Photo: Oscar Urdaneta. London is Top Global City for UHNWI, but New York Poised to Take Crown
New York will overtake London as the most important city for the ultra-wealthy by 2023, according to Knight Frank’s Wealth Report, an annual analysis of wealth flows and property investment around the world.The report shows that three of the top five most important cities by 2024 will be in Asia, knocking Geneva from the top 5. New York is followed by Miami, Washington D.C, San Francisco and Toronto in North America.
Over the last year, the global response to the financial crisis continued to boost property markets in many parts of the world. The latest results from The Wealth Report’s Prime International Residential Index (PIRI) confirm that Asian markets, led by Jakarta, experienced the biggest price growth in 2013, followed by Auckland, Bali, Christchurch and Dublin.
Liam Bailey said: “History, location and their long-established wealth mean that London and New York’s positions look unassailable, at least for now. It is further down our leader board that the real city wars are being waged. The main battleground is Asia, where a handful of locations are slugging it out in the hope of establishing a clear lead as the region’s alpha urban hub”.
“By region, the Middle East top five includes Istanbul and Abu Dhabi, two centres from our “hotspots” list – cities that are set to rapidly increase their influence on Ultra High Net Worth Individuals* (UHWNI) – close behind Dubai in prime position. One legacy of the Arab Spring is the enhanced status of Turkey as a safe haven location for investors from the Gulf and North Africa.
“Although it still trails some way behind the top four cities in Asia-Pacific, Sydney is steadily growing in importance as a wealth hub for the region. Despite its geographical remoteness, it comes in as the fifth placed hotspot. Sao Paulo heads the current Latin American top five list -with Río, Buenos Aires, Mexico City and Santiago-. Current trends suggest that the city is also set to see its UHNWI population ranking rise from 11th to 8th position globally by 2023.”
In terms of property performance, locations that were hardest hit by the downturn, like Dubai, Dublin and now Madrid, are also bouncing back strongly.
The report also examines wealth creation across the world, finding that the number of ultra-wealthy individuals across the world rose by three per cent last year, despite continued economic turbulence. Exclusive data prepared for the Wealth Report, shows that the number of Ultra High Net Worth Individuals (UHNWIs) in 2023, who have $30m or more in net assets is set to grow by nearly 30% over the next decade.
Data from Wealth Insight, the global wealth intelligence firm, shows that while Europe will remain home to most UHNWIs, the biggest growth will be in Africa. The number of people with $30 million or more in assets will climb by 53% by 2023, underpinned by a 92 per cent rise in Nigeria and a 74 per cent rise in Kenya.
“The growth of UHNWIs in China and India coupled with an eye-catching 144 per cent increase in Indonesia and a stellar 166 per cent hike in Vietnam will help push the total number of UHWNIs up by 43 per cent t0 2023,” explained Liam Bailey.
BNY Mellon, a global firm of investment management and investment services, announced that it has signed an agreement to acquire the remaining 65% interest of HedgeMark International, LLC, a current affiliate and a provider of hedge fund managed account and risk analytic services.
The deal is expected to close in the second quarter, subject to regulatory approval. Financial terms of the transaction were not disclosed. BNY Mellon has held a 35% ownership stake in HedgeMark since 2011.
Founded in 2009 and headquartered New York, HedgeMark assists in the structuring, oversight, and risk monitoring of hedge funds, specifically dedicated managed accounts. More and more, institutional investors globally are using dedicated managed accounts – single investor funds – as a way to invest in hedge funds that allow for greater customization, transparency, liquidity and control.
“As institutional clients continue their shift into alternatives, especially hedge funds, this acquisition will enable us to better meet demands for improved governance, risk reporting, and transparency,” said Samir Pandiri, BNY Mellon executive vice president and CEO of Asset Servicing. “We’ll be able to integrate HedgeMark’s capabilities with our Global Risk Solutions offerings to set a new industry benchmark on risk and transparency. It marks the next step in our strategy to provide sharper insight into hedge fund investments and enterprise risk across a client’s entire portfolio”.
