March 2024 • privatedebtinvestor.

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THE LESSONS OF A DECADE

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 Contents

How to contact us

Senior Editor
Andy Thomson
andy.t@pei.group, +44 20 7566 5435
Head of Special Projects
Graeme Kerr ISSN 2051-8439 • ISSUE 111 • MARCH 2024
graeme.k@pei.group,
+44 20 3862 7491
Americas Editor
Robin Blumenthal
robin.b@pei.group, +1 646 970 3804
News Editor Insight
John Bakie
john.b@pei.group, +44 20 7566 5442
Reporter
Christopher Faille
christopher.f@pei.group
2
Refinancing Is it right to speak
Contributors of a maturity wall?
Claire Coe Smith, Fairuz Farhoud
Managing Editor, Production: Mike Simlett Trend watch Study finds distress
Production Manager: David Sharman
on the rise in Europe 4
Senior Production Editors: Tim Kimber,
Adam Koppeser
Strategies
Strategy Arena’s Zwirn sees
Production Editors: Helen Burch,
Nicholas Manderson, Jeff Perlah
Copy Editors: Christine DeLuca, Khai Ojehomon
opportunity amid implosion
Regulation How Europe has
6
21
How to grasp the credit
Art Director: Mike Scorer
laid the foundations for a private opportunity There are many
Head of Design: Miriam Vysna
Art Director – Americas: Allison Brown
credit boom 8 different definitions but all credit
Senior Designers: Denise Berjak, Lee Southey Fund formation opportunity funds offer flexibility
Designers: Shanzeh Adnan, Ellie Dowsett
Kirkland and Fried Frank and distinct positioning 22
Global Business Development Director
– Private Debt: Beth Piercy take plaudits 10 Now is the time for commercial
beth.p@pei.group, +44 20 7566 5464 real estate debt Jack Gay of
Subscriptions and Reprints EDITOR’S LETTER 11
subscriptions@pei.group Nuveen Real Estate takes a
Customer Services look at the sector’s key
characteristics 24
customerservices@pei.group
Editorial Director, US: Rich Melville
Cover story
LPs follow the pack in the age

Editorial Director: Philip Borel
Change Management Director,
Information Products: Amanda Janis
Director, Research and Analytics: Dan Gunner
Operations Director: Colm Gilmore
Managing Director, US: Bill O’Conor
Managing Director, Asia: Chris Petersen
Chief Commercial Officer: Paul McLean
Chief Executive Officer: Tim McLoughlin
12
Reflections on the past, present
and future
Six private credit investors share
their views on how the private debt
market has been shaped over the
past 10 years
of the dinosaur Investors are
keeping faith with mainstream
strategies – at least for now 27
The arsenal of distressed debt
violence The workarounds that
allow distressed pre-bankruptcy
firms some final-reprieve
liquidity 28

Analysis Data

For subscription information visit
privatedebtinvestor.com
30 32
Life after the fundraising slump
Which global financial institutions
Full-year fundraising: Private credit
are backing private debt?
joined other private markets in a
Key financial bodies have very
tough 12 months
different assessments of how much
systemic risk is posed Funds in market 34

March 2024 • Private Debt Investor 1

 Refinancing Is it right to speak of
a maturity wall?
A
new paper from
KBRA Research
argues that the
much-discussed
“maturity wall”
is a myth. Other
analysts, including from investment
and advisory firm StepStone, defend
its reality, writes Christopher Faille.
In looking at the purported “wall”,
the Kroll Bond Rating Agency uses
four distinct databases. One of these
is its recent credit estimates of more
than 1,800 mid-market private credit
borrowers. Only 10-15 percent of
the total loans in that market are
scheduled to mature over the next
two years.
An example of the conventional
view that KBRA sets out to debunk
comes from a 2023 StepStone white
paper, which claimed that more than
$2 trillion of debt is maturing in the
US alone and that this substantial
wall will have to be scaled by
recapitalisations.
Since “conventional debt financing
for these types of refinancings
is relatively scarce, especially for
comprehensive solutions for funds
and other multi-asset investment
vehicles”, says StepStone, some GPs
will have to “walk away from good
2 Private Debt Investor • March 2024
assets that can deliver returns in the
recovery period”.
Speaking to Private Debt Investor,
Jeff Giller, head of StepStone Real
Estate, says it’s impossible to put a
number on the extent to which that
will happen, “because there are a lot
of solutions out there and different
ways in which the losses will be
spread about. But it seems likely we
are looking at significant distress”.
The myth and the real problem
Aside from mid-market credit
estimates, the data KBRA uses to
debunk the posited maturity wall
comes from its analyses of the BDC
universe, loan maturities across the
entire BDC landscape and the library
of loan terms and statistics in its
Direct Lending Deals.
KBRA acknowledges that “some
companies needing to refinance in
2024 in the private credit market will
likely face weaker valuations, wider
spreads, tightened covenants” and
the other ills often attributed to the
wall. But it says the number of those
at risk due to maturities coming due
in this two-year period is small.
KBRA concedes another point to
those who use the wall metaphor.
It says there will be heightened
refinancing risks starting in 2026.
But the report contends that talk
of a maturity wall is a misdiagnosis
of that problem. The real risk
in the private credit market is a
combination of higher interest rates
and slower growth, which has placed
pressure on liquidity, especially for
“small-sized companies sponsored
by smaller platforms [which] lack
the tools necessary to rescue their
overleveraged investments”.
Giller reaffirms his view that the
maturity wall is very real. “For years
[subsequent to the global financial
crisis] debt costs were cheap and
borrowers could rely on short-term,
low-cost financing. I don’t argue
with the percentages posited by
KBRA. Perhaps only 15 percent
of that volume of borrowing is
scheduled to mature over the next
  The big numbers
Weakening balance sheets and defaults
“In the European on the rise, TCW launches asset-backed
corporate debt strategy, deal uptick expected
markets, 2024 is
off to a strong start
– especially among
high-yield issuers.
Such ample capital
markets access
(to complete
refinancing) is a
31%
Proportion of companies with weak balance sheets, based on a
study of 4,500 European companies by Alvarez & Marsal
net positive for

$1bn
corporate credit
quality, in our
view”

Taken from Anchor capital for a new asset-backed

finance business launched by TCW
BlackRock’s
Global Credit
Weekly


153
Corporate defaults tracked by S&P in its Global Credit
Markets Update, compared with a five-year average of 131

Ups
&
downs $100bn

Size of the debt funding gap faced by Europe’s real estate
market in the 2023-26 period, according to analysis by AEW
two years. But that is 15 percent of a
historically high level of borrowing,
so it is perfectly consistent with the
absolute number we employed in
our white paper.”
KBRA, however, notes the
difference in focus between its
“It is a cycle that
is behaving
differently to those
we saw prior to
80% Proportion of lenders that say they expect a higher
level of deal activity in the year ahead than last year,
according to Proskauer’s 2024 Private Credit Survey
own research paper focused on covid. That said,
private mid-market corporate loan we believe credit
maturities and StepStone’s work on markets are much
liquidity-constrained real estate.
In terms of the dollar amounts,
KBRA says the $2 trillion figure
cited by StepStone “likely includes
weaker than meets
the eye, particularly
in terms of
availability”
642
Number of bankruptcies tracked by S&P Global Market Intelligence in
2023, just ahead of the 639 in 2020 – the peak covid year
the broader amount of corporate
Taken from Värde
high yield, broadly syndicated loan
Partners’ Värde

$219bn
and investment grade corporate Views: 2024
bond market debt”. Those markets Market Outlook
combined add up to more than


and Opportunities
$13 trillion of outstanding debt. But
KBRA says a $2 trillion wall out of Amount raised globally by private debt funds in 2023, according to
$13 trillion is “not that large either”. n our latest fundraising data – the lowest annual amount since 2016

