are just now gaining traction. Of the USD 350 billion in annual corporate direct lending, we estimate that co-investments represent only 5%.
StepStone expect this proportion to grow over time. One can already observe an increase in both the number and the amount available for co-investors during the COVID-19 outbreak. To better diversify their portfolios and limit their exposure to individual companies, underwriting GPs have given to making smaller investments. To maintain their underwriting capabilities and compete for interesting opportunities, they are turning more toward like-minded partners to secure the necessary capital.
Co-investments provide financial benefits for the GP and LP alike. From the GP’s perspective, the most obvious advantage of co-investments is the ability to access capital needed to complete a transaction. Maintaining control over an investment, something notably absent in most club deals, and staying within the investment parameters set forth by the fund are other important considerations.
Also, co-investments offer several financial advantages to LPs:
First, they are typically done on a no-fee, no-carry basis, thereby improving returns.
Second, co-investments accelerate capital deployment and hence improve the dollar return for the investor.
Third, co-investments provide more flexibility for evergreen structures to reinvest capital returned by borrowers, thus mitigating the opportunity cost of fund investments.
Lastly, co-investments give investors greater control over their portfolio.
In particular, LPs can achieve benefits from diversification since they can access deals with managers of varying sizes, in different regions, with different sector specializations. As a result, co-investments are more efficient in terms of cost, capital deployment, returns and diversification.
Exhibit 7: Benefits of Co-Investments
Source: Preqin, StepStone Private Debt Internal Database
Like co-investments, secondaries provide many financial benefits. In a secondary transaction, an investor will buy a portfolio of seasoned loans, thereby reducing the overall deployment duration and ensuring a faster turnaround on distributions and higher returns. In addition, it is usually possible to buy secondary portfolios at a discount to the net asset value (NAV), which creates immediate value for LPs. Discounts can come about for a number of reasons including from sellers who require immediate liquidity.
Currently, the secondary volume in private debt is quite small, but as the asset class matures, we expect secondary volumes to grow and follow a path not unlike the one laid out by private equity. The COVID-19 crisis may act as a short-term catalyst for secondary transactions. Were prices in public markets to drop for an extended period, some LPs may be forced to sell part of their private market exposure to remain in line with their asset allocation guidelines. For levered portfolios, a deterioration in fundamentals may trigger margin calls by lenders and hence the need to sell assets to raise cash.
Investors ramping up their private debt exposure or with less stringent constraints will benefit from this selling pressure. A growing set of opportunities will also allow potential buyers to be more selective and better diversify their secondary portfolio. In addition to the financial benefits, co-investments and secondaries enable the LP to more thoroughly vet the GP’s investment insight, and to gain a better understanding of a GP’s capabilities and style. For the GP, co-investments and secondaries provide an opportunity to showcase its skill set and, if all goes well, persuade the LP to commit to a future fund.
Given the many benefits of co-investments and secondaries, why do most LPs not participate? For co-investments, speed is the biggest obstacle. Most private debt deals are finalized within two to three weeks. Unless the LP has a dedicated co-investment team, it is not equipped to make investment decisions that quickly. Though many LPs may mention the desire for co-investments when discussing a commitment to one of the GP’s funds, they are rarely able to execute when the opportunity arises. For secondaries, LPs need to have the ability to analyse many loans in a short period of time, which may also require a dedicated team.
While the intangible benefits of co-investments to both LPs and GPs are clear, debate over the actual results continues. Academic research, including a study by Fang/Ivashina/Lerner (2015),[8] raises significant questions about the performance of co-investments, specifically a concern about adverse selection. In a white paper[9] published in 2014, StepStone demonstrated that co-investment deals generally performed in line with their parent funds on a gross basis, outperformed them on a net basis, and, on average, had lower risk profiles than their parent funds.
This analysis suggests that GPs actually had higher conviction in the co-investment deals and they were not simply “selling down risk”. Therefore, the performance comparison shows that the adverse selection concern in co-investing may be overstated. Thus, compelling returns are achievable in co-investing as long as the co-investment program incorporates processes and structures to mitigate the risks associated with co-investing.