Ken Phillips, HedgeMark’s founder and CEO, has announced his intention to retire when the transaction is completed. HedgeMark’s board of directors will appoint Andrew Lapkin, current president, as its new CEO. Lapkin will help supervise the transition and report to Pandiri after the closing.
“HedgeMark has collaborated closely with BNY Mellon‘s investment services business these last three years to deliver client- and market-driven solutions for the alternatives industry,” said Lapkin.
Photo: Felipe Burgos Álvarez. Cartica Capital Urges CorpBanca to Reconsider its Approval of the Merger with Itaú
In response to inquiries following news reports, Cartica Capital confirmed today that it has delivered a letter to the Board of Directors of CorpBanca S.A. In the letter, Cartica urges the Board to immediately reconsider its approval of the proposed merger with Itaú Unibanco Holding and take appropriate steps to commence an auction process that maximizes value for all shareholders, consistent with the Board’s fiduciary duties.
Cartica believes that the proposed transaction with Itaú as currently structured greatly undercompensates the Bank’s minority shareholders, while securing valuable benefits exclusively for CorpBanca’s controlling shareholder, the Alvaro Saieh-controlled CorpGroup Holding. Cartica previously advised Mr. Saieh privately of its concerns.
With in excess of US$2 billion under management, Cartica Capital manages a concentrated long-only portfolio of publicly-traded equities in Emerging Markets. Cartica engages with companies in a constructive and cooperative manner to influence the direction of each company to improve performance, unlock value, and increase market valuations.
The full text of the letter to CorpBanca’s Board follows: March 3, 2014
Re: Fairness of proposed CorpBanca / Itaú transaction
Dear Members of the Board:
We are writing to inform the Board of our conviction, previously communicated to the Bank’s controlling shareholder, Mr. Álvaro Saieh, that the proposed transaction between CorpBanca SA (the “Bank”) and Itaú greatly undercompensates the Bank’s minority shareholders and extends disproportionate consideration to Mr. Saieh and his affiliates. As one of the Bank’s largest minority shareholders, we believe that the decision to approve the transaction as currently structured constitutes a failure of the Board to discharge its fiduciary duties to all shareholders. Accordingly, we request that you reconsider moving forward with the transaction and instead take immediate steps to oversee a fully transparent process for the sale of the Bank that maximizes value for all shareholders, as your fiduciary duties require.
As you are aware, the Bank confirmed its intention to seek a “combination” with a larger regional institution in a disclosure (hecho esencial) issued on November 29, 2013. Soon thereafter, the financial media reported that Mr. Saieh intended to select the eventual partner based on which suitor offered the greatest degree of influence in the post- merger institution to him and CorpGroup, the holding company through which the Saieh family exercises control over the Bank. In a letter to Mr. Saieh dated December 20, 2013, we insisted that price should be the sole criteria for selecting among the Bank’s suitors and that any arrangement that avoided a tender offer would amount to inequitable treatment of minority shareholders. We also spoke by telephone and met in person with Mr. Saieh in December 2013 to impress on him the fiduciary duty of the Board and its controlling shareholder not to compromise on the value of the deal for all shareholders in exchange for securing special benefits for Mr. Saieh and CorpGroup.
Disregarding the best interests of minority shareholders, Mr. Saieh and the Bank nonetheless agreed to a transaction that will, if completed as currently structured, provide Itaú with effective control of the Bank while conferring numerous valuable benefits to Mr. Saieh and CorpGroup. The market swiftly repudiated the deal: the Bank’s shares dropped precipitously in the days following the announcement, erasing more than US$700 million in shareholder value.1
While the full details of the transaction agreement and the shareholders agreement to which the Bank, Itaú and CorpGroup are parties have not been disclosed, the incomplete and inadequate disclosures that have been made so far clearly reveal that Mr. Saieh and CorpGroup will receive an array of special benefits not shared with other shareholders, including at least the following:
The purchase by the post-merger bank of CorpGroup’s 12.38% interest in CorpBanca Colombia for US$329 million and of CorpGroup’s co-investors’ interest in such unlisted and illiquid entity for an additional US$565 million at a price significantly higher than fair market value or the value that would be received in an arm’s-length transaction. This purchase of the minority interest in CorpBanca Colombia represents a transfer of value from the Bank’s shareholders to CorpGroup and its co-investors in CorpBanca Colombia.