March 2024 • Private Debt Investor 3

 Insight
Trend Watch Study finds distress on
the rise in Europe
E
vidence of a challenging
environment has been
provided by the latest Distress
Alert from professional services firm
Alvarez & Marsal.
The study, which assesses the
financial performance and balance
sheet robustness of more than 4,500
companies in Europe, finds that
corporate distress in the region is at
its highest level since the start of the
covid pandemic. Nearly 10 percent of
companies in the study are in distress
and the proportion facing distress
has risen 10 percent since 2021.
Furthermore, the number of
companies experiencing weakening
performance has risen 20 percent
year on year due to inflation
impacting wages and energy
costs amid decelerating consumer
demand.
The number of companies with
weak balance sheets has also risen
year on year, climbing to nearly one-
third of all companies (31 percent).
A&M said this reflected rising debt
costs and upcoming maturities in a
higher interest rate environment.
Use of AI on the rise
Alternative fund managers are
focusing more on developing
artificial intelligence strategies, as
initial projects have delivered strong
results, according to research from
fund administration and services
specialist Ocorian.
The study, involving private equity,
venture capital and real estate
fund managers, found nearly half
(49 percent) are ‘very focused’ on
the development of AI for their
sector while the same number are
‘quite focused’. Just 2 percent are
not focused or don’t have a view.
Almost all (97 percent) say AI will
4 Private Debt Investor • March 2024
be important to the success of their
company over the next five years,
including 43 percent who believe AI
will be very important to how their
fund performs.
That is partly explained by the
success that firms have had with AI
so far – 34 percent have seen strong
results from tests they have done,
while 57 percent say the results have
been quite strong.
Positive outlook for allocations
Going into 2024, more than half of
the investors surveyed by Private
Debt Investor indicate that they are
planning to allocate more to private
debt this year than they did through
2023 (see chart below). Fewer than
one in 10 intend to allocate less this
year than last, demonstrating the
most positive outlook for the asset
class that we have seen in the past
five years. n
How much capital do you plan to invest in
private debt in the next 12 months compared
with the previous 12? (%)
More The same Less
100
80
60
40
20
0
2020 2021 2022 2023 2024
Source: Private Debt Investor’s
LP Perspectives 2024 Study
ALLOCATION•WATCH
n New York State Teachers’
Retirement System
NYSTRS announced it had made two
commitments worth a combined
$400 million between October
and December 2023 to private
debt vehicles. The commitments
comprised $100 million to Peninsula
VIII and $300 million to OIC Credit
Opportunities IV. Peninsula VIII is
targeting a $450 million final close
and is focusing on subordinated/
mezzanine debt in North America.
NYSTRS previously made
commitments to Peninsula Capital
Partners’ predecessor fund, which
held a final close on nearly $364
million.
n Connecticut Retirement Plans
and Trust Funds
The organisation proposed making
commitments worth $2 billion to
private credit in 2024 during its
recent investment advisory meeting.
The US pension fund has a current
allocation of 3.9 percent to private
debt and is aiming to achieve a
strategic allocation target of 10
percent by the end of 2024. That
allocation would be broken down as
30-70 percent to senior debt, 0-30
percent to mezzanine, 0-20 percent
to special situations and 0-20
percent to distressed debt.
n Ventura County Employees'
Retirement Association
VCERA approved two private debt
commitments worth a total of $55
million in Q4 2023, according
to January business meeting
materials. The public pension fund
committed $25 million to PIMCO
Aviation Income Partners II, as well
as $30 million to Pantheon Credit
Opportunities III.
7-8 May 2024 | Hilton Tower Bridge, London

Meet 70+ thought-provoking speakers

this May
Jennifer
Hartviksen
John Bohill David Bateman Managing Director,
Partner, Private Debt Managing Partner Global Credit
StepStone Group Claret Capital Partners Investment Management
Corporation of Ontario
(IMCO)

Meaghan
Dan Robinson Joaquin Ardit
EMEA Head of Mahoney
Portfolio Manager Managing Director and
Alternative Credit
Allianz Global Investors Portfolio Manager
DWS
Artisan Partners

Ralf Kind Sanjay Mistry

Roxana Mirica Head of Real Estate
Head of Alternative
Partner, Head of Capital Debt
Credit
Markets Edmond de Rothschild
Pension Protection
Apax Partners Real Estate Investment
Fund
Management

View key conversations

privatedebtinvestor.com/europe-summit/
 Insight

D
an Zwirn has what
might be termed
forceful opinions
on the legacy
issues facing
certain areas of the
investment universe – calling them
a “rolling train wreck” – writes Andy
Thomson.
The strength of his opinions may
not be shared by everyone in the
market but he’s not alone in seeing
the contrast between the alluring
opportunity that lies ahead and the
legacy issues that may have helped
create that opportunity.
The first train carriage to hit the
buffers was the growth and venture
space says Zwirn, chief executive
officer and chief investment officer
of international fund manager
Arena Investors, which has three
offices in North America, two
in Europe and two in Asia-
Pacific.
He says many asset
types have managed to
thwart true price discovery
until they have been
exposed by such things as
cash needs, liability mismatches and
maturity walls. “It started in growth
and venture in late 2021 where a
lot of enterprises needed money, Strategy Arena’s Zwirn sees
having feasted on negative cost
equity. That forced the realisation of
opportunity amid implosion
how much value destruction there
had been, and we’re still only in the
bottom of the first inning in that implosion in the general funds space Secondaries opportunism
destruction.” as people realised that X mega-fund Zwirn acknowledges the
The next accident to reveal itself, wasn’t going to come back every opportunism of the larger GPs
according to Zwirn, was the private two years with a $20 billion fund, in turning their attention to the
capital mega-fund market in 2022. and that actually these things can secondaries market where they
“You saw the beginning of the last 15 years.” could continue raising mega-funds
in a different guise. “It also created
a lot of ancillary opportunities
“ There are investments where you that have only just begun to
show themselves and are really
can make 20 percent-plus taking interesting,” he says.
advantage of the implosion in various The next drama to unfold, around
a year ago, was commercial real
markets on a distressed basis ” estate – most obviously in the office

6 Private Debt Investor • March 2024


“ You saw the beginning of the
implosion in the general funds
space as people realised that
X mega-fund wasn’t going to
come back every two years ”
sector and certain parts of retail.
“That’s a really ugly thing because
it’s a big part of portfolios and
magnified by virtue of the fact that
these were often well-regarded
assets where nothing could go
wrong – big Midtown New York or
London office buildings. All kinds
of organisations that are the least
girded for extreme losses were
loaded with that stuff, both in the
debt and equity,” says Zwirn.
He points out the irony of US
banks having been encouraged to
expand their commercial real estate
lending activities by regulators,
which they did, but not necessarily in
sensible ways when it came to such
things as tenor and deal structures.
His view is that a large amount of
the losses made are currently being
obscured by a build-up of reserves.
CLO misalignment
In the leveraged finance market,
meanwhile, he points to last year’s
highest bankruptcy rate since 2010
– exacerbated by an environment of
inflation and margin compression.
He says the collateralised loan
obligation (CLO) equity market is
one area with issues created by
misalignment: “The equity was
not provided by the manager of
the CLO, a situation helped by the
regulator who allowed them to not
have skin in the game.”
In past cycles, the recovery rate for
the loans underpinning CLOs was
strong but Zwirn does not believe
that will be the case this time around.
He also thinks the leveraged
finance market ended up in
competition with direct lending
“to get to the lowest common
denominator in price taking”. He
believes many fund managers will
be waiting with bated breath in
the hope that rates come down
before the maturity wall hits by
late 2024. He describes this as “the
employment of hope as a strategy”.
But while it might be tempting
to conclude that Zwirn’s view of
the market is so negative as to be
almost doom-mongering, he sees
the problems described above
as creating a great high-return
$5bn+
Cumulative capital deployed
since inception
100+Team members
400+
Transactions
since inception
Insight
opportunity for new transactions.
“There are investments where you
can make 20 percent-plus taking
advantage of the implosion in
various markets on a distressed basis
by buying existing obligations or
providing idiosyncratic new issue
finance,” he says.
Among the areas presenting
opportunity, according to Zwirn, are
the likes of commercial mortgage
lending, energy lending, asset-based
lending and lower mid-market
non-sponsored direct lending. In
sum, the kinds of things he believes
everybody wanted to do when it
made little sense but now suddenly
start to make sense after many years.
Lower mid-market
In the lower mid-market non-
sponsored area, Zwirn says there
is good pricing, tenor and deal
structures including covenants and
“no adjusted EBITDA nonsense”.
He also believes sellers have now
started to accept more realistic
valuations of their businesses.
Towards the end of last year, Arena
backed the launch of Mercatus
Finance’s cashflow lending business,
providing loans of between $20
million and $75 million. It also
supported Mountain Ridge Capital’s
launch of Alpine Ridge Funding,
a factoring commercial finance
company focused on factoring
facilities worth between $50,000 and
$30 million.
Venture lending, software-as-a-
service/enterprise software lending
and energy lending are other areas
of interest for Arena. Zwirn says:
“I think energy is a spectacular
opportunity of various sorts. We
do things in oil and gas as well
as EV and other energy transition
beneficiaries.”
As with many areas of focus for
the firm, it is an opportunity that
has arisen from the hardships of
investors that have gone before. n
March 2024 • Private Debt Investor 7
 Insight
Regulation How Europe has laid
the foundations for a private
credit boom
Expert analysis by Jiří Król, global head of
the Alternative Credit Council
W
elcome to my new
monthly series exploring
the factors shaping
the growth of private credit. As an
association representing 250-plus
members managing more than
$1 trillion in private credit assets,
the Alternative Credit Council has
a unique vantage point on what
distinguishes our industry from other
parts of the asset management
sector and the value it provides to
investors. I look forward to sharing
my insights and perspectives with
you on a range of topics, starting
with some thoughts on the future of
the European market.
I often hear that the European
private credit market is around five
years behind the US. During the last
five years, the US market has grown
from an estimated $437 billion to
$1 trillion-plus. Estimates suggest
the European market is now at a
similar starting point ($443 billion),
so are we set to see the European
market make a similar leap forward
and reach that symbolic $1 trillion
milestone by 2029?
Changing regulation
One factor that typically casts doubt
on the growth potential of the
European market is the regulatory
framework, which manages to be
both far-reaching and fragmented –
who’d have thought that introducing
national loan fund regimes
8 Private Debt Investor • March 2024
alongside detailed Alternative
Investment Fund Manager Directive
rules would make things overly
complex? This created regulatory
and operational barriers for private
credit lenders looking to invest in
European businesses.
Thankfully, policymakers have
heeded messages from our industry
and made important changes that
directly address some of these
issues. Recent reforms to AIFMD
provide greater legal certainty
on cross-border lending activity,
making it easier for firms to scale
their operational footprint and invest
across the European market.
In policymakers’ own words,
these reforms will “make it possible
for alternative investment funds to
develop their activities by originating
loans in all member states of the
Union and to facilitate the access to
finance by EU companies”.
“ Europe is now
more closely aligned
with a regulatory
approach that has
underpinned the
growth of the US
market ”
While lenders will need to
manage some of the attendant rules
accompanying the lending passport,
it is a significant improvement on
navigating the patchwork of national
and European rules.
A second big change is the
revised European Long-Term
Investment Fund regulation
and the introduction of the UK
Long-Term Asset Fund. Both now
closely resemble the US Business
Development Company model,
which has been a key driver of
growth beyond the institutional
investor segment, making it easier
for firms familiar with BDCs to set
up similar products in Europe.
The flexibility provided by ELTIFs
and LTAFs means there are more
opportunities to develop products
that are attractive to European
investors, especially in the
burgeoning retail market.
Valuing private credit
Both examples show how Europe
is now more closely aligned with
a regulatory approach that has
underpinned the growth of the US
market. It is an important recognition
of the value of private credit to
European businesses and investors.
If regulation alone were capable
of supporting the growth of a market,
the world would be a much simpler
place. Firms looking to capitalise
on the opportunities these reforms
create will still need to navigate
business challenges and ensure they
manage any risks arising from their
investments in the right manner.
Additionally, not all the regulatory
change is fully bedded down.
National legislation and further
regulatory rulemaking can still throw
a spanner in the works. However,
we hope the new frameworks will
provide a solid foundation for the
European market to hit similar
heights to the US in the coming
years. n
 The Global Guide
to Private Debt
The practitioner’s handbook to navigating private debt