LPs source co-investments and secondaries through their primary private debt manager relationships. The key to creating a diversified co-investment portfolio is to see many co-investment opportunities. This is important for three reasons:
Selectivity matters: GPs typically review 1,000 transactions per year, but close on only between 3% and 5%.[10] A strong co-investment “flow” helps LPs to be equally selective.
LPs gain knowledge of the current deal environment and are able to better distinguish between “good” and “bad” deals.
With good “flow” LPs will be able to create more diversified portfolios.
As a result, the key to creating a strong co-investment portfolio is to have significant scale and be a meaningful partner to many GPs. This can be challenging given that private debt has fewer managers than private equity. To make the most of this situation, investors might rely on an adviser with the reach and scale necessary to cover the global private debt market.
Although each secondary and co-investment opportunity has its own idiosyncrasies, which engender a certain level of customization, there are several analyses that should be part of any investment due diligence. In light of how time sensitive these transactions can be, drilling down into these five criteria may be helpful to LPs as they decide whether to proceed:
covenants (see also section 6),
control/lender of record (see also section 6),
EBITDA adjustments (see also section 2.2.4),
leverage levels & Loan-to-Value (LTV) ratios,
gross asset yield.
High equity cushions and low LTV ratios are tantamount to “skin in the game” for private debt managers. These metrics provide powerful insight into whether the lead sponsors will be properly aligned with their co-investors. If equity cushions are too low and leverage is too high, sponsors may not be as patient as they otherwise might be during a market correction. A high LTV ratio, on the other hand, may be evidence that the GPs’ underwriting standards are too lax, and they are willing to take unnecessary risks to boost returns.
The gross asset yield of an investment considers both the coupon and the closing fees paid by the borrower to the lenders. Though co-investors are typically entitled to receive the closing fee, they should be mindful of “skimming” – the practice of shaving one or two points off the Original Issue Discount (OID). This skim is similar to the origination fee banks charge for bearing the risk that syndication implies.
3
Return Drivers of Private Debt Investments
Investors considering the private debt asset class often raise the question “To what risk does an observed interest margin relate?” Their point of reference would typically be the gross interest margin that a local bank might offer to a corporate borrower. However, in countries with a competitive banking landscape and bank debt priced at around 250 bps to 300 bps interest margins for leveraged buyouts, a 600 bps margin for direct lending transactions appears to be risky. However, a more differentiated approach and analysis is needed to fully appreciate the attractive return and risk drivers of direct lending. The aim of this analysis is the attribution of the interest margin to specific risk factors.
An important requirement to do so is the availability of data for a notoriously opaque asset class. The analysis that follows is based on a comprehensive data collection and includes more than 5,100 loans originated from 2006 to 2018.
Exhibit 8 illustrates the findings of the interest margin decomposition. The analysis not only helps in understanding the risk/return drivers but also supports the efficient sourcing of loans and portfolio construction.
Exhibit 8: Risk premia decomposition of Corporate Direct Lending
Source: StepStone Private Debt Internal Database, based on more than 5,100 US loans originated between 2006 and 2018
3.1
Base Loan-related Factors
The base loan factors primarily relate to the variables present in a loan structured by a bank for a particular borrower. In exhibit 8, the base loan is defined as a core sponsored covenant-lite first-lien loan issued by a US utility company with an EBITDA between USD 30 million and USD 50 million, an LTV below 40% and leverage above 6x. The return of such a loan can be broken down as follows:
Risk-free base rate: This would be the floating base rate over which the margin is added; LIBOR is used as the base rate for a majority of loans.
Credit premium: A portion of the interest margin will be related to the borrower’s creditworthiness. If the bank deems the borrower to be of higher credit quality, a lower premium will be charged to reflect a lower risk profile.
Illiquidity premium: There is no active secondary market for loans made to middle-market companies. Hence, loan pricing includes an illiquidity premium to compensate lenders for the risk that holding these assets implies.
3.2
Direct Lending Specific Factors
Financing solutions provided by direct lending GPs tend to deviate from a bank-style base loan. As a result, they can tap into additional return drivers.