A US$950mm credit line to be provided by Itaú to CorpGroup, which provides no benefit to the Bank’s minority shareholders.
CorpGroup’s rights under the proposed shareholder agreement to appoint the Chairman of the post-merger bank (reported to be the Bank’s current Chairman, Mr. Jorge Saieh) and members of its Board (reported to include Mr. Fernando Massú, the Bank’s current CEO), to veto senior management appointments, and to otherwise influence the structure and composition of the senior management team.
Tag-along rights and rights of first offer.
A share liquidity mechanism for the sole benefit of CorpGroup.
An agreement to give CorpGroup the option to co-invest with Itaú in a regional alliance of banking businesses outside the geographic range of the merged bank.
The paucity of detail on the transaction provided by the Bank’s management thus far means we may not even know the full extent of the disproportionate consideration to be accorded Mr. Saieh and CorpGroup, or that the particulars of these benefits have been accurately reported. Given the special benefits received by Mr. Saieh and his affiliates, we reject the Bank’s assertion that the structure of the transaction as a share-for-share merger means that all shareholders will receive the same treatment. To the contrary, we believe that it is patently evident that the tortured legal structure adopted by Mr. Saieh for the transaction was selected precisely to deprive minority shareholders of the opportunity to have their shares acquired in a tender offer for fair value. And, of course, CorpGroup and its co- investors will be receiving cash, not shares, for their interests in CorpBanca Colombia.
In a letter to Mr. Saieh dated January 31, 2014, we rejected the characterization of the transaction as fair to minority shareholders and asserted our belief that Mr. Saieh and the Bank’s management had negotiated merger terms disadvantageous to the Bank’s minority shareholders in return for special benefits accruing to Mr. Saieh and CorpGroup. We expressed our hope for a constructive dialogue with Mr. Saieh to seek equal treatment for all shareholders. Instead, we were referred to the Bank’s counsel, who dismissed our concerns and asserted that the Bank would provide shareholders with no further information about the transaction.
Faced with the refusal of Mr. Saieh and CorpGroup to engage with us over our objections to the proposed transaction, we now call upon you, the Board of Directors of the Bank, to rectify this situation consistent with your fiduciary duties. We know you understand that your fiduciary duties require you to act in the best interests of all shareholders rather than simply endorsing and implementing the will of the Bank’s controlling shareholder. We believe the best way to maximize value for all shareholders is to conduct an open auction for the Bank without regard to the continuing benefits Mr. Saieh stated would be a key element of any transaction. In addition, the Bank should immediately disclose all the terms, contracts, agreements, understandings and plans for the proposed transaction so that all shareholders may assess for themselves its merits.
As members of the Board of Directors of CorpBanca you are stewards of the Bank and fiduciaries of all shareholders. The affiliated private investment funds managed by Cartica Management, LLC (collectively, the “Cartica Funds”)2 have been shareholders of CorpBanca SA since October 2012 and currently collectively own 10,971,557,595 shares including both common shares and ADRs. These holdings represent approximately 3.22% of the Bank’s outstanding shares. We urge you to take immediate steps to do what is right for all shareholders and run a full and transparent process to maximize shareholder value. We believe that an open and constructive dialogue between the Board and shareholders can contribute to a resolution of the issues raised in this letter and we remain open to such dialogue. However, consistent with our duties as fiduciaries for the investors who have entrusted their capital to Cartica, we are prepared to pursue any and all avenues and remedies available to us to protect the interests of the Cartica Funds as CorpBanca shareholders.
Sincerely, Teresa Barger
Senior Managing Director Cartica Capital
1 In fact, between November 29, 2013 (the day after CorpBanca announced that it had retained Goldman Sachs and Bank of America) and January 28, 2014 (the day before the announcement of the Itaú transaction), CorpBanca shares traded at a Volume Weighted Average Price (“VWAP”) of CLP 7.163. On January 29, 2014, the day of the announcement, the shares closed at CLP 6.067, a drop of more than 15% from the VWAP .