This guide helps fund managers:

• Understand how LPs are constructing private debt allocations within their portfolios
• Determine how best to structure the legal, taxation and financial terms of a private debt fund
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 Insight

Fund formation Top firms by total funds formed

Kirkland and 0 5 10 15 20 25

Fried Frank Kirkland & Ellis

International

take plaudits Paul, Weiss, Rifkind,

Wharton & Garrison

T
he top dogs have emerged in
Winston & Strawn
Private Debt Investor’s second
Fund Formation League Table.
Kirkland & Ellis is head of the table Ropes & Gray
based on number of funds advised
and Fried, Frank, Harris, Shriver &
Clifford Chance
Jacobson leads the way on the basis
of aggregate value of funds advised,
writes Andy Thomson. Fried, Frank, Harris,
Shriver & Jacobson
Despite the period in question
being relatively subdued on the
fundraising front, Kirkland & Ellis Schulte Roth & Zabel
advised no fewer than 24 funds –
well ahead of Paul, Weiss, Rifkind,
Wharton & Garrison in second place Top firms by aggregate value of capital raised ($bn)
with 15. Among the funds advised
by Kirkland were Ares Infrastructure 0 10 20 30 40 50
Debt Fund V and Blackstone Green
Private Credit Fund III. Fried, Frank, Harris,
Shriver & Jacobson
Fried, Frank advised more
than $46.5 billion worth of funds Kirkland & Ellis
raised, denying Kirkland & Ellis – in International
second place – a league double. Its
mandates included HPS Core Senior Paul, Weiss, Rifkind,
Wharton & Garrison
Lending Fund II and Permira Credit
Solutions V. Debevoise & Plimpton
It will be interesting to see how
our ranking changes over the year
ahead, with hopes higher than 12 Ropes & Gray

months ago.
Simpson Thacher
Methodology & Bartlett
Our research tracked closed-end
debt funds that held a final close Clifford Chance

between 1 October 2022, and 30

September 2023. Macfarlanes
In our ‘Top firms by total funds
formed’ table, both lead counsel law
Proskauer
firms and supporting firms received
credit for funds advised. In our ‘Top
firms by aggregate value of capital Davis Polk & Wardwell
raised’ table, only lead counsel
received credit for the full value of
the fund. n Source: Private Debt Investor

10 Private Debt Investor • March 2024

 Insight

Editor’s letter
New York
530 Fifth Avenue,
14th floor
A decade of drama
New York,
NY 10036
T: +1 212 633 1919

London
100 Wood Street
London Andy Thomson
EC2V 7AN
andy.t@pei.group
T: +44 20 7566 5444

Hong Kong
Room 1501-2, Level 15,
Nexxus Building,
No. 41 Connaught Road, Central,

Hong Kong
T: +852 2153 3240
Private Debt Investor
Published 10 times a year by
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F
rom the resilience of private debt through various cycles to the increasing
attention of the regulators, and from the emergence of impact investing
to the unexpected rise of the asset class in the Nordic region, our Decade of
Private Debt podcast series has given us no shortage of interesting talking points
as six industry leaders reflect on the past 10 years and take a peek at what may
lie ahead.
In our cover story (see p. 12), we
present insights arising from this “ We have a
collection of conversations with Mike
Arougheti, Ares Management; Paul section dedicated
Burdell, LCM Partners; Julien Rigon, to understanding
Kartesia; Symon Drake-Brockman,
Pemberton; Sabrina Fox, the European more about some of
Leveraged Finance Association; and Akila private debt’s key
Grewal, Apollo Global Management.
Also in this issue, starting on strategies today ”
p. 21, we have a section dedicated to
understanding more about some of private debt’s key strategies today: real
estate, distressed debt and opportunistic credit are among the investment
approaches placed under the microscope. We find a lot of faith still being
placed in tried and trusted strategies – reminding us that, despite its rapid
progress, private debt remains new to many investors and they prefer to
tread carefully.
We are also delighted to bring you our Annual Review 2023, which includes
the result of our awards process in more than 50 different categories. The
Review delivers our reflections on the trends through a year that was hardly
plain sailing for the industry, but during which private debt proved itself
resilient and adaptable.

Printed by Pureprint Group

pureprint.com

Andy Thomson

March 2024 • Private Debt Investor 11

 Cover story

Paul Burdell Symon Drake-

Co-founder and chief Brockman
executive officer, Co-founder and
March 2024 • privatedebtinvestor.com EXTRA

LCM Partners
Focus on
the hottest
strategies

managing partner,
Pemberton
THE LESSONS OF A DECADE
Six views on how the asset class has changed
Private Debt Investor | Issue 111 | March 2024

Cover story

Michael
Arougheti Sabrina Fox
Co-founder, chief Chief executive
executive officer officer, European
and president, Ares Leveraged Finance
Management Association

12 Private Debt Investor • March 2024

 Cover story

Reflections
on the
past, present
Akila Grewal
and future
Partner in client and
product solutions, Six private credit insiders share
Apollo Global
Management their views on how the private debt
market has been shaped over the past 10
years, and what to expect next.
By Andy Thomson

P
rivate debt: an asset class that has done a lot of
growing up during the last 10 years. Wheth-
er in relation to the level of fundraising, vol-
ume of deals, reporting processes, approach to
ESG or increasing engagement with regulators,
the sector has progressed many steps on the
road to maturity.
So far, private debt has met various challenges successfully
– it has emerged in decent shape from the covid pandemic,
for example. But new tests lie ahead in a very different envi-
ronment, where sharp rate increases have put arguably more
pressure on borrowers than ever before.
Our Decade of Private Debt podcast mini-series has been
exploring the private debt transformation, with some of pri-
vate debt’s leading voices revealing their insights about the
Julien Rigon market. This piece selects some key takes from the series
Partner and by six of today’s industry leaders: Mike Arougheti of Ares
head of France, Management, Paul Burdell of LCM Partners, Julien Rigon
Kartesia of Kartesia, Symon Drake-Brockman of Pemberton, Sabrina
Fox of the European Leveraged Finance Association and Ak-
ila Grewal of Apollo Global Management.

March 2024 • Private Debt Investor 13

 Cover story
On the market’s key evolutions
Michael Arougheti: If you think about
what has happened over the last 10
years, you had significant bank consol-
idation in the US market throughout
the 1980s and 1990s, and by the time
you got to 2000, the decade leading up
to the GFC, most of the mid-market
capacity within the banking system had
consolidated out. That’s when you saw
the growth in the loan and high-yield
markets and the proliferation of the col-
lateralised loan obligation market as the
most efficient path to execution.
But, as those markets were getting
larger and as the banks’ balance sheets
were getting larger, those markets were
moving to scale as well. Fast forward to
the GFC and the last decade and a gap
emerged where the small to mid-mar-
ket borrower wasn’t quite large enough
to get into those liquid markets because
they couldn’t get the attention of the
small number of consolidated banks and
the regulatory capital framework didn’t
really make it economic for these loans
to be held on bank balance sheets.
“We noticed, about a
couple of years ago, that
a massive amount of
private credit had built up
within mid-market
direct lending”
AKILA GREWAL
Apollo Global Management
14 Private Debt Investor • March 2024
On the resilience of the market
Michael Arougheti: The thing that gets lost is that private credit, as
people refer to it these days, is really lending money to a private equity
firm or an institutional owner of real estate or infrastructure, and so
you really can’t talk about risk in private credit without talking about
risk in private equity or risk in real estate.
It’s always been fascinating to me how, having done this for as long
as I’ve been doing it and having been through Long-Term Capital
Management, the Asian debt crisis, the dot-com crash, the global
financial crisis, covid, taper tantrum… we’ve been as tested I think
as any asset class has been and the performance has been incredibly
durable.
I think that’s because it sits largely at the top of a capital structure
with a lot of institutional equity support, and the support of the
structure and the strength of the relationship with the sponsor
The reason we’ve been able to grow structure of the markets was still very
is that investors finally understood there heavily geared towards private equity
was an opportunity to invest in this as- and public equity or 60/40 portfolios
set class. Ten years ago, we were talking and frankly, there wasn’t any way for a
to investors about investing in private lot of these firms to buy private credit.
credit and even if they saw the return You had to go through this other
opportunity as attractive, they weren’t phase where the institutional investor
structurally set up to buy it because the community restructured to be able to
look at private credit as a meaningful
alternative to fixed income.
Akila Grewal: We have been on a
journey since the GFC where, in our
view at least, there has been the con-
tinued trend of the privatisation of the
 Cover story

community and the equity owners of companies and assets, I think

is fundamentally misunderstood.
Any time you see growth in a market like we’ve seen, the
narrative is: there’s risk being taken that’s inappropriate and
something bad is going to happen – and I always push back
on that pretty hard. If we’re going to be losing money in our
private credit portfolio, that means that you’ve blown through
$2.8 trillion of private equity that’s sitting in the ground today.

