The Public Rise of Private Debt

12 May 2016

Since the financial crisis, Alternatives as a broad asset class has been propelled into the ‘mainstream’ of asset allocation, given the low yield environment and search for meaningful returns.

As part of this development, clients have recently engaged us looking to hire mid to senior level talent within Private Debt/Alternative Credit franchises.

In this article, we look at both the factors driving demand and also their implications from a talent perspective.

The Context

Opportunistic demand becoming Strategic:

Traditionally, investors viewed less liquid strategies in a fairly opportunistic light, often allocating small speculative amounts out of a broader ‘Private Equity’ allocation. However, as returns in more traditional credit strategies have fallen, decisions to allocate have become more strategic and long term in their outlook. This has translated into notably successful fundraising rounds for many Asset Managers and Alternatives Providers.

Overcoming perceived illiquidity concerns:

One of the major issues which has historically faced this asset class is the perceived lack of liquidity and access to capital for Investors. However, continued innovation around ‘Liquid Alternatives’ and niche debt instruments have gradually eroded some misgivings giving greater liquidity and investor appeal.

Constraints on Bank lending:

Increased Balance Sheet requirements under Basel III have seen many more traditional corporate lenders retract or exit the market. With the banks’ ability to lend increasingly challenged, demand for ‘shadow’ or ‘alternative’ banking services has grown. Direct ‘mid market’ lending strategies have undergone a surge in popularity and investment highlighting the market’s appetite for less liquid products plugging a gap in corporate demand.

Expected Investor returns:

Depending on the credit quality of vehicles and the inherent risk therein, the spectrum of return ranges from LIBOR + 2.0% to 4.5% p.a (e.g senior real estate debt and senior infrastructure debt) through to LIBOR +15% to 17% (Distressed Debt).

The result of such a divergence of returns has been the creation of robust private debt portfolios allowing investors to meet a broad range of investment objectives. Research from Mercer suggests that growth Fixed Income portfolios can have an allocation to Private Debt of between 20% and 40%. As new products meeting a range of expected risk/return appetites are launched, overall demand for the asset class is likely to grow.

Implications for Talent

A number of established Credit Alternative firms have been active in this market for some time. Junior talent has come through either specific buy side credit training or hired from Investment Banking teams. Sell side teams of interest have included Leveraged/Mezzanine Finance, High Yield, Restructuring and Special Situations.

More recently, a large number of more ‘traditional’ Asset Managers have increased their competence in the market, either through team/business acquisition or organic growth. This is a trend likely to continue based on recent discussions with many business leaders.

Shared Characteristics for Success

The following skills and characteristics are in high demand across all potential hires. The level of importance placed on each will vary depending on the seniority of the individual:

  • First rate Credit assessment ability
  • Fiduciary ‘buy side mentality’
  • Depth of third party investor knowledge and track record
  • Strong Financial Sponsor network
  • Commercial approach to expected investment returns
  • Exceptional work rate and productivity
  • Multi-jurisdictional experience

Based on the factors outlined above and continued discussions with leadership teams, we believe there will be continued demand for talent in this market.

Written by

Navin Raina

T: +44 (0)20 7397 3773

Please contact us for further information