PEI Media

Both advisors and managers say there are opportunities in the retail market for illiquid products.

FRIDAY LETTER

Apr 14, 2017

Rich pickings

Both advisors and managers say there are opportunities in the retail market for illiquid products.

It’s a dilemma facing many a billionaire. Where do you turn when your investments are buffeted by volatile equity markets? Increasingly, it seems, to private credit.
After a slower 2016, fundraising in the asset class bounced back in Q1 as high-net-worth individuals and family offices increasingly found reasons to fit debt into their portfolios.

GPs raised $30.5 billion in the first three months of the year, compared with the $20.8 billion during the same period 12 months ago, according to PDI data. Among the usual institutional investors, this increase has partly been driven by wealthy investors seeking protection for their capital. After all, if things go sideways and a restructuring is required, creditors are ahead of shareholders in the pecking order.

Brett Hickey, founder and chief executive of Star Mountain Capital, the asset manager, is among those witnessing the trend and says the appetite for senior versus junior debt among high-net-worth individuals is about equal with varying risk-reward appetites.
“There are enough junior debt opportunities where you can get a private equity-style return in a lower risk profile,” he says.

The illiquid nature of the asset class does not appear to be deterring the new investors as the thought of a few extra percentage points in performance outweighs the need for cash on hand to buy another property or pay for a child’s school fees.

Interval funds are emerging as a compromise vehicle with a simple premise, one source says: put capital to work in alternative assets but periodically offer to buy back shares.

At least three private credit firms have launched interval funds this year: Medley Management launched the Sierra Total Return Fund in January; PIMCO launched the PIMCO Flexible Credit Income Fund in February; and FS Investments launched the FS Energy Total Return Fund in March. CION investments and Ares Management also launched the CION Ares Diversified Credit Fund late last year.

As private debt continues to grow, additional avenues will open up for prudent managers that can capitalise on them. For now, it appears high-net-worth individuals and family offices fall into that category.