Europe may swerve rise in creditor-on-creditor violence
THE SMALLER size of European leveraged loan markets could protect lenders from being pitted against each other, as so-called creditor-oncreditor violence cases increase in the US.
Creditor-on-creditor violence has come under the spotlight over the last year, with lenders being pitted against each other, essentially competing
to get a better claim on a borrower’s assets at the expense of others.
This infighting can be a result of borrowers, in many cases sponsors, exploiting loopholes in debt agreements to raise new financing for their struggling portfolio companies.
But it is a much more common occurrence in the US than in Europe,
according to Gijs de Reuver, managing director in Houlihan Lokey’s financial restructuring group.
“One reason is that European directors are held to a higher standard of fiduciary duties generally than those in the US,” he said. “You would expect directors to show more resistance to what the shareholder
wants because they have other stakeholders’ interests to consider.”
The second reason is the size of the capital markets.
“It’s like living in London, people don’t know their neighbours and therefore care less what they do to their neighbours,” de Reuver added. “In Europe, capital markets are much smaller with fewer large >> 4
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What do investors want?
Liquidity – or lack of it – is a central theme when people talk about private credit.
The typical argument is that investors benefit from the illiquidity premium and accept the asset class as a more long-term investment than public markets.
But the growing push into the wealth market – supported by fund managers and regulators alike – has resulted in the roll-out of semi-liquid vehicles like the European Long-Term Investment Fund (ELTIF) and the UK’s equivalent, the Long-Term Asset Fund.
These structures have been heralded for boosting liquidity and making the sector become more retail-friendly.
But here’s the rub. Evergreen funds, which offer less liquidity but higher yields, are growing in popularity more quickly than ELTIFs, with demand coming from the wealth market.
This challenges the common conception that individual investors need liquidity. With the public markets performing better of late, perhaps there is a deepening understanding that private assets can make up a less liquid part of their portfolio.
I’m not pretending to have the answer to this question, but it’s certainly something any private credit fund manager targeting the wealth market should consider carefully.
SUZIE NEUWIRTH EDITOR-IN-CHIEF
cont. from page 1
credit providers, so it is a village in comparison to the US. They all know each other, are repeatedly in the same credit facilities and are – so far – behaving as good neighbours.”
But when it does occur, it can cause reputational damage to the sponsor, leading some lenders to think twice about lending to that group.
“At some point the creditor either stops lending to these
sponsors or decides whether to charge them a premium over what a reputable sponsor would pay,” de Reuver said. “However, in a market where supply of credit exceeds demand to borrow, creditors that need to deploy material amounts of credit may say they will no longer lend to tainted sponsors but in practice concede their principals on the next deal that comes to market.”
US view
Although there have been several high-profile cases in the US, lending continues to feature looser covenants. While some people claim this is unfair, “when it comes to making money, those arguments don’t go far”, according to Michael Fay, partner in the creditor rights, bankruptcy and restructuring practice at Boies Schiller Flexner.
“One of the problems a lot of the times,
particularly with secondary market purchasers, is that they don’t even bother to read the documents,” he added.
“It all comes down to ‘were you allowed to do this’.”
While the language in some of the documentation seems to be changing in light of some of the litigation that’s taken place, according to Fay, this will continue to be a feature of the market.
Private credit firms and banks competing for talent
IN FEBRUARY this year, Blackstone announced a deal with Barclays to buy its outstanding credit card receivables and the pair entered into a “long-term strategic…arrangement”.
Just a few months later in May, Blackstone hired Tom Blouin, global cohead of leveraged finance at Barclays. And in August the asset manager brought in Matthew Humphrey, previously head of SRT structuring at the bank.
While private credit managers and banks are increasingly partnering up and working together – such as the partnership of Apollo and Citigroup –they are at the same time competing for talent.
“There is an interesting dynamic we haven’t seen before,” said Skye Lucas,
senior vice president at Selby Jennings. “Some are teaming up and at the same time senior bankers are leaving those banks.”
Also this year, Apollo hired Vivek Dasani, who was head of EU high yield trading at Barclays, after joining the bank from Citi. Meanwhile, AlbaCore hired Goldman
Sachs’ head of EMEA credit finance capital markets Luke Gillam.
