CASE STUDY

Direct Lending

Canadian Public Pension Fund | 2017


Engagement at a glance

 

This Canadian public pension plan was seeking to redeploy capital being returned from previous private debt investments (with which bfinance had also assisted) in the US and Europe. They hoped to invest with one or two private debt managers in North America or Europe ($50 million per manager), targeting a 7-11% net return.

CLIENT-SPECIFIC CONCERNS

This client was uncertain about the types of private debt strategy that they wanted, making flexibility and education particularly important. During the middle stages of the search the investor decided to avoid unsponsored loans and junior debt, having initially been open to these at the onset of the project. Yet deeper understanding of the managers and their processes ultimately led them to select funds with significant exposure to these sectors. The investor was also concerned about the speed of deployment, the managers’ allocation policies and how quickly capital would be returned to them, and had a strong preference for managers with a lead origination style.


Outcome

  • bfinance issued a customised RFP for this investor, encompassing a range of strategies including lower middle market, middle market, sponsored and sponsorless loans in Europe and the US. Out of the 76 managers considered, 38 were examined and 21 scrutinised in more detail.

  • After the initial RFP, the client expressed a preference to adjust the criteria further, focusing on sponsored loans and funds with a larger proportion of senior/unitranche deals, and to limit leverage to 1x.

  • While the analysis was adapted accordingly, bfinance also advised giving further consideration to a handful of managers that did not fit the adjusted requirements due to significant sponsorless/junior debt exposure. Our specialists considered them to be particularly well suited to complement the investor’s existing portfolio and deliver the desired objectives. The investor ultimately selected two managers that would have been excluded by a more simplistic approach (one in opportunistic junior debt, one with a significant proportion of unsponsored lending).

  • Making this possible required deep analysis of the shortlisted managers and how they would fit within/diversify the existing portfolio, board education, and intensive due diligence Through the process the client became more comfortable with sponsorless loans and junior debt, particularly in view of the diversification characteristics and the processes of the particular managers involved.

  • Serious consideration was given to the allocation policies of the managers to determine how quickly the investment may be deployed and how loans are allocated to the relevant vehicles (fund, SMAs, part of BDC etc). Conflicts of interest can arise and allocation polices are not well documented by many private debt managers.

  • Supported by bfinance analysis of US and European private debt markets, the investor ultimately preferred to focus on US opportunities due to manager track records, GDP predictions, LIBOR movements, loan issuance figures and more. They are likely to revisit the European private debt market as the situation evolves.

Our specialist says