“Any time you see

growth in a market like
we’ve seen, the narrative
is: there’s risk being
group last year, now known as Atlas SP
taken that’s inappropriate Partners, and whether that’s equipment
finance, trade finance, fleet finance, air-
and something bad is craft finance, residential, consumer, we
are touching a number of different asset
classes. We think that provides a diver-
going to happen” sified exposure compared with what has
historically been described as private
MICHAEL AROUGHETI credit.
Ares Management

Paul Burdell: What has changed over

credit markets. Post-GFC, one of the
biggest trends was mid-market direct
lending, which came out of what was
traditionally a bank channel, which
then moved a lot more into the private
credit realm.
There was also some speciality
finance coming out of that, such as
aircraft leasing, which was very capi-
tal heavy from a banking channel per-
spective, and private solutions started
to enter the space. We noticed, about
a couple of years ago, that a massive
amount of private credit had built up
within mid-market direct lending.
Our view was that large-cap direct
lending was the next leg of that stool,
and in 2019-20 we started to see some
of these very large companies – who are
involved in $2 billion-$3 billion-type
transaction sizes and historically had to
go to the banking channel – also want to
look at alternative sources of financing.
So, we started to provide those sizes of
loans with certainty of execution and
certainty of scale and size.
We have also been at the forefront
of asset-backed finance and the priva-
tisation of that market. We purchased
Credit Suisse’s securitised product
the last 10 years is oversight, and it’s
also oversight with a political element.
The first oversight came post-GFC
with Basel III and IFRS 9, and that
forced banks to actually address their
non-performing loans, and how they
managed loans in general.
Regulators have addressed NPLs in
terms of how banks set their reserves
against them and how they report against
them. Some countries were more adept
at it than others – some didn’t actually
want to address the situation and kind of
ignored it – but they’re all singing from
the same hymn sheet today, and obvi-
ously Basel IV is the future.
Our business isn’t NPLs any more,
it’s much more than that because the

March 2024 • Private Debt Investor 15

 Cover story

“[We have seen deal

amendments] where you
think that is just not fair
– it’s not possible for any
lender, no matter how
prepared, to see it”
banks that had a good experience with
SABRINA FOX
us at the outset moved with us from
European Leveraged Finance Association
NPLs to rescheduled loans to per-
forming loans, and they’d start going
through all the other books they had
such as SMEs, asset finance, residential
mortgages etc, and today we do about
15 different products from non-per-
On contractual borrower/lender deal negotiations forming through to fully performing.
Sabrina Fox: I’ll give you an example of a situation where there
were terms inserted in a way that lenders could not possibly see, or On regulation today
procedurally a deal was constructed so that it would be very difficult PB: What the regulators have seen is
for lenders to form a group. These were things where you think that is a decrease in banks and financial in-
just not fair – it’s not possible for any lender, no matter how astute or stitutions providing finance to private
prepared, to see it. equity – there’s been this wave of funds
It was in a deal I was reviewing when I was at Covenant Review. raised to basically try to make up for
We used to blackline to quickly spot things that had been picked up that shortfall. I think what happened is
and, in the blackline, I picked up that there were two words that had that some regulators woke up and won-
been deleted and they were “default or”, so the provision that used dered what was happening, and they’re
to read that there must be no default or event of default in order for trying to play catch-up.
a particular basket to be used to make dividends and other restricted I think knee-jerk reactions are a
payments now just said “no event of default”. The removal of “default mistake and always come back to bite
or” opened up the ability for the borrower to pay dividends even during people on the backside, and that’s when
a time when it was in default. industry and lobbyists start saying no,
That is huge and to me, as a lender, I would think that’s a risk I you can’t do this and that. I think what
would want highlighted. There’s a risk factor section in the offering we as an industry have to do is educate
memorandum – what are we using it for? This seems like something regulators. I’m not suggesting they’re
you would want to have highlighted, but it was just two little words stupid, they’ve got a hell of a lot on
gone, and we wrote a market alert about that to make sure that their plates, but what I am saying is this
investors were aware. And actually in that deal, the two words were is an asset class they haven’t really had
put back in. to focus on.

16 Private Debt Investor • March 2024


On the growth of Europe
MA: We launched our business in Eu-
rope in 2007 when people weren’t re-
ally talking about private credit there.
I remember going out and doing due
diligence all across Europe and trying
to figure out whether there was an op-
portunity – the idea that people would
borrow outside the banking system was
seen as crazy at the time, but post-GFC,
that changed very quickly. We saw the
opportunity but the financial crisis real-
ly accelerated it for us, and now we have
one of the largest teams, portfolios and
market shares in that market.
Symon Drake-Brockman: It certain-
ly has been a significant change over
10 years from when we first set up
our firm. Private credit was really an
unknown asset class back in 2012-13.
Most investors knew about it in the US
but were somewhat sceptical that it was
ever going to be something significant
“I think what happened
is that some regulators
woke up and wondered
what was happening,
and they’re trying to
play catch-up”
PAUL BURDELL
LCM Partners
in Europe because of the number of
banks in the region. But over that 10-
year period, it’s grown immensely – in-
itially more out of the UK, which was
seen as the most transaction-orientated
market inside Europe, and then gradu-
ally into France and Germany.
I think the biggest transition that
really shows it has come of age as an
asset class is probably the Nordics.
When we look at the Nordic banking
system, it came out of the financial cri-
sis in probably the strongest shape and
the banks were super-competitive in
providing capital and lending to private
equity firms.
Over the last two or three years,
we’ve seen even the Nordic banks start
to pull back, with smaller ticket sizes
that they’re willing to provide to bor-
rowers, and therefore today private
credit is truly a pan-European asset class
with transactions happening in all the
major Western European economies.
Cover story
On current market conditions
Julien Rigon: I would say discipline
comes first. This has been the case
across the last 10 years, and the next
five or 10 are also going to be very
heavily geared towards how disciplined
an investor you are. What I think is that
today private debt investors have prob-
ably the best ship in a very large storm.
In terms of the economic environ-
ment, looking forward it’s probably
worse than looking backwards – or at
least there are more identifiable chal-
lenges that are going to come up and
put business models to the test. We’re
going to see some issues around the
ecological transition, which will involve
heavy investment for a number of busi-
ness models.
The reason I believe private debt in-
vestors are well prepared is that the dis-
cipline we have enables us to be much
more focused on making sure we select
the right transactions under the right
conditions. Maybe, compared with two
years ago, which were the Champagne
years following covid – when some
transactions were a bit aggressive on
economics, terms, structures and busi-
ness models – I feel that today we are
coming back to a better approach with
very strong discrimination between the
good assets and bad ones.
March 2024 • Private Debt Investor 17
 Cover story
On the future
MA: Private credit doesn’t just mean
making loans to private equity spon-
sors. It means self-originating creative
solutions to owners of companies and
assets, and it can straddle high-grade
exposures to structured equity and debt
exposures all over the globe in every
economy and every market, both real
assets and corporates.
When you think about it that way,
that’s when you start to understand just
how massive these addressable markets
are. I think about the consolidation
happening now, even in the alternative
credit space, and I think that is going
to be one of these ‘aha’ moments when
people see how important the private
credit market is to the growth of the
alternative credit space, particularly in
light of what’s going on with the bank-
ing system right now.
SDB: I think private equity as an indus-
try is going to continue to grow very
strongly, so I don’t think the demand
side for financing is really going to be
interrupted. You may have a quarter or
two quarters where activity levels come
down while private equity firms are ei-
ther reviewing their portfolios, or price
expectations between buyers and sellers
18 Private Debt Investor • March 2024
On the future of ESG
Julien Rigon: My take is that 30 years from now what we currently call
Article 9 will be all vehicles in the investable environment. I do believe,
in spite of the pushback in the US, it [ESG] is something you cannot
dispute anymore and something that has somehow to be addressed.
There have been challenges lately around Article 8 and 9 and how
exactly the taxonomy is pushed forward.
It probably can be improved and it’s very early days still in the way
investors approach ESG – not in a marketing fashion but in a deeply
rooted impact fashion. There may be some discrimination across
the environment between investors that are effectively Article 9 – or
whatever you want to name it – but are effectively pushing a strong ESG
agenda onto strong ESG-driven companies, and the ones that have taken
the opportunity to push a vehicle that was taken to be Article 9 but I
would say was not really driving anything specific into ESG elements.
are realigning because of liquid market coming in from all the different econ-
dislocations. omies inside Europe. I think buyer and
But I think if you look back at seller expectations have come back
2023, it was a relatively quiet Q1, ac- much more in line.
tivity started to pick up slowly in Q2 Multiples that people are looking at
and by the time it got to November, it seem to be quite stable because stock
was our busiest month in the last three markets have been relatively stable,
years – there was a broad range of deals and people have adjusted to the cost of
“I think the biggest
transition that really
shows it has come of age
as an asset class is
probably the Nordics”
SYMON DRAKE-BROCKMAN
Pemberton
 Cover story

So, there will be some hiatus, but my conviction is that we have laid
down the principles of how we believe at Kartesia that the ESG
agenda should be taken forward in Europe. How we are going
to articulate it, define it and push it is probably still going to
evolve, but the direction is clear. Now it’s a case of finding the
right levers to make sure that we as investors, whenever we
say impact, we do impact and not just talk about it.