Unfortunately for banks, the talent exodus to private credit funds is not likely to stop any time soon. The private credit industry is set to continue its growth, and more and more people are finding it interesting.
“We placed a few people recently out of M&A teams at high quality banks, two or three years ago that would have been unheard of, they would have wanted private equity and not found credit work interesting,” said Andy Miller, a director at Dartmouth Partners.
“But now I think it is inevitable that they will lose more and more talent. The view seems to be that private credit is going to become more commoditised. And the problem the banks have is that they can’t change the job and they never will be able to. They can maybe pay people more money or they can promote them quicker and give them different titles and sense of seniority.”
Private credit “in between” bull and bear phase
PRIVATE credit is “in between” a bull and a bear cycle, says Sam Boughton, head of EMEA and director of Moonfare UK.
Boughton said that over the past 18 months the investment platform has seen increased demand for private credit, “especially if people thought that they could take some risk off the table, but not necessarily massively compromise on their returns.”
This demand started to take off in the second half of 2022, when the rising interest rate environment saw investors turn to products such as secondaries, infrastructure and private credit.
“One of the things that we see from a Moonfare perspective is that our
investor demand really does change, dependent on market cycle and depending on what people read and where interest rates are,” said Boughton.
“Right now, we're in that in between phase where interest rates have started to come back down and inflation seems like it's more under control.
People are still not fully risk-on, but at the same
time, they are thinking a little bit more defensively and being slightly more adventurous.”
The Moonfare platform offers access to multiple private market funds with minimum investment thresholds of $75,000 (£57,482). Boughton said the platform works with around 20 to 30 funds per year, with a focus on private market strategies
such as buyout growth, VC infrastructure, and private credit, including direct deal opportunities.
“The original purpose of Moonfare was to provide broader access to private markets to a group of investors that we thought were underserved by private markets,” said Boughton.
“We will continue to look at private credit funds in response to our investors, and especially in response to investors who are building that portfolio and see private credit as a way of bringing a bit of risk diversification and J curve mitigation.”
Boughton added that the firm plans to launch more products in the direct deal space in response to investor demand.
Viola reveals growth plans following Cadma joint venture
VIOLA Credit plans to use a new financing deal with Apollo affiliate Cadma Capital Partners to grow its business by lowering its cost of capital.
In September, the asset manager unveiled an agreement with Cadma which has given the firms a financing capacity of up to $500m (£385m) to execute asset-based lending transactions which are originated and managed by Viola Credit.
Alex Ginzburg, partner and head of risk at Viola Credit, told Alternative Credit Investor that the firm does not intend to use this funding to seek out new types of investments.
Instead, Viola plans to boost its business by lowering its cost of capital in order to become more competitive to mainstream lenders.
“It’s a part of our strategic decision to grow,” said Ginzburg.
“Our growth strategy is based not on looking for new verticals or new niche investments, but rather to lower our cost of capital and to be more competitive with mainstream lenders, and to compete with banks and institutional capital at a higher scale.
“As part of this strategy, we are working with insurance companies and big asset managers that have this access
to cheaper capital.
“We started this joint venture with Apollo as part of this strategy of getting access to cheaper capital and being more competitive in this market, being able to provide more efficient solutions to our portfolio companies in terms of funding sources that are more scalable and cheaper.”
Read the full profile with Ginzburg on page 22.
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Investors shun liquidity as evergreen funds take off
EVERGREEN funds are becoming more popular, in a sign that investors are deprioritising liquidity in the search for higher yields.
According to a recent report from Novantigo, evergreen funds have been attracting around 10 times more investment than European LongTerm Investment Funds (ELTIFs) to date, and evergreen AUM is growing.
The research found that during the first quarter of 2024, approximately €7.3bn (£6.08bn) was invested into private debt evergreen funds, but by the second quarter this had risen to €7.8bn. This appears to be in response to demand from wealth managers and their clients, who are comfortable accepting a little less liquidity in exchange for higher returns.
Evergreen funds are investment vehicles that continuously accept capital, without fixed maturity dates. Liquidity in evergreen funds is generally limited. While investors can typically redeem shares at set intervals, withdrawals may be restricted to maintain stable funding for investments.
