Private credit is enjoying a period of expansion as fund issuance rises in response to investor demand. PitchBook estimates that total assets under management are approximately $1.6 trillion. Performance is certainly a key factor here. As Cambridge Associates noted recently, through September 2023, US direct lending funds returned more than 11% over the preceding 12 months. But another key factor is the convergence taking place between private credit and private wealth.
While the asset class has long been the preserve of institutional investors and UHNW clients, private wealth channels are opening up to the mass affluent, with semi-liquid ‘evergreen’ funds offering a unique access point.
The private credit roundtable session will feature six leading GPs and two LPs:
- Harriet Steel, Partner, Pemberton Asset Management
- Amitayush Bahri, Co-Head, European Direct Lending, Goldman Sachs Asset Management
- José María Martínez-Sanjuán, Global Head of Fund Selection, Santander Private Bank
- Mattis Poetter – Partner & Co-CIO, Arcmont Asset Management
- Aymeric Martin – Executive Director, Private Debt, Tikehau Capital
- Gaetan Aversano - Deputy Head of Private Markets, Union Bancaire Privée
- Raman Rajagopal – Senior Client Portfolio Manager, Private Credit, Invesco
- Dan Robinson – EMEA Head of Alternative Credit, DWS Group
Vincent Archimbaud, Head of Wholesale Europe, Tikehau Capital, says:
“We feel that we are well positioned to answer the demand. In terms of expertise, we’re a pioneer in private credit in Europe, with expertise in direct lending since 2007 and a total AuM of more than EUR18 billion.”
A win-win dynamic
Private credit is a strategy that should do well for private wealth for a number of reasons.
It offers downside protection, it is an alternative to high yield bonds, it comes in a variety of different strategies and risk/return profiles and the fact that the underlying loans are private and therefore not completely liquid means investors also get some cash yield (income) along the way.
“The all in yields are some of the best I have seen in my 16 years of investing in private credit,” comments Amitayush Bahri, Co-Head, European Direct Lending at Goldman Sachs Asset Management. “The normalised base rate environment has helped this asset class generate double digit returns. Conversely the risk is lower as larger and larger companies are seeking private credit solutions and LTV’s remain modest.”
Direct lending strategies involve the origination of senior secured loans which help to provide an alternative financing solution to companies.
Bahri explains that these strategies can generate anywhere from 10 to 15%, “despite not being the most junior part of capital structures. Borrowers are getting more flexible, more customised, more user-friendly solutions than in the traditional syndicated loan market and investors are getting a great risk adjusted return which creates a win-win dynamic for private credit.”
As GPs look to build long-term relationships, they are a placing a lot of commitment on educating distribution partners to ensure they understand their needs as well as their end clients. Tikehau Capital has been active in the UCITS space for more than a decade where it has built qualitative relationships with a large number of European distributors.
But as Archimbaud notes, “The level of commitment that is expected from them, in the context of semi-liquid fund distribution is much higher compared to a more classic UCITS fund distribution”.
“They need to perform exhaustive due diligence, validate the fund internally, train all their advisers about the different features of the product, and organise resource-intensive roadshows to make it a commercial success."
Ask the right questions
As wealth platforms forge new GP partnerships, asking the right questions is crucial to ensure there is alignment with their investment goals and risk tolerance. José María Martínez-Sanjuán, Global Head of Fund Selection, Santander Private Bank, says some of the key questions it is asking third party managers include:
- What is your investment philosophy, and how does it align with our investment goals?
- What has been your performance history over various market cycles? What are some examples of your best and worst investments, and what did you learn from them?
- How do you manage and mitigate risk within the portfolio?
- What are your fee structures and are there any additional costs we should be aware of? How do you ensure that your fees are competitive and fair relative to the value provided?
- How frequently and through what channels will you communicate with us?
“There has been increasing interest from investors into private credit attracted by low-volatility risk-adjusted returns and a substantial cash yield component to the return,” says José Martínez-Sanjuán.
“It is of paramount importance in Santander Wealth´s strategy and specifically in our recently created Santander Alternatives Investments. The bulk of the funds managed by SAI focus on private debt products: direct lending, specialty finance, real estate debt and infrastructure debt. SAI hasn’t distributed any semi-liquid funds to our retail investors, so far.”
A broader church
Pemberton Asset Management sees a broadening appetite among wealth allocators for private credit as an asset class as appetites change and become more sophisticated. Harriet Steel a partner at Pemberton, notes that there have been allocations from the upper end of the wealth market who can afford to allocate to closed-ended funds, for quite some time.
“However, there is now accelerated interest from a much broader church of wealth investors who are looking for more flexible fund wrappers,” she says. “It comes hand in hand with private credit really coming of age as an asset class.”
What used to be a fairly anodyne product offering centred around direct lending, has evolved into a broader suite of strategies that can be combined to deliver outcome-specific solutions for wealth investors; providing a degree of liquidity and flexibility in terms of risks. In the last 10 years, the vast majority of growth has been in direct lending. But there are new solutions such as significant risk transfer, NAV financing, and new access points emerging, which make it a much more agile asset class, according to Steel.
"For our forward-looking strategy we need to open up the wealth channel to give investors access to our solutions,” says Steel. “On the back of that we’ve built a semi-liquid ELTIF product for Zurich Insurance Group for distribution in its unit-linked business. It’s a multi-strategy solution. Private credit is incredibly agile, particularly if you combine different strategies into very specific outcome-driven solutions.”
Sleep well at night
At Goldman Sachs Asset Management, the sole focus of its direct lending wealth product is on large-scale market leaders in software, healthcare and mission critical services.
As Bahri states: “We tend to stay clear of cyclical businesses or those over-exposed to commodity prices. This is a ‘sleep well at night’ strategy. We’re not trying to be heroes. It’s all about minimising downside and capital loss and compounding your capital with a running cash yield.”
Understanding liquidity management within an evergreen private credit fund is a key focus of discussion. This is not surprising given how early a lot of wealth managers are on this particular journey.
While some solutions that use public market strategies such as high yield or broadly syndicated loans as the liquidity buffer, others use alternative liquid solutions within private markets. At Pemberton, the team uses a working capital finance strategy, which finances trade payables and receivables for large sub-investment grade companies.
As Steel concludes: “The default risks are very low and there is zero duration and no market correlation. So stable returns with less performance drag than cash, and much less volatility that public market options. The underlying assets self liquidate on an average period of around 60 days.”