2 The Cartica Funds are: Cartica Corporate Governance Fund, LP; Cartica Investors, LP; Cartica Capital Partners Master, LP; and Cartica Investors II, LP.
There has been much speculation this year when it comes to the future of the Argentine economy. Many on wide side believe the country is heading towards another major financial crisis while many others believe it is just business as usual.
One of the major investment vehicles in the country is bonds, so what do they have to say about the state of the nation?
Let’s take a look at the development of the BODEN (Bonos Optativos del Estado Nacional) Elective Government Bonds, known by their acronym in Spanish, which are the dollar denominated bonds regulated entirely in Argentina and backed by the Argentine Central Bank.
BODEN RG12 was the bond series launched in 2002 after the financial crisis.
It carried a coupon payment of 12.50% and was being traded at a median performance of 17.99%, which was an adequate performance in relationship to the dividend payments. When the Government made their last payment in 2012 to investors, everyone praised it as a significant movement away from crisis. About 80% of investors were foreigners, and it surely gave them confidence about the future outlook of Argentina.
The next big test for the BODEN series will be the R015 expiring on October 3rd, 2015.
The bond has an average performance of 18% after the peso devaluation and it is causing concern in the markets, considering it carries a fixed coupon payment of 7% and a payment date just around the corner.
I will trust the bonds to give us more input this year in the upcoming state of the Argentine economy.
Argentina must make payments on the BODEN bonds in dollars, which in turn must come from the Central Bank reserves. Argentina uses these same reserves to resist downward pressure on the peso, and to pay for imported goods.
As the BODEN is a dollar-denominated instrument however, it demonstrates that contrary to common misrepresentation, Argentina can indeed access international capital markets, at least to some extent. Furthermore, the BODEN’s consistent value and trading value over time shows that international investors and markets continue to seek exposure to Argentina.
Argentina has demonstrated both a commitment to and indeed the prioritization of honoring this commitment; however, their continued ability to do so will depend on the bond closing prices, as well as on reserve levels in the upcoming year.
Foto: Rakkhi, Flickr, Creative Commons.. Legg Mason compra la gestora de QS Investors
Legg Mason has announced a definitive agreement to acquire QS Investors, a leading customized solutions and global quantitative equities provider based in New York, with $4.1 billion in assets under management and nearly $100 billion in assets under advisory.
Legg Mason’s existing quantitative equity platform, Batterymarch Financial Management, and Legg Mason Global Asset Allocation, its existing solutions platform, will be integrated over time into QS Investors as a result of this transaction. The combined platform will be a world-class retail and institutional solutions and global quantitative equity provider with compelling investment strategies and strong consultant relationships.
The expanded platform will be branded under the QS Investors name, and headed by Janet Campagna as Chief Executive Officer and Rosemary Macedo as Chief Investment Officer. Key investment professionals from Batterymarch and LMGAA will join the existing QS team as senior members.
The acquisition is expected to close in the first fiscal quarter of FY 2015. The acquisition and combination transaction is expected, excluding restructuring and transition costs, to be modestly accretive to Legg Mason’s earnings in the first year. In connection with the combination of the businesses, Legg Mason expects to incur restructuring and transition costs of approximately $35 million, including $3 million in the March 2014 quarter and $30 million in fiscal year 2015. Terms of the transaction were not disclosed.
The combined business will remain committed to delivering alpha for clients. This transaction strongly positions Legg Mason within the rapidly growing global client demand for customized solutions, liquid alternatives and smart beta strategies with: a scalable and distinct investment process and key capabilities in Custom Solutions, Liquid Alternatives, Global Quantitative Equities (including a 12-year track record in Smart Beta), and Multi-Manager Asset Allocation; a research-driven process with a strong track record in combining fundamental research, quantitative models and insights from behavioral finance to dynamically shift investment exposure based on changing market conditions and opportunities. Also, with significantly enhanced capabilities and operational efficiencies to deliver outcome-oriented products and strategies, compelling investment performance, a world-class technology platform and strong relationships across the consultant community and a broad institutional client base of public and private pension funds, endowments, sovereign wealth funds and financial institutions.