“It’s a case of finding

the right levers to make
sure that we as investors,
whenever we say impact,
we do impact”
JULIEN RIGON
Kartesia
financing, which was quite a big shock
in Q4 2022 and Q1 2023, when we saw
central banks make a very rapid increase
in rates to try to fight off inflation.
These periods of slowness and then
activity increasing will always happen in
all asset classes, but I don’t think there’s
any fundamental slowdown in demand
from private equity firms to find highly
attractive businesses that they can con-
solidate – that’s a multi-decade trend.
AG: It’s a really exciting time for credit.
Many of us grew up in a zero-interest
rate world in credit for over a decade,
and it hasn’t been that exciting to talk
Scan here for all PDI podcasts,
including the lastest episodes
of our Decade of Private Debt
mini-series
about first-lien risk at several hundred
basis points of yield. Now, you’re able
to create low double-digit type return
profiles in very high-quality credit in
companies that have really great capital
structures, and also at low loan-to-val-
ues and good pricing.
But it would be remiss to ignore
the fact that there are many managers,
some who are incredibly cycle-test-
ed and have been through higher rate
environments, and some who haven’t.
From our perspective, when we think
about private credit, we’re thinking
about very high-quality, top-of-the-
capital structure, senior-secured and
investment-grade type risk because
company selection is key if you do be-
lieve there might be some stress, and
there might be a corporate cycle and a
period where there might be increased
defaults.
We do think there might be some
stress in the broader private credit eco-
system, given the amount of capital that
has gone into it, but our view is that if
you stay safe and you stay senior and
make sure you understand the docu-
ments and understand the equity below
you, you can have a really great port-
folio that will get you unlevered dou-
ble-digit yields in the environment that
we’re in today. n

March 2024 • Private Debt Investor 19

 Private Equity
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 [delete as required] Cover story / Analysis

STRATEGIES
A special report

How to grasp the

credit opportunity
Page 22

Nuveen on real estate debt’s key characteristics

Page 24

LPs follow the pack in the age

of the dinosaur
Page 27

The arsenal of distressed

debt violence
Page 28

March 2024 • Private Debt Investor 21

 Strategies
How to grasp the
credit opportunity
There are many different definitions of the credit opportunities strategy, but all offer
flexibility and a distinct position in the investing spectrum. John Bakie reports
A
s private credit be-
comes an increasingly
important part of LP
portfolios, it has also
had to expand the
range of products it
offers the investor community. In re-
cent years, this has led to a prolifera-
tion of the ‘credit opportunities’ strate-
gy, which today is offered by many fund
managers.
The term itself is hard to pin down
and as Private Debt Investor’s research
has discovered, everyone has their own
idea about what credit opportunities
should be. If you ask 20 fund managers
how their credit opportunities strategy
differs from others in the market, you
would likely get 20 completely dif-
ferent answers, but some key themes
emerge that allow us to arrive at an
industry standard definition of a credit
opportunities fund.
22 Private Debt Investor • March 2024
Perhaps one of the simplest ways
to define a strategy as diverse as this
is to look at what it isn’t. Firms tend
to agree that credit opportunities fall
somewhere between direct lending and
distressed debt, and for many firms,
their decision to launch a dedicated
fund arose from encountering poten-
tial investment opportunities that did
not neatly fit into those buckets.
“As the market develops, flagship
funds in direct lending or distressed
debt have become more defined,” says
Marc Chowrimootoo, managing direc-
tor and portfolio manager for private
credit at London-based Hayfin Capital
Management. “That gives them less
flexibility to go after those interest-
ing opportunities that they invested
in when this was still a fairly new asset
class. This means there is a need for
dedicated vehicles that can invest in
those types of opportunities.”
Hayfin launched its tactical solu-
tions strategy in 2022, offering its take
on credit solutions. “What the tactical
solutions strategy allows us to do is look
at sectors, size of businesses or parts
of the capital structure that we would
typically avoid with the direct lending
fund, because we can price the risk dif-
ferently and can approach downside
protection in a different way,” explains
Chowrimootoo.
Performing credit
While targeting more complicated sit-
uations than a typical direct lending
fund, credit solutions is also distinct
from distressed debt and typically will
focus predominantly or entirely on
performing assets.
“People often think that credit op-
portunities is just another name for
distressed investing but our approach is
predominantly senior secured, first-lien

debt with no stress or distress in the
portfolio, and we are not a loan-to-own
outfit,” says Ben Gulliver, head of port-
folio management and co-head of direct
lending at Pemberton.
Gulliver is responsible for Pem-
berton’s strategic credit opportunities
strategy, which closed its first fund in
2016. The strategy is quite different
from many other credit solutions offer-
ings in that it is exclusively focused on
performing credit, direct lending and
mostly makes senior loans. But what it
does have in common with other op-
portunistic strategies is the ability to be
flexible.
“Each fund has been very different,”
he says, “the first was in the fairly calm
market conditions of 2016, our second
fund was raised during the covid-19
pandemic and then our third is now
being raised during an inflationary era.
For each of these, the opportunity set
has been very different but the strategy
allows us the flexibility to react to these
kind of events.”
This is perhaps one of the clearest
identifying features common across
credit opportunities strategies, the fact
that they provide the fund manager
with a significant amount of leeway
in how, where and what they will in-
vest in.
“Being flexible is important as we
are playing in a big sandbox from syn-
dicated loans to large loan private cred-
it, investment grade through to high-
yield,” says Chris Long, chairman,
chief executive officer and portfolio
manager at US-based Palmer Square
Capital Management. “We’re investing
on a relative value basis and we need to
be able to invest in that value wherever
we find it.”
Doug Logigian, co-managing part-
ner and president at US-based oppor-
tunistic credit specialist Kennedy Lewis
Investment Management, says: “We’re
targeting segments of the economy
which are experiencing some form of
disruption and where private capital can
help those businesses through a period
of transition.”
Strategies
What’s the difference?
Credit opportunistic investing versus distressed debt and
direct lending
Direct lending funds seek out more predictable loans with lower returns
but a lot of stability, security and standardised terms, whereas distressed
debt funds are looking for firms in serious trouble where they can acquire
discounted debt with the potential for major upside, but also with no
downside protection.
Credit opportunities aim to offer similarly stable returns to direct
lending funds and with downside protection, but those yields are typically
enhanced due to the increased complexity of the loans it makes and also the
ability to adapt to situations and pick up opportunities that might otherwise
struggle to access finance via more traditional routes, especially during
periods of disruption.
However, for credit opportunities, it “In the past, it was thought that you
is important to adopt a strategy that can could only capture volatility in cred-
work throughout the credit cycle from it via distressed debt, but I think that
relatively benign market conditions to what we’re showing with our opportu-
major periods of dislocation. nities strategy is that you can do this in
“There are always industries or performing credit as well,” he explains.
businesses going through periods of Chowrimootoo agrees that oppor-
disruption, whether that is macroeco- tunistic credit can provide LPs with a
nomic, secular, regulatory, or technolo- strategy that provides upside in a much
gy driven, and sometimes we are back- safer way than distressed debt, saying:
ing the disruptors, especially in areas “Direct lending is becoming more
like life sciences. But in all cases, these commoditised and LPs have shown
are businesses which aren’t conducive an appetite to move up the credit risk
to traditional bank capital or direct spectrum. What tactical solutions can
lending,” Logigian adds. offer is a more interesting return but
Palmer Square’s strategy allows it with similar protections that you would
to instead invest in more plain vanilla see in a more traditional direct lending
and less risky assets during times when fund.”
markets are less volatile, continuing to As private credit continues to evolve
put money to work when more lucra- and become a more mainstream feature
tive deals are thin on the ground, says of institutional portfolios, there is a
Long. need to offer a wider array of products
“If spreads become tighter then we to investors to be able to meet long-
can go up in quality and be very ‘risk- term liabilities. With many investors
off ’ and that means we can invest right now having dedicated private credit
through market cycles.” allocations, there is also more demand
for granularity in risk-return, and
The middle ground providing a bridge between the very
Pemberton’s Gulliver believes cred- high potential returns (and risks) of
it opportunities can offer investors a distressed debt and the more predict-
unique risk-return profile to comple- able and lower-yielding world of direct
ment other private and public market lending is one way asset managers can
credit allocations. tap into this demand. n
March 2024 • Private Debt Investor 23
 Strategies
E X P E
Jack Gay, global head of real estate debt at Nuveen Real Estate,
takes an in-depth look at the sector’s key characteristics
Now is the time for commercial
real estate debt
Q Where in the cycle do
you think we are for
commercial real estate debt?
We are approaching the trough in
terms of the real estate downturn,
which creates a good point in the
cycle for debt. If you look back at
how debt performs historically in real
estate cycles, the best loans are typ-
ically made at the trough or in the
early years following the trough when
spreads are higher, loan terms are bet-
ter and you are underwriting off of a
reset value.
We can also see looking back
that loans made early in the cycle
tend to benefit from lower default
rates and higher spreads, so we
believe we are shaping up for a
good vintage in commercial real estate
loans.
24 Private Debt Investor • March 2024
R T
SPONSOR
NUVEEN REAL ESTATE
Q Why should investors
back CRE debt versus
other areas of private credit?
One of the unique aspects of commer-
cial real estate lending versus other ar-
eas of private credit is that CRE loans
are asset-backed and generally non-re-
course, so when you flip into a new
vintage, your new loans are underwrit-
ten off reset values and less dependent
on any excess from the previous cycle.
In other parts of the market, there may
be more of an overhang as borrowers
may still have excesses on their balance
sheets from the previous cycle.
As a private asset class, CRE debt
also benefits from being less correlated
Q & A
to other investment alternatives, there
is less volatility in private mortgage
loans, and there tends to be a bit of an
inflation rate hedge, particularly if you
lend on a floating rate basis.
Q How does lending risk
differ between the US,
Europe and APAC?
First, there are some remarkable simi-
larities globally in terms of what econo-
mies have gone through. We are seeing
higher interest rates introduced as a re-
sponse to high inflation, which is now
helping to bring inflation down.
The pace of adjustment has varied
a little between markets. Europe has
certainly faced a bit more uncertainty
around the strength of the recovery,
and real estate prices have adjusted
quicker there than elsewhere. We have