There have been a number of high profile evergreen fund launches in the past few months. In October, Apollo launched a new suite of evergreen secondaries products for global wealth investors, and Russell Investments rolled out an evergreen fund aimed at providing professional investors in the UK with exposure to global private credit markets. Around the same time, Canyon Partners launched an evergreen strategy following investor requests for drawdown
profile and underlying assets. By contrast, more liquid strategies such as ELTIFs currently offer returns of approximately six to eight per cent.
The relative popularity of evergreen strategies suggests that investors are happy to lock their money away for a period of time if it means boosting their gains.
funds that typically last seven to 12 years.
Brett Hillard, chief investment officer at GLASfunds, believes that the rise of evergreen funds proves that investors are not seeking out liquidity when looking at private market funds, rather they are “prioritising where they can get the relative best return”.
“Yes, liquidity is always an issue, but let's put things in context,” he said.
“US equity markets are at all-time highs. Bonds have stopped losing money on a full return basis, and have actually generated some returns. So there are a lot of investors whose public books are doing very, very well. The cost of liquidity goes down as liquidity supply goes up.”
Evergreen private credit funds typically offer returns ranging from six to 12 per cent, depending on the risk
One private credit manager told Alternative Credit Investor recently: “People used to think illiquidity was a bug. Now it seems to be a feature.” This same asset manager is planning to launch an evergreen fund in the near future.
However, Novantigo warned that the gold rush for evergreen funds may be tailing off.
“Not all asset management firms may prioritise the private wealth channel,” said Justina Deveikyte, cofounder and managing partner at Novantigo. “The growing momentum in this sector emphasises the urgency for those who are interested in tapping into this market to swiftly define their engagement strategies.
“The early entrants, who have introduced multiple evergreen funds for private wealth, are quickly taking up the available shelf space.
“This window of opportunity will not remain open indefinitely.”
Why yield compression is creating new opportunities in private credit
PRIVATE CREDIT YIELDS
are beginning to compress, but this opens up a range of new opportunities for private credit managers, industry experts have agreed.
At a roundtable event in October hosted by Alternative Credit Investor in partnership with fund administrator Aztec Group, a number of private credit chief operating officers (COOs) and chief financial officers (CFOs) met to discuss the challenges and opportunities facing the in-demand sector.
During a wide-ranging conversation, there were discussions around fund liquidity, domiciles, regulation, data transparency, and other market trends.
The panel looked at the ways in which the market has changed since the global financial crisis, reminiscing over the enormous growth of the private credit sector during a time when investors were desperate for yield. While it took a while for investors to become comfortable with the concept of private credit, by the end of 2022 corporate direct lending was practically everywhere. However, now this initial demand appears to be easing off somewhat.
“The rise in rates really helped investors and potential LPs pile money into that asset class,” said one panellist. “Particularly levered direct lending because you could get 12 per cent net returns by just putting money into level direct lending, senior secured asset types.
“Now those yields are compressing
slightly. But there’s a little bit more interest coming into credit ops and special situations which is creating new opportunities.”
During a conversation held under Chatham House rules, the industry experts swapped yield rates on their most recent fund vintages, with eight to 10 per cent IRRs appearing to be the norm. This, coupled with the higher rate environment, has led to slightly reduced demand for private credit.
However, one industry stakeholder noted that any discussion around yield has to be nuanced, because it depends on whether your fund overlaps a period of rising interest rates.
“Look at the deals that were done in a more similar environment to now,” they said. “The ones that were done in 2019 are obviously not looking as good now.”
In the present climate, private credit fund managers also see opportunities in banks de-risking through synthetic risk transfers.
“We see them cleaning up their balance sheet, particularly at year end, which is an opportunity for us,” said one roundtable attendee.
“We need to be a bit careful that we’re not just entering back into those securitised types of bonds which every brokerage house is trying to sell. You want to stay differentiated. But I do think there is still opportunity to drive value through either acquiring portfolios from banks directly or synthetically.”
The maturity of private credit has also made LPs more familiar with the intricacies of the sector,
and they have become much more demanding, the panellists said. They are now asking for more detail on deals, and they are cognisant of the possibility of liquidity mismatches. This has led to a need for greater transparency and communication from GPs.