Post transaction, Legg Mason will leverage this enhanced solutions platform together with Legg Mason’s other investment affiliates and global distribution network for future growth in the institutional marketplace as well as with retail clients, where demand for customized solutions is increasing.
Joseph A. Sullivan, President and CEO of Legg Mason, said: “Optimizing and expanding our portfolio of investment products has been a top priority for our senior management team. The combination of QS Investors’ highly regarded investment capabilities and thought leadership with our existing investment teams creates a powerful offering in an area of the market that is expected to experience significant growth in the coming decade. When we marry that with our global distribution platform, we believe we will be well positioned to bring compelling products to retail and institutional investors in markets around the world.“
Janet Campagna, CEO of QS Investors, said: “QS Investors and Legg Mason share a ‘client first’ culture committed to transparency that will allow us to focus on investment strategies and serving our clients, and this unique combination will allow us to leverage Legg Mason’s global retail distribution platform, build and further strengthen our talented research and portfolio management teams, and continue to be at the forefront of innovative product development. Our objective over the next year is to integrate Batterymarch and LMGAA with our platform to leverage the best ideas from each group much like we’ve successfully adapted and efficiently integrated ideas both within and across asset classes for clients for over 14 years. We are confident in our ability to execute against this plan and especially pleased that our entire team continues to be focused on the long term success of our clients and business.”
Legg Mason was advised by Dechert, LLP and QS Investors was advised by RBC Capital Markets and Paul, Weiss, Rifkind, Wharton & Garrison LLP.
Photo: Mstyslav Chernov. The Shanghai Free Trade Zone Is Now a Focal Point for Financial and Economic Reforms
Victoria Mio – CIO China, Co-head Asia Pacific Equities and Fund Manager of Robeco Chinese Equities – came back from her last macro research trip to China with more confidence on cyclical recovery and reform momentum.
Different from Japan or Korea, which are small in comparison and urbanized very quickly, China remains relatively poor after 30 years of unprecedented growth. Although the coastal regions have reached an advanced stage in their development, the central/western regions are still underdeveloped. That provides a lot of room for growth. China is still an ‘adolescent’, yet to reach ‘adulthood’.
The Shanghai free-trade-zone pilot scheme was approved by the State Council on 22 August 2013. The most innovative part of the plan lies in promoting renewal in the financial sector and allowing market forces to work. Investors, points out Victoria Mio, are getting very excited by these new initiatives.
It is anticipated that the FTZ government may abolish many approval procedures and replace them with a registration process, and will allow foreign companies located in the FTZ to conduct currency conversion more freely. The FTZ may also be an important step for China to move towards joining the negotiation for a Trans Pacific Partnership (TPP), which requires all member countries to provide the same policy environment for companies, regardless of ownership. In this sense, the FTZ will lead China’s next phase of economic liberalization to drive economic growth for many years to come. Once proven successful, it will be rolled out on a nationwide basis.
Figure 1 shows the Shanghai Free Trade Zone, which includes A) Waigaoqiao Free Trade Zone, B) Pudong Airport Free Trade Zone and C) Yangshan Free Trade Port Area (land/harbor). The total area combined is 28.8 sq km, or 2.6% of Hong Kong (1,103 sq km) and 0.45% of Shanghai (6,340 sq km).
Conchita Calderón. Photo: Linkedin. Conchita Calderon is Appointed Executive Director for JP Morgan in Mexico
Conchita Calderon has been appointed by JP Morgan as executive director of New Business Development for Mexico, according to information supplied to Funds Society by sources familiar with the appointment.
Calderon has worked to date as the partner responsible for the Mexican market at Canepa Management, a company which participates in Azora’s capital.
With over 14 years experience in the financial and wealth management sectors, Calderon has spent most of her career between Miami and Mexico specializing in ultra-high-net worth (UHNW) clients of the Private Banking division of Banco Santander.