seen less adjustment in Australia, while
in the UK, the decline in valuations has
been quicker and more pronounced.
Those declines are taking longer to roll
through in the US, yet the US econ-
omy is showing more resilience than
Europe.
Q There is talk about an
impending funding gap
as borrowers hit a maturity
wall. Where are the main
vulnerabilities?
The maturity wall sometimes gets a lit-
tle exaggerated in my view. We look at
the absolute dollar amount of maturi-
ties ahead and there is not necessarily
a big spike, though it is higher than in
previous cycles.
In part, that is because valuations
have gone up over the cycles, but on a
relative basis there is less debt against
peak values, so the wall is not quite
what it has been made out to be. In
other words, lenders were more disci-
plined and lent at lower loan-to-values
in this past cycle as compared with the
previous cycle.
That said, last year was a relatively
illiquid year globally. Loans in the of-
fice sector often required short-term
extensions as they approached maturi-
ty. We expect that to remain the case
for some time, and those short-term
maturity fixes will add to that maturity
wall.
Q Where do you see the best
opportunities right now
for real estate debt?
The lack of liquidity caused by banks
pulling back globally from commercial
real estate lending is creating opportu-
nities for alternative CRE lenders to
fill the gap. That is why we are seeing
higher spreads and better loan terms,
given where we are in the cycle, as the
large institutional lenders are focused
on their own liquidity issues.
This has created opportunities
across both fixed-rate and floating-rate
executions, but the spread widening
and absolute return levels for floating
rate loans has created the best near-
term opportunity.
Q Many new players,
particularly equity shops,
are entering the real estate
debt space. Is there enough
dealflow to support so many
players?
The new entrants have been quite
modest in terms of the amount of
capital they have because of the con-
strained capital raising environment.
We haven’t seen a huge amount of
activity from new players, with one
exception being some equity office
“The lack of liquidity
as a result of banks
pulling back globally
from commercial
real estate lending is
creating opportunities”
owners in the US that have pivoted to
provide distressed or rescue capital in
that sector.
Dealflow has declined substantially
and continues to be muted, given the
mismatch in pricing expectations be-
tween buyers and sellers, but with cap-
ital constrained, there has been enough
dealflow to satisfy loan demand.
Q How does the intensifying
focus on the sustainability
profile of assets alter lending
risk?
Sustainability is an ever-increasing con-
sideration when we are underwriting
new credits. Over time, assets that are
brown in nature will need significant
investment to make them greener, so as
Strategies
a lender you need to know what kind
of capital will be required and whether
it is going to be possible to make assets
more sustainable.
Assets that don’t have a pathway to
sustainability will be in less demand
from occupiers and of less interest to
other investors and debt providers, cre-
ating a meaningful risk to valuations.
Q What does the spread
environment look like
heading into 2024?
Spreads are high relative to the past
decade, but there is hope that as we
work through this year more liquidity
will come into the market and spreads
may compress. There is certainly no
consensus around a dramatic drop in
spreads in the near term though, and
we expect them to stay elevated for
some time.
Q Can you see Nuveen
lending against traditional
office assets again over the
medium term?
Yes, but it will be selective. Most port-
folio lenders probably have larger allo-
cations to traditional office than they
would like right now, so while there
may be attractive office assets, lenders
still may want to end up with fewer of-
fice assets in the portfolio. Until some
of those existing office loans show
the ability to be repaid, there will be
a headwind to allocating to the sector.
Q With the CRE equity
market seemingly heading
towards recovery, is this the
time for CRE debt lenders to
move up the risk curve?
There are attractive opportunities
across the risk spectrum, from the
more conservative core end up to more
transitional bridge lending. Transi-
tional lending tends to be priced using
floating rate indices, which enhances
the yield as the yield curve remains in-
verted. Where an investor chooses to
lend is reliant on each investor’s risk/
return appetite. n
March 2024 • Private Debt Investor 25
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 Strategies

LPs follow the pack in the

age of the dinosaur
Our research indicates investors are keeping faith with mainstream strategies
– at least for now. By Andy Thomson

C
onservatism appears to be the Regarding private debt, how do you plan to invest in the following fund strategies in the next 12
driving force for many inves- months compared with the previous 12? (%)

tors in private debt, our LP Invest more capital Invest same amount of capital
Perspectives 2024 Study suggests. Invest less capital Do not invest
When it comes to fund strategy, di-
rect lending has long been the most fa- 0 20 40 60 80 100

voured option for investors – and noth-

ing in our latest test of opinion suggests Direct lending
that is likely to change any time soon.
As our accompanying chart shows, 45
percent of investors plan to invest more Mezzanine/
in direct lending in the next 12 months subordinated
than the last 12, with mezzanine and
distressed debt/special situations the
next most popular options at less than Distressed/
special situations
20 percent.

Rerun of the classics

Structured finance
In a podcast with Private Debt Investor,
Reji Vettasseri, lead portfolio manager
for private markets investments at De-
calia, a Geneva-headquartered wealth Venture debt
management specialist, reflected on the
findings of our study and said he wasn’t
too surprised by the dominance of tried
Speciality finance
and trusted firms and strategies.
He noted: “We are living in this pe-
riod where the biggest firms with the Source: Private Debt Investor’s LP Perspectives 2024 Study
most classic strategies have been seeing
the biggest level of growth… the very
big firms focused on direct lending are “The dinosaur works when there
growing faster. Sometimes they call it
the ‘age of the dinosaur’, it’s a place
where the bigger the better, the people
who can eat everything and be more
45%
Share of investors that will
are lots of feeding opportunities
around but if you think about how
markets might evolve, if you have too
much capital in a certain place and
raise their investment to direct
aggressive have actually done very well lending this year when private debt starts becoming a
over the last few years.” very large proportion of the leveraged
He added that he sees this as natural building out a private debt programme. finance market in traditional LBO fi-
in a fast-growing asset class where plen- He questions whether this is the right nancing, it’s harder to generate a re-
ty of investors are in the early stages of approach over the long term, however. turn premium.” n

March 2024 • Private Debt Investor 27

 Strategies
The arsenal of distressed
debt violence
Christopher Faille assesses the workarounds that allow distressed pre-bankruptcy
firms some final-reprieve liquidity and offer risk-tolerant lenders opportunities
T
he image that has de-
veloped of distressed
strategies in the 2020s
is this: creditors, losing
an old-fashioned sense
of scruples or a willing-
ness to work together, have turned to
a more bare-knuckle approach in the
pursuit of a distressed debt strategy.
Bankruptcy litigation is being overrun
by metaphorical lender-on-lender vio-
lence.
That image is not baseless. It is sup-
ported, for example, by recent frenetic
activity around Spirit Airlines (see box).
But the image needs to be qualified in a
couple of ways.
First, a lot of coverage overstates
the novelty of the violence. The bare
knuckles in question go back at least 15
years.
Second, it is not so much the bank-
ruptcy litigation that is getting more
aggressive, but the negotiations and
renegotiations that often precede it
in the last months of a company’s sol-
vency, when an issuer is looking for
rescue and various different rescuers
may present themselves. A distressed
pre-bankruptcy issuer will look aggres-
sively for someone willing to provide
it with liquidity and will prove willing
to enter into creative arrangements to
work around obstacles. It is in that con-
text that the prisoners’ dilemma nego-
tiations come about.
28 Private Debt Investor • March 2024
The underlying phenomenon is
global. Danny Ong, co-founder and
managing director of Singapore-based
law firm Setia Law, says, with refer-
ence to practice in East Asia: “As be-
tween different classes of creditors and
claimants who have competing inter-
ests, it is typical to see aggressive tac-
tics employed by some, particularly in
the context of one class seeking to get
ahead of another.”
Setia Law is seeing, Ong says, “a sig-
nificant uptick in distressed situations
in Asia, even outside the Chinese real
estate context, and correspondingly,
lenders starting to take enforcement
action and investors looking for early
exits”.
Double dip
“Funds have now Two distinct moves in liability manage-
ment are known as ‘double dip’ and ‘pari
seen the pain of a plus’. Each gained new momentum in
2023 because (in the words of a clients’
free-fall bankruptcy, memo from law firm Wachtell Lipton),
“challenged companies have sought
and out-of-court
to maximise competition between (or
exchange offers or among) their existing lenders, on the
one hand, and direct lenders outside
pre-packs are their capital structure, on the other”.
In a double dip, a parent company
preferable” is on the hook for a subsidiary’s ob-
ligations, and the subsidiary enters
SINA TOUSSI bankruptcy. The parent may be re-
Two Seas Capital quired to make two distributions to
the indenture trustee for the bonds on