Capital structure: The more junior a loan is positioned in a company’s balance sheet, the greater the probability that its nominal amount is not covered entirely by the borrower’s enterprise value. Also, a lender taking on a second lien or junior position has less control over the recovery process. Therefore, a risk premium is attributed to the lender’s position in the capital structure.
EBITDA: Direct lenders consider a borrower’s EBITDA when estimating credit risk; a lower EBITDA typically equates to lower creditworthiness. Several factors can affect a company’s EBITDA, including market share, customer concentration, and cash flow stability.
LTV: As with capital structure, the risk for the lender increases with the LTV ratio. Direct lenders seek greater compensation for loans that are less collateralized.
Leverage: The more leverage a company uses, the lower its ability to service that debt. Not surprisingly, highly leveraged transactions incur a premium. Conversely, our analysis shows that transactions using very little leverage also command a premium. In our experience, this situation tends to arise in lending to smaller companies with less solid credit metrics, as noted above, or to companies in cyclical sectors.
Covenants: Direct lenders can often put in place covenants to fit each borrower’s risk profile. This flexibility comes at a cost: Fewer covenants can equate to an additional risk premium.
Sponsor/non-sponsor: Lenders often require a risk premium for lending to non-sponsor companies. Sponsor-backed companies typically have better financial reporting and corporate governance, as well as stronger management teams. Sponsors’ rigorous due diligence process provides lenders with additional confidence in the company’s business plan and ability to service debt. Lending to non-sponsor companies typically requires more time and effort in due diligence. Consequently, lenders often seek an additional compensation premium for their work.
Strategy: Lenders specialising in complex situations also command a risk premium for their deeper sector expertise or the additional work needed to complete the transaction. They also have more freedom to charge a “scarcity premium” given the lower number of financing options available to borrowers in these situations.
3.3
Portfolio Positioning through the Credit Cycle
Determining the relative value of a particular market segment or capital structure through the credit cycle requires a closer look at its performance over time. This provides an investor with the necessary information to decide which portfolio rotations are sensible given a specific market outlook. To demonstrate the importance of a good positioning in the capital structure as the cycle evolves, we analysed distributions of IRRs and loss rates for pre- and post-GFC periods.
Using the resampling methodology, we randomly selected 100 loans from our proprietary private debt database to build a portfolio. We then calculated the IRR of each randomly selected portfolio and repeated this process 100,000 times to obtain the IRR distribution for each strategy.
Exhibits 9 and 10 illustrate the importance of a good positioning through the cycle. The pre-GFC period is characterised by a platykurtic IRR distribution for second-lien/mezzanine loans, demonstrating the sector’s higher risk profile, particularly in periods of market stress. Such a distribution also complicates portfolio construction, since expected returns are harder to derive and less robust.
Exhibt 9: IRR Distribution by Market Segments pre-GFC and GFC vintages (2005-2009)
Source: StepStone Private Debt Internal Database
Exhibit 10: IRR Distribution by Market Segments post-GFC vintages (2010-2017)
Source: StepStone Private Debt Internal Database
Looking at the first percentile of these distributions (i.e., the 99th percentile Value at Risk), one notices that the values in the first-lien segment vary from 4.5% to 5.5%, whereas the second-lien value is 1.5%, showing the risk carried by junior capital instruments. Nevertheless, these figures also illustrate the defensive nature of private debt investments because the values stayed positive even for second-lien loans.
In the post-GFC period, riskier instruments benefited from the economic expansion whereas first-lien instruments demonstrated their robustness through the cycle and outperformed their pre-crisis returns. In both periods, the upside potential of the upper middle market was limited but the sector is important in the portfolio construction process as target returns have a higher probability of materializing. Among the three first-lien market segments, lower-middle-market loans offer the best relative value across the cycle. Indeed, they delivered higher returns in both the pre and post-crisis periods without exposing investors to excessive volatility.
4
Risk Mitigation and Success Factors When Investing in Private Debt
There are a few key success factors investors should consider when investing into private debt. To benefit fully from these factors, two main drivers are crucial: implementation efficiency and access to high-quality data.