One industry stakeholder noted that while IRR is important, it is just one of the factors that investors now consider before investing in a fund. What’s more, the fund’s dynamics are likely to change during its life cycle, for example, there could be retradings, NAV lines issued, or continuations of the performing portfolio. Each of these changes will be subject to the same high level of investor scrutiny which can add up to higher fees.
“From day one, the limited partnership agreement stipulates the expectations to an investor and what a GP can do,” they said. “But down the line, you’re very much trading with your LP about what their tolerance level is and checking back in. It gets to a point where it becomes very expensive due to legal fees, administrative costs, etc, so that’s the economic trade off.”
Liquidity continues to be a hot topic in private credit. In order to meet new demands for liquidity from investors, GPs are doing much more cash management forecasting, but the roundtable attendees noted that these forecasts are only really valid for three to six months, when they have to be remodelled.
“I think there’s a disconnect between how managers manage
the liquidity of portfolios and what investors probably would like them to be doing for their repayment,” said one participant.
“If I was on the investor side, I’d find it terribly cavalier that anything beyond six months is a sort of shoulder stroke.”
As a result, more and more private credit managers are becoming reliant on third party fund administrators such as Aztec Group. During a discussion about data transparency, one stakeholder shared that they would like to streamline their administrative workload, using an external provider to manage portfolio returns and metrics as a proprietary exercise and also report to LPs.
As LPs become more demanding, GPs are paying more attention to the third party providers who can help them grow their business sustainably. For some, AI represents
a potential solution, but most of the roundtable attendees agreed that the technology is too immature.
“We’re more leaning on the external finessing of data before we ingest AI,” said one attendee.
Fund domiciles were also compared, and the attendees agreed that despite the popularity of Luxembourg as a fund domicile, they are still drawn to the “familiarity” of old favourites such as Jersey and Guernsey. One delegate suggested that Luxembourg was more appropriate for fund managers who also did hedging. For pure private credit vehicles, the consensus seemed to be that consistency is best, and in Jersey and Guernsey the onshoring of marketing passports has the benefit of creating a lower barrier to entry.
Looking ahead, the huge demand for best-in-class private credit products, and the supremacy of the biggest GPs is
making fundraising harder, the industry stakeholders said.
“Everyone is fundraising for longer,” said one.
“Fundraising stays harder.”
“US-based LPs are still hugely over allocated to alternatives,” said another. “So until rates temper and they get distributions back on some of these PE deals – because capital markets just ground to a halt – until the big endowments and pension plans get their money back, we’re just not recycling.”
As another attendee noted, you have to get money out to put money back in, and with lower yields, more demanding LPs and new technologies flooding the sector, the need for fresh funds will be an ongoing issue for GPs. However, the roundtable demonstrated that fund managers are well aware of the challenges ahead and are already mapping out their solutions to these hypothetical problems.
Navigating the lending landscape and how Kuflink stands out in a crowded market
IT IS A CHALLENGING TIME
to be a borrower in the UK.
A dearth of high street bank lending has led many property developers and other small- and medium-sized enterprises (SMEs) to consider alternative lenders for the first time. While many alternative lenders are willing and able to plug this funding gap and loan funds to new borrowers, the best-in-class lenders tend to have very low approval ratios.
Kuflink’s robust due diligence processes ensure that the firm’s underwriters gain a unique understanding of their borrowers and can complete on a higher percentage of borrower applications than many of its rivals. This allows the platform to write good volumes of business by funding the best projects with the highest chance of success.
According to Brian West, Kuflink’s head of sales in bridging, and Matt Freeman, the company’s head of underwriting, there are a few things that would-be borrowers can do to ensure that they have an even better chance of securing much-needed funding.
“You can't underestimate the value that a well packaged case offers for everyone, whether it's the broker, the applicant, and particularly us, as a lender,” says West.
“There is no ideal client,” adds
Freeman. “We are an alternative lender. If the deal stacks up, from an underwriting perspective, the most important thing to us is how a deal is presented.”
In practice, this means that Kuflink is looking for detailed applications from the very start of the process. Freeman wants the initial application form to lay out exactly what the borrower intends to use the money for, their circumstances, and crucially how they're going to repay the loan, as well as any relevant information such as a property portfolio, or a copy of their CV.
“Fully packaging and presenting a new enquiry goes such a long way in terms of the perception it gives you as an underwriter when assessing that case,” he says.