account of a single claim. Suppose the
claim is for $1 billion: one necessary
distribution may go directly to bond-
holders on account of the $1 billion
guarantee claim, and second, indirect-
ly via a $1 billion intercompany claim,
which flows to the subsidiary and out
to the subsidiary’s creditors (again, the
bonds).
The point is not to get $2 billion out
of the bankruptcy estate. In the words
of the debt advisory team at Jefferies,
“recovery on the new money loan re-
mains limited to the amount owed on
the loan, but the additional claims/
guarantees provide significant credit
enhancement for lenders”. The point is
to increase the likelihood of getting the
full $1 billion.
The pari plus is a variation of this.
In a true double dip, the intercompany
loan (the first dip) and the new money
guarantee (the second dip) are asserted
against the same entities at the existing
credit group. In a pari plus, on the oth-
er hand, the new-money guarantee is
made by an entity outside of the exist-
ing credit group.
Changing times
In July 2009, CIT Group received $3
billion from bondholders in the hope
of fending off bankruptcy. It did enter
bankruptcy, though, later that year. In
November, it filed a prepackaged bank-
ruptcy and in December it emerged
from the court’s protection.
Sina Toussi, founder and chief in-
vestment officer of Two Seas Capital,
formerly Kairos, is a veteran of dis-
tressed debt battles.
In the period before and through
the global financial crisis, Toussi was
at One East Capital Advisors. He says
he was involved in the negotiations and
litigation surrounding the failure of
CIT at that time.
“In fact,” he says, “our dip was a tri-
ple dip (something that is in play today
in $1.1 billion of Spirit Airlines bonds).
These bonds [involved in the CIT
negotiations] had multiple avenues
Strategies
Spirit: A borrower in need of creativity
Lenders offer innovative solutions to an airline in free-fall
US budget airline Spirit Airlines is in trouble in the wake of a judicial veto
of its planned merger with JetBlue. The two airlines are jointly appealing
the district court ruling, which blocked the deal over fears the merger was
anti-competitive and would harm consumers, but the appellate process is
slow, with the appeals court not slated to hear arguments until June. The
outcome of such an appeal is, at best, uncertain.
In the wake of the ruling, Spirit’s shares lost half their value. Within
days, the price had found a floor at $5.70 (against a pre-ruling price of
$15). It had bounced above that floor, in recent days, but at time of writing
it is below $7. Note that the JetBlue deal had valued Spirit at $3.8 billion,
which implies a share value of $33.50.
The company has around $1.1 billion in debt falling due in 2025. It
has been burning through cash rapidly, so although it has more than $800
million in cash on its balance sheet, that will
have been reduced by then.
Press reports indicate that Spirit is looking
for ways to refinance its debt. Sources indicate
there are private lenders interested in doing
that, and that double- or even triple-dip
arrangements are under discussion in those
talks.
of recovery and received par plus ac- is often, and will continue to be, a mat-
crued.” ter for litigation.
But Toussi also somewhat countered Uptiers involve the amendment of
the idea that the bankruptcy proceed- existing secured debt documents to
ings themselves have become an all- allow new super priority secured debt.
for-one melee. Dropdowns, on the other hand,
He says that it might actually be eas- transfer assets out of a secured collat-
ier now than it once was for a distressed eral package to an unrestricted subsidi-
company to get the sign-ons necessary ary so that the subsidiary can issue new
for a prepackaged bankruptcy. “Funds debt, secured by those transferred as-
have now seen the pain of a free-fall sets. As Dechert observes: “Drop-down
bankruptcy,” Toussi says, “and out-of- liability management transactions do
court exchange offers or pre-packs are not necessarily require the consent of
preferable.” the majority creditors, although sub-
sequent ratification of the transaction
Tiering up and dropping down is often sought and obtained from par-
Two other phenomena closely related ticipating majority creditors to avoid
to these multiple dips – ie, other ways litigation.”
of creating liquidity for firms in danger When it comes to the creativity
of insolvency, while respecting existing of lawyers, accountants and consult-
lenders’ sacred rights as established by ants, there is no end. Perhaps lender-
law – include uptiers on the one hand on-lender workarounds is a better
and drop downs on the other. Whether phrase to use than resorting to meta-
those sacred rights have been respected phorical violence. n
March 2024 • Private Debt Investor 29
 Analysis
Which global financial
institutions are backing
private debt?
Key financial bodies have very different assessments
of how much systemic risk is posed by private debt
P
rivate credit’s effect on
the stability of the global
financial system has be-
come a subject of detailed
scrutiny by central banks
and leading financial insti-
tutions. This includes the International
Monetary Fund, the Federal Reserve
Board, the European Central Bank and
most recently, in December 2023, the
Bank of England.
The Fed and IMF have opposing
views on the private credit market, par-
ticularly in light of its growth post-fi-
nancial crisis. The Fed, in its May 2023
Financial Stability Report, presents an
optimistic stance, noting the sector’s
marked growth with assets under man-
agement estimated at about $1 trillion.
This expansion is seen as a sign of the
sector’s resilience and growing impor-
tance in the financial system.
The Fed attributes the limited fi-
nancial stability risks to the low lev-
erage used by private credit funds and
the nature of investor commitments,
30 Private Debt Investor • March 2024
Guest comment by Alex Di Santo
pointing out that the closed-end fund
structure mitigates the risk of sudden,
large-scale redemptions. However,
the Fed also acknowledges challenges
in the sector, such as assessing default
risks and potential liquidity demands
during downturns.
In contrast, the IMF views private
credit as a potential source of insta-
bility in the global financial market,
particularly during times of stress. The
IMF is concerned about the potential
“The BoE points to
the risks of market
disruptions from
interconnectedness
and vulnerabilities in
leveraged finance”
for market disruptions due to large
outflows from investment funds, the
increased exposure of pension funds
and insurers to riskier assets and the
vulnerability to rapid redemptions in
funds offering daily liquidity.
These factors, coupled with the use
of financial leverage by institutional
investors, could exacerbate financial
market stress. The IMF also highlights
concerns about the significant exposure
of non-bank financial institutions to il-
liquid investments and the potential for
delayed price adjustments, which could
lead to abrupt market corrections.
More lower-rated securities
The IMF’s caution extends to the
heightened vulnerability of entities
like insurers to rating downgrades and
defaults due to increased exposure to
lower-rated securities since the global
financial crisis. Additionally, the IMF
points to risks associated with high in-
terest rates and leverage, which have
impacted business models and led to

reduced private equity activity. The
IMF emphasises systemic risks and
spillover effects, particularly due to the
interconnectedness of private credit
markets with other financial sectors.
The EU’s regulatory stance on
private credit reflects a proactive ap-
proach, distinctly different from the
perspectives of the Fed and the IMF.
Recognising the substantial growth
of the private credit market post-GFC,
the EU is set to implement new reg-
ulations aimed at curbing leverage in
private debt funds to mitigate finan-
cial stability risks. These regulations,
including leverage caps and specific
restrictions on open-end credit funds,
highlight the EU’s concern about sys-
temic risks and market disorderliness, a
stance that aligns more closely with the
cautious approach of the IMF than with
the Fed’s more optimistic viewpoint.
While the IMF has expressed con-
cerns about potential market disrup-
tions, increased exposure to riskier
assets and the systemic risks associated
with private credit, the EU’s impending
regulations mirror these apprehensions,
especially in terms of managing lever-
age and liquidity risks. In contrast, the
Fed’s perspective is notably more posi-
tive, emphasising the sector’s resilience
On side: the Fed
is optimistic about
private credit
and minimal financial stability risks
despite its rapid growth. The Fed ac-
knowledges the challenges in assessing
default risks and potential liquidity de-
mands but does not advocate for the
same level of regulation as the EU.
Thus, the EU’s approach represents
a middle ground between the IMF
and the Fed. By introducing legislative
measures to limit leverage and manage
liquidity risks, the EU demonstrates
its recognition of the potential risks in
the private credit market, similarly to
the IMF’s stance, while acknowledging
the sector’s importance in the financial
system, a point underscored by the Fed.
This balanced approach aims to foster
sustainable growth in the private credit
sector while ensuring financial stability
across member states.
Rising rates, tighter financing
Meanwhile, the BoE’s focus is primari-
ly on the vulnerabilities of highly lever-
aged corporates, particularly those re-
liant on leveraged loans, private credit
and high-yield bonds. This aligns
somewhat with the IMF’s stance, high-
lighting the risks of market disruptions,
especially in times of financial stress.
The BoE focuses on the vulnera-
bility of corporates with high leverage
Analysis
and floating-rate debt to rising interest
rates and tighter financing conditions.
This emphasis on the impact of interest
rates on debt servicing and refinancing
aligns with the IMF’s concerns about
systemic risks.
However, the BoE also provides
a more detailed examination of the
private credit market’s structure and
leveraged finance growth, offering
sector-specific insights beyond the
IMF’s broader perspective.
In contrast with the Fed’s optimism,
the BoE acknowledges the private
credit sector’s growth but stresses the
associated risks and potential impacts
on financial stability. While the Fed
highlights the sector’s resilience and
benefits of structures such as closed-
end funds, the BoE points to the risks
of market disruptions from intercon-
nectedness and vulnerabilities in lever-
aged finance.
In terms of regulatory approaches,
the BoE’s perspective aligns with the
EU’s focus on systemic risks. While
the EU adopts a proactive regulatory
stance to limit leverage in private debt
funds, the BoE takes a more analytical
approach, examining the sector’s dy-
namics and potential risks.
Both entities recognise the need for
risk oversight, with the BoE’s analy-
sis aiming to understand the market’s
complexities. Overall, the BoE bridges
the gap between the IMF’s systemic
concerns, the Fed’s confidence in the
sector and the EU’s regulatory meas-
ures.
Managers operating in more than
one jurisdiction need to be aware of
changes in the views of regulatory bod-
ies and the compliance requirements
these views engender.
While this article highlights the nu-
ances that are important for asset man-
agers in navigating regulatory com-
plexities today, this will change over
time. n
Alex Di Santo is group head of private equity
at Crestbridge
March 2024 • Private Debt Investor 31
 Data