Stephen Thariyan, Corporative Debt Responsable at Henderson.. Henderson Reaffirms its Commitment to Building a Global Credit Franchise
Henderson is investing resources in building a global credit franchise, led by Stephen Thariyan. In February 2013, Henderson announced the appointment of Kevin Loome as manager of U.S. corporate bonds, and his team of five specialists. With these engagements Henderson built a U.S. credit team based in Philadelphia that complements its European fixed income franchise. As confirmed by Thariyan during an interview with Funds Society, the next step will be the hiring of a specialist emerging fixed income team. “That way we will have all the resources to position ourselves in the credit subclass, which offers the best prospects for profitability,” says Henderson Global Investors’ global head of corporate debt.
The next few years will be quite different to what we have seen in the credit markets during the last five years; a period in which “everyone did well without doing anything special, other than being in the asset class,” says Thariyan. The outlook is more complicated now, mainly because investors are “accustomed to double-digit returns.”
A reduction in returns which ultimately did not happen had been expected for 2013. In fact, most experts predicted that the high yield credit market would see a year in which the investor would earn “the coupon” rate, about 5.5%, for the European high yield market. However, as Thariyan points out, the reality was different and the high yield market favorably surprised investors by giving them returns of 11%.
Looking to 2014, the expert points out two focal areas in the credit market. “First, there are still some interesting returns in some sub-asset classes such as high yield and emerging market debt. Moreover, unlike what happened in recent years, this period will not be dominated by the actions of central banks, so this is a year in which the selection of securities becomes important once again.”
Given this much more complicated scenario, Thariyan emphasized that “more than a great rotation from debt into stock, it is internal rotation which is occurring within the credit market”, both geographically, favoring regions where monetary stimuli remain, and in absolute return management products, “which offer protection against duration risk.”
Thariyan explains that, his team’s goal is to provide an additional market return exceeding 50 bp for the entire credit range by selecting appropriate strategies and emissions. “Now is the time to have a good credit analyst team generating the most value,” he added that for performanceit is very important to access the largest possible universe of securities and “to be willing to leave the index if it is suitable for the portfolio.”
Since the year 2009, Henderson has applied four levers in order to obtain alpha in their fixed income portfolios: a good selection of securities, ignoring the index, using credit derivatives and performing active duration management.
Thus, Henderson has already achieved great success in European IG Credit where it has a strategy which leads the market with 1,700 million dollars in assets under management, as well as in its absolute return strategy, Credit Alpha, which has had a soft close in November to approach the figure of 1,000 million pounds, an amount which the credit team considers the limit in order to optimize fund performance considering the operational costs involved in the strategy. Just over a year ago they launched their strategy for European high yield, which is ranked among the most profitable in its category, and three months ago, relying on Kevin Loome’s team in Philadelphia, Henderson launched a global high yield strategy. Overall, Henderson manages 20,000 million dollars in fixed income strategies.
“We hope to be ready to complete this deal with emerging fixed income strategies soon so that in two or three years we will have a truly global deal on credit, and have accumulated a significant track record for investors,” he concludes.
. The First Funds Society Golf Tournament in Miami Kicks off with 50 Participants
The First Funds Society Golf Tournament was held at the Biltmore Hotel’s golf course in Miami last Thursday, the 27thof February. The tournament was attended by over 50 participants of the Wealth Management sector in Southern Florida and was supported by the Henderson management company and by Goldman Sachs AM.
Although the weather was not in our favor for a few days leading to the tournament, and it seemed that the golf tournament would be a wet affair, the rain held off on the date, and all participants were able to enjoy a great day of golf.
The session was preceded by a presentation by fixed income managers Jason Singer, Managing Director of Global Fixed Income at Goldman Sachs Asset Management, and Stephen Thariyan, head of Global Credit at Henderson Global Investors. Both speakers exposed the reasons why they believe it is important to participate in this asset class and answered the questions of those present, who were especially interested in the reality of emerging markets and in particular in Latin American countries.
The tournament’s kick-off was held just after midday, and it was played under the Stableford system in two separate categories. The first category was for players with handicaps of 0 to 18.4, and the second for those with handicaps from 18.5 to 36.
