Tackling Hidden Costs in US Private Debt
Private debt investors are increasingly turning towards US opportunities. Yet the structures used by managers can create substantial undisclosed leakage for clients.
IN THIS PAPER
What are the key sources of leakage in this asset class? Visible fees, evident-but-indeterminate costs and hidden losses all play a role. Illustrative examples show the extent of the problem, in both IRR and cash terms, for both US and non-US investors.
A closer look at three of the most popular structures: Season and Sell, BDC and ICAV. What are the pros and cons, not just in terms of leakage but other strategic and risk management considerations?
Key lessons for manager selection. The information provided on various types of leakage is often unclear and ambiguous, both in RFPs and in fund documentation. Closer scrutiny can provide clarity on probable expenses, and identify where good practices and incentives are (or are not!) in place to maximise net outcomes for clients.
In today's environment of declining spreads and potential market corrections, private debt investors in Europe and Asia have increasingly turned towards the US - the world's biggest and most mature market.
The pull is simple: higher base rates, longer track records, a uniform legal framework and so forth. Yet the obstacles have also been significant, chief among them being the need to structure vehicles in order to eliminate unfeasible levels of tax.
In an effort to diversify their investor base, more US managers have been developing and refining structures to make them suitable for international clients from a tax standpoint. As a result, a multitude of models now exist, each with their own advantages and disadvantages - apparent costs, non-visible leakage, leverage, risk, strategic constraints, investor requirements and more.
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