Description
The private debt asset class primarily represents directly-originated senior or mezzanine lending to middle market companies and real estate investors. It also includes opportunistic special situations and sector specialist strategies, for example in the healthcare and technology sectors, which may offer more attractive risk-adjusted returns. In the aftermath of the global financial crisis, the deleveraging and increased regulation of banks resulted in significant opportunities in private debt as banks all but abandoned complex categories of lending given high regulatory capital requirements. Private debt offers a complexity and illiquidity premium which we expect to on average be in excess of liquid credit returns. Private debt strategies typically include a high level of contractual return and a significant margin of safety from substantial equity subordination or asset coverage.
How We Invest
We seek managers who have invested across multiple credit cycles, and who have a deep fundamental credit skillset with the structuring and workout capabilities to protect capital over the full cycle. As we have seen significant capital flow into the more “vanilla” parts of private debt such as corporate direct lending, we have increasingly focused on more specialised or less competitive areas of the market such as lending to healthcare and technology companies, lending to small businesses (through the US Small Business Investment Company program), real estate debt or construction financing, less liquid areas of structured credit and other niche/specialist lending strategies. Our best ideas are captured by our private debt vehicle. The evergreen pooled vehicle has invested in over 50 private debt and uncorrelated strategies since inception in 2012. We also offer bespoke specialist mandates in private debt for large clients.
Case Study
In 2022, we invested in a healthcare lending strategy that provides capital to medium and large-sized life sciences businesses. The strategy provides capital to mature companies that have commercial stage products and predictable cash flows, avoiding early-stage companies that are subject to product approval and regulatory risk. The strategy focuses on downside protection, achieved through bilateral transactions with multiple tight covenants, low loan-to-value ratios, and often benefits from hard assets as collateral such as manufacturing facilities, specialist equipment and real estate. These companies exhibit resilient characteristics, as evidenced by the healthcare sector having the lowest default rate of any other industry sub-sector within the leveraged loan market over the past 25 years. The investment is further supported by secular tailwinds in the industry, namely an ageing population and increasing R&D expenditure, which is expected to lead to a significant financing need for these companies. The attractiveness of the opportunity set for the strategy has further improved over the course of 2022 as companies have been reluctant to raise capital through dilutive equity raises during a period of lower valuations, turning instead to debt capital solutions.