Following is the list of winners of the Funds Society First Golf Tournament:
Flight 1:
1º – Daniel Eulate – Andbank Wealth Management – Director
2º – Luis Cardenas – Banco Sabadell Miami Branch – Assistant VP Credit Department
Flight 2:
1º – Javier Martín Pliego – Santander International – VP Business Development
Fixed Income investors have heard the same story repeatedly over the past few years: there is no juice in traditional fixed income products, and investors will have to look elsewhere to earn any meaningful yield. We see an opportunity for our clients in private debt, as the risk premium of over 5% above comparable high yield bonds nicely compensates for the illiquidity of this asset class, which is arguably the most common barrier to investing. However, we find that most of our clients hold over 85% of their family portfolio in highly liquid securities (i.e. with less than a week of liquidity). The expansive monetary policies of central banks, coupled with some distortions formed by the 2008-2009 financial crisis, have created a great opportunity to lend to middle market private companies.
Brief Overview of Private Debt
Private debt is often utilized by small and mid-sized companies looking for capital or financing. These firms are known as “middle-market” companies- broadly defined as those firms with EBIDTA of $15mm to $100mm and capital needs of $50mm to $500mm. [1] Because of their size, these middle-market firms have limited access to liquid capital markets, which have high minimum issuance sizes. The average issue size per bond in the iBoxx High Yield Corporate Bond index is currently $855 mm.[2]
There are different types of private debt securities- the most typical are in the form of senior loans (first and second lien); unsecured and subordinated debt; and hybrid instruments (combining senior and subordinated debt). The two principal sources of private debt deals are private companies and private equity sponsors. Private companies may look for funding to make acquisitions, to refinance or for growth capital. Private equity sponsors also look to the private debt markets when a transaction such as leveraged buyout or add-on acquisition occurs, or a company needs refinancing.[3]
Investors in private debt earn returns from two factors: 1) contractual return components and 2) equity upside. The contractual return component is the base of the return stream (consisting of high coupons typically 10-15%), plus up-front commitment fees and sometimes premiums relating to early redemptions. Equity upside can be a source of return in some private debt deals. A private debt investor will usually have the opportunity to make equity co-investments in a deal to enhance returns; or sometimes have warrants which potentially benefit from capital appreciation. Private debt investments are positioned higher in the capital structure than equity, giving investors a priority on cash flows of the company.
To understand the risk/return profile of private debt investments it can be helpful to compare this asset type with high yield bonds and private equity (see Table 1 below). While private debt is illiquid when compared to high yield bonds, when compared to private equity we see two main differences: 1) Private debt has a shorter investment period (usually 3-5 years); and 2) Private debt generates attractive cash flows (today we expect around a 9% current yield).
We like the attractive yields and risk profile of private debt. Private debt is a highly specialized market. Thus, it requires managers with a strong track records as well as a solid network to gain access to deals. We believe the best way for our clients to invest in private debt is through a high quality third party manager. Over the past few months, we have been looking into different managers in the space, focusing on these core qualities:
Track record through multiple credit cycles. We’re looking for managers with a long track record through different market cycles. There are many funds which boast a 0% default rate- but have only been investing since 2009, a period of low defaults across the board. We want to see a team that has proven itself to invest in difficult market and credit environments.
Access to private equity sponsors/ deal flow. We want to work with managers who have direct access to private equity sponsor and deals. This access is important because it ensures the manager is seeing the best deals first- and has first choice in participating. Managers with good access also avoid paying fees to a middle man – which would otherwise be absorbed by the investors in the fund.
Strong investment process/ due diligence process. We want to see a proven track record as well as a strong investment process. We like to see highly experienced teams with the right firm infrastructure to allow for in-depth due diligences.
Alignment of interests. We are always looking for a meaningful alignment of interests when we invest, in this case a capital commitment to the fund from the fund senior managers and or the firm.
Dividend Distributions. In line with our investment philosophy, we look for managers that pay distributions of around 75% of their gross yields. That means at least 9% current yields with expected gross returns of 13% to 17% per annum.