P
artly due to the denominator
effect and partly due to a lack
of distributions, last year was
challenging for investors that
Life after the
wanted to make commitments
to private markets funds. But
although it was private debt’s toughest
year since 2016, the asset class suffered
fundraising slump
less than other comparable areas of
investment – and there is hope that the
coming 12 months may present a better
Private credit joined other private markets in
opportunity to fill the coffers. a tough 12 months on the fundraising trail in
Below are some of the key highlights
arising from Private Debt Investor’s fund-
2023 but hopes are higher for the year ahead.
raising figures for full-year 2023. John Bakie reports

Private debt fundraising The fundraising figures are in

Capital raised ($bn) Number of funds for full-year 2023 and they reveal
300 600 a drop in global private credit
capital accumulation to just
250 500 $219 billion, the lowest amount
seen in a PDI Fundraising Report
200 400 since 2016, when $180 billion
was raised. The number of fund
150 300 vehicles raised fell to 303, the
smallest figure seen since 2012.
100 200 This mirrors a similarly difficult
fundraising year in other private
50 100 markets asset classes as LPs looked
to rebalance their portfolios after
0 0 a year of high inflation and sharp
2019 2020 2021 2022 2023 interest rate rises.

Despite the lower Proportion of strategy focus (%)

fundraising volume in 100
2023, the distribution
of strategies remained 80 Royalties
remarkably stable. Venture debt
Senior debt continued Leasing
to be the most popular 60
Fund of funds
strategy, making up 40 Distressed
percent of the market, 40 CLO
followed by junior Subordinated/
mezzanine debt
credit on 36 percent
20 Senior debt
and distressed on 17
percent.
0
2019 2020 2021 2022 2023

32 Private Debt Investor • March 2024

 Data

Perhaps the biggest story of

the year was the huge divide Region focus ($bn)
between North American 0 20 40 60 80 100 120
fundraising activity and that
in Europe. Capital raised North America
in North America still fell
substantially, down almost $30 Multi-regional
billion compared with 2022,
but European fundraising Europe
saw a larger proportionate
fall, approximately $27 billion
Asia-Pacific
lower, with just $39.1 billion
raised as fears over energy
prices, war and industrial Sub-Saharan Africa

performance came to the fore.

Middle East/
North Africa

Average fund size sat above $1

Average fund size ($m)
billion at the end of the year.
1,200 Notably, 2023 was the first year
where average fund size was
1,000 more than $1 billion in each
of our quarterly reports. This
800 reflected a market where the
most established fund managers
600 were continuing to raise ever-
larger vehicles amid a declining
400
pool of smaller funds.

200

0
2019 2020 2021 2022 2023

Amount targeted by funds in market, 23 Jan 2024 ($bn)

Despite a tough fundraising
0 50 100 150 200
year, there are a large number
of credit funds actively raising North America
in the market, seeking sums
totalling almost $400 billion. If Multi-regional

the economy begins to improve

Europe
in 2024, as many expect,
then we could see a rapid Asia-Pacific
bounce-back in private credit
fundraising. Latin America

Sub-Saharan Africa

Middle East/
North Africa
Source for all data: Private Debt Investor

March 2024 • Private Debt Investor 33

 Data

Funds in market
This month’s measure of the pulling power of managers, regions
and strategies in private credit
Top funds in market, 2 Feb 2024

Fund Institution Target Raised Region Strategy Sector

($bn) ($bn)
Oaktree Opportunities Fund XII Oaktree Capital 18.0 Undisclosed Multi-regional Distressed Corporate
Management
Brookfield/Societe Generale Private Brookfield Asset 10.9 2.7 North America Subordinated/ Diversified
Debt Fund Management mezzanine debt
Ares Senior Direct Lending Fund III Ares Management 10.0 Undisclosed North America Senior debt Corporate

Oaktree Lending Partners Oaktree Capital 10.0 Undisclosed North America Senior debt Corporate
Management
Blackstone Senior Direct Lending Fund Blackstone 10.0 8.0 North America Senior debt Corporate

Stepstone Private Credit Fund StepStone Group 10.0 0.1 North America Subordinated/ Corporate
mezzanine debt
Blackstone Real Estate Debt Strategies V Blackstone 8.0 3.7 Multi-regional Subordinated/ Real estate
mezzanine debt

Fortress Credit Opportunities Fund VI Fortress Investment 8.0 0.4 Multi-regional Distressed Diversified
Group
CVC European Direct Lending IV CVC Capital Partners 7.7 Undisclosed Europe Senior debt Corporate

HPS Specialty Loan Fund VI HPS Investment 7.5 Undisclosed North America Senior debt Corporate
Partners

Strategy focus of private debt funds in market, 2 Feb 2024 (%) Amount targeted of private debt funds in market,
2 Feb 2024
100

80
Leasing
Royalties

60
CLO
Fund of funds
$181.9bn
North America
Venture debt
Distressed debt
40
Subordinated/
mezzanine debt
Senior debt

20

0 $4.2bn
Target amount Number of funds Latin America

Source for all data: Private Debt Investor

34 Private Debt Investor • March 2024

 Data

Capital raised by private debt funds in market by region, 2 Feb 2024 ($bn)

0 20 40 60 80 100 120 140

North America

Multi-regional

Europe

Asia-Pacific

Latin America

Sub-Saharan Africa

Middle East/North Africa

Sector focus of private debt funds in market, 2 Feb 2024

Infrastructure

8%
Diversified

7%
$393bn
Total amount targeted by funds in
market

1,225
Number of closed-end funds in market

Real estate

23%
Corporate

61% 758
Number of managers with funds
Figures have been rounded in market

25.5%
Percentage of amount targeted by the
$103bn 10 largest funds in market

Europe

98
Number of funds in market targeting
$1bn or more

$0.2bn
Middle East and
North Africa $14.2bn
Asia-Pacific
46.3%
Proportion of capital targeted by funds
in market focused on North America

$1.6bn
Sub-Saharan Africa
$88bn $234.1bn
Capital raised by funds in market
Multi-regional through interim closes

March 2024 • Private Debt Investor 35

 Next month
Hard times
Our April issue will take a deep dive into
distress and special situations
There can be few bigger talking points in
private debt today than the opportunity
in distress and special situations – which
will account for much of the coverage in
our April 2024 edition.
While there is excited chatter about a
‘golden age’ based on encouraging
conditions for new investments, the
steep rise in interest rates has placed
borrowers under the kind of repayment
pressure that has caught many off guard
after the long years of near-zero rates.
Some cracks are already appearing,
notably in commercial real estate, where
parts of the office and retail markets are
Don’t miss out!
36 Private Debt Investor • March 2024
facing huge challenges. But even in the
corporate sphere, where major issues
have been slower to surface, there are
concerns that debt interest coverage
ratios will be eaten away while fears
grow over the ‘maturity wall’ of loans that
need to be refinanced in a very different
environment.
Our coverage will speak to leading GPs,
LPs, placement agents, debt advisory
and law firms and others as we seek
insights into topics such as bankruptcy
laws, hiring workout professionals,
operational priorities in a tough
economic climate, fundraising prospects
and much else besides.
 Japan Korea Week
2024
25 - 27 June 2024 | Seoul & Tokyo

Meet our industry-leading speakers:

YoungSang
Cho Akihiro Endo Inseon Hwang
Head of Private Co-Head of Private
Professional
Debt Investment Equity Investments
Samsung Fire &
Division Tokio Marine Asset
Marine Insurance
Samsung Asset Management
Management

Makoto
Ichioka
Fund Manager, Co- Dong Hung Daniel Leger
Head of Overseas
Infrastructure and
Jang Managing Director
Senior Adviser MGG Investment
Private Corporate Group
Yulchon
Debt
Daido Life
Insurance Company

Antonella
Joji Takeuchi
Napolitano Executive Manager,
Maiko Nanao Managing Director, Private Asset
Managing Director, Global Head of Investments,
Investment Investor Relations Strategic Fund
Research, Asia and Capital Investment Group
Aksia Asia Formation Asset Management
Deerpath Capital One
Management

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Issue 111

1 ANREV/INREV/NCREIF Fund Manager Survey 2023. Survey illustrated rankings of 116 fund managers globally by AUM as at 31 Dec 2022; updated annually.
2 Nuveen 31 Dec 2023.
March 2024

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