An efficient implementation process ensures high and rapid deployment levels as well as effective cash management. These two factors combined improve the US-dollar return at a given level of capital commitment. Also, granular and reliable data ensure that investment decisions are based on proper insight into the strategy and characteristics of each GP considered.
4.1
Market & Loan Level Data
Given the nature of private markets, access to transaction-level data is less straightforward. Close interaction with GPs and other market participants can provide data for investors to identify market trends and assess a GP’s strategy successfully. Gaining information on deals previously originated by a GP can help identify the market segment in which the manager operates. Knowing a GP’s “sweet spot” allows investors to avoid undesirable risk- factor concentration or select a GP based on how well it fits the portfolio’s broader objectives.
Data on individual loans are harder to obtain and require a closer relationship with the originating GP. Still, this level of granularity is essential if we are to effectively compare managers. Exhibit 11 illustrates this point by providing a clearer picture of the segments in which different GPs source most of their transactions. This is an important tool for manager selection and monitoring as well as for portfolio construction.
Exhibit 11: Average Yield and EBITDA per GP
Source: StepStone Private Debt Internal Database
4.2
Investment Control
In recent years, the amount of capital as well as the number of GPs in the market have grown significantly. This increase in competition has led to an environment that generally favours borrowers. In that regard, investment guidelines are a useful way to prevent managers from chasing unattractive deals. With these guidelines, thresholds can be applied to certain credit metrics such as leverage, LTV or effective covenants.
Exhibit 12 demonstrates that covenants can effectively protect lenders. Indeed, imposing just one covenant can reduce losses by more than half on average, based on historical figures. Covenants are also helpful to identify the borrower’s underperformance earlier thus mitigating the loss rate.
Exhibit 12: Average Loss Rate by Number of Covenants for Corporate First-Lien Loans (2004-2016)
Source: StepStone Private Debt Internal Database, based on more than 8,000 US and EU first-lien loans
4.3
Lender of Record
Being the lender of record (e.g., through co-investments or managed accounts) further strengthens the position of investors. The lender of record owns the loan, has a direct relationship with the borrower, and reserves the right to enforce, settle, compromise, amend the loan, or sell a participation. Participants, on the other hand, have no direct rights under the loan agreement; they can neither enforce the loan nor proceed against the collateral. In most instances, the borrower does not even know the participant exists.[11] The ability to control and drive negotiations with underperforming companies determines the final recovery.
4.4
Deployment
When investors evaluate GPs’ performance and track records, they often look at the managers’ gross and net IRR. However, it is equally important to assess the deployment rate at that IRR, as this dictates the absolute cash return to the investor. Simply put, if a GP cannot identify enough transactions, an investor’s capital sits idle in a bank account where it provides low or even negative returns.
As can be seen in exhibit 13, having the ability to put capital to work sooner leads to significant differences in the cumulative US-dollars-earned amount over the relevant period. These differences mostly stem from different implementation strategies. The chart compares the US-dollars earned on capital committed under three different investment scenarios: an evergreen vehicle, a closed-end vehicle and a single fund.
Exhibit 13: Cumulative US-dollars-earned Comparison
Source: the estimates for the evergreen platform and the closed-end platform are based on StepStone vehicles and on Preqin data for the single fund
4.5
Flexibility
Investors should consider an investment structure that provides the flexibility to shift allocations from one GP to another. This cannot be achieved with investments in funds but requires a Separately Managed Account (SMA) with individually negotiated terms. The need for flexibility may be driven by return, risk, regional focus or capital deployment considerations.
Investing through a flexible SMA platform on which LPs’ commitments can be shifted between GPs allows investors to manage their portfolio based on exposure rather than commitments. By targeting an optimal deployment level, investors can avoid opportunity costs faced in a traditional fund rollover strategy across vintages, as demonstrated in exhibit 7.
4.6
Diversification
Direct lending investors typically seek stable returns at a defined target level, looking for neither excess returns nor excessive losses. As in public markets, diversification is the simplest and cheapest way to reduce risk within a portfolio. This is even more important for investments such as private debt. Only a handful of managers have track records that precede the GFC, which makes it hard to assess how well a given GP may perform throughout the economic cycle.