“Transparency is the key. If someone is upfront about their bad credit, for example, that can help in terms of how the deal is presented.”
One of West’s biggest frustrations is when a borrower drip feeds bad news to their prospective lender throughout the application process.
“No lender likes piecemeal bad news,” he says. “The one thing that will wear a lender down is if a case is presented, and then three days later, you find out there's another issue which the broker should have been told about on day one. It’s vital that brokers
and borrowers work together to present a complete picture.
“If we, as a lender, know everything up front from day one, and can genuinely see that the clients are looking to work through difficulties, then we can work with them.”
Both West and Freeman noted that many of the platform’s borrowers tend to come back again and again for funding on their next projects, in a testament to Kuflink’s professionalism and expertise.
As the bridging and development lending market becomes more competitive, West believes it is
this hands-on, detail-oriented approach that sets it apart from other alternative lenders.
“Borrowers are better educated now than they've ever been because there's so much material and information,” says West.
“But that can be a double-edged sword because they’ve almost got too much information. If I see a menu that's got 150 choices, I struggle to make a choice.
Conversely a more limited menu can offer better quality options. At Kuflink we strive to be one of those better-quality options.”
Both Freeman and West agree
that it has become much more difficult to stand out in the current lending market when so many different alternative lenders are offering the same types of products. They believe it is Kuflink’s track record, combination of product and processing strengths and reputation for good risk management that sets it apart.
“Many lenders claim to have USPs but genuine USPs are very rare,” says West. “I think it's more a case of having combinations of selling points, and that's what makes us unique. Equally, nearly every lender claims to be fast and
flexible but in truth that should be a given with bridging loans.
“Across the industry average application times have gone up in recent years but we have bucked this trend. We genuinely do offer quick turnaround times because of our internal processes and procedures. We assign one underwriter to each case, so they can build that relationship with the broker, the borrower and sometimes both. At the same time our whole team is easily accessible. We offer a truly personal and completely transparent approach.”
The Kuflink team has been delivering bridging finance to borrowers since 2011. Over the past 13 years, the firm has worked with countless borrowers and brokers to bring them muchneeded funding even during times of economic instability. It is a testament to the company’s high standards that so many of these borrowers return to Kuflink for their next projects.
“The key things that we look to offer are speed, flexibility, and thinking outside of the box,” says Freeman.
“We are flexible with the types of valuations that we offer including automated valuations, desk-tops and drive-by. Expedited legals further streamline the application process for our borrowers.”
To date, Kuflink has facilitated the investment of more than £369m into British businesses, without any capital losses to its investors.
Kuflink knows what it does best, and it knows how to get the best from its borrowers from the very start of the application process. When transparency and clarity is prioritised on both sides of the lending agreement, everybody wins.
The road to retail
ELTIF 2.0 promises to open up the private assets market to retail investors, but not quite yet. Kathryn Gaw investigates
THERE HAS BEEN A flurry of European LongTerm Investment Fund (ELTIF) launches in recent months, sparking fresh conversations around the potential reach of the product – and its investors.
When ELTIF 2.0 debuted in January 2024, it was hailed as the fund structure that would bring private asset investments to the masses. With enhanced liquidity and transparency features, the ELTIF was designed with the global wealth market in mind. Private credit analysts have long speculated that the future growth of the sector lies in the portfolios of high-networth individuals (HNWIs) and their wealth managers, as well as sophisticated retail investors seeking diversification.
Earlier this year, research from Novantigo found that the size of the global private wealth market for private markets strategies could be worth between $10tn (£7.71tn) and $13tn by 2032. As private credit rates begin to come down, it makes sense that fund managers are already thinking about how to expand their distribution channels beyond their usual institutional investor base and
bring in new sources of funding.
In the year to date, ELTIFs have been launched by BNP Paribas Asset Management, Pemberton, M&G and PGIM, to name just a few. According to the ESMA register, there were 139 ELTIFs registered as of October 2024 – up from a relatively paltry 25 in 2020. Certainly, the fund structure is growing in popularity. But across Europe there is a sense that the ELTIF has yet to reach its full potential.
For a start, ELTIF 2.0 has had a slower-than-expected roll out. Although it launched in January, the regulatory technical standards (RTS) which provide important additional details to supplement
expected to have been formally adopted by the end of the year, and the data suggests that many fund managers were holding off on launching their ELTIFs until after these regulations had been finalised.
Before the publication of the updated RTS, there were
“ The appetite for ELTIF and ELTIF administration appears to really be with the tier one and tier two players”
the product have not yet been officially adopted. This has led to some uncertainty in the market.
The initial version of the RTS was rejected, before being updated in July. This updated version is
approximately 40 ELTIFs listed on the ESMA database. But between July and October of this year, almost 100 more ELTIFs have hit the market, and experts believe that there are plenty of other fund
launches waiting in the wings.
James Abram, principal consultant at Temenos Multifonds, says that the delay in the publication of the RTS led many managers to hold off on imminent launches until there is more clarity around distribution.
“I think people are still trying to figure out how to access the genuinely retail capital for these types of products,” says Abram. “It's about connecting what we have in the traditional retail space to the private asset managers and getting them comfortable with that distribution.”
Private credit fund managers do not have much experience working with retail investors, and they are currently quite limited in their distribution channels. Some are opting to use investment
platforms such as Moonfare, while others are targeting the wealth management market via broker networks or private banks.
Sam Boughton, head of EMEA and director of Moonfare UK believes that the ELTIF cannot be considered a “pure retail” product just yet, as fund managers are still only seeking out big ticket investors.
“These are clients that have got a private banking relationship,” he says. “They've got however many hundred thousands of euros, dollars, or pounds being managed by their bank, and then they might integrate some private markets, as opposed to a retail investor putting €500 (£416) in a private markets product.”
In reality, no ELTIF yet offers an entry point as low as €500. The
‘cheapest’ ELTIF on the market at the time of writing is Swiss Life’s Privado Infrastructure Fund, which comes with a minimum investment threshold of €1,000. However, the majority of ELTIFs have a threshold of €10,000 or higher, making them more suitable for HNWIs and sophisticated investors, rather than the average individual investment portfolio.
It is likely that the financial barrier to entry will come down over time, but fund managers appear to be in no rush to take on the administrative responsibility of retail investors.
“As soon as you start to target these types of investors, the regulatory burden becomes that much more imposing,” says Abram.
“That's hindering growth for
the ELTIF. Does a mid-size LP really want to deal with multiple tens of thousands of investors with all of the AML, KYC and due diligence requirements that go with them? All of that stuff is going to be brand new to a lot of these guys. And it's a real challenge.
“What we've seen at Multifonds is that the appetite for ELTIF and ELTIF administration appears to really be with the tier one and tier two players. It's not with the midsized and smaller boutique houses.”
Pan-European passporting has added to the challenge of distributing ELTIFs, and made the cost of roll-outs more expensive. Passporting regulations were built into ELTIF 2.0, but local jurisdictions can still undercut the European rules. France, Spain and Italy are among the domiciles that have added their own ELTIF requirements, which means that fund managers seeking to distribute their products in those countries must effectively operate under a double regime.
“ELTIF is a European regulation and is thus harmonised by definition from a regulatory perspective,” explains Serge Weyland, chief executive of the Association of the Luxembourg Fund Industry (ALFI).
“However, hurdles for accessing certain markets can exist as some tax advantages are only granted to local domiciled funds. Additionally, restrictions exist in non-financial regulations, for example in France where life insurance policies are restricted to local domiciled funds.”
“In France they do make it quite difficult for passporting, particularly of ELTIFs,” agrees Abram.
“Although there is a European regime, typically, in France, there will be additional hoops that you
“ Hurdles for accessing certain markets can exist”
have to jump through. I understand that it's nigh-on impossible to distribute ELTIFs to retail in France, even under ELTIF 2.0.”
As a result, only the largest private market players can afford to be the first movers of the ELTIF regime. €2tn asset manager Amundi is the only fund manager to have ELTIFs registered in three jurisdictions: France, Italy, and Luxembourg. BNP Paribas Asset Management and Eurazeo both have ELTIFs in France and Luxembourg. These three firms are the only multi-jurisdiction ELTIF managers as of yet.
In the absence of retail investors,
institutions appear to have identified the ELTIF as an efficient vehicle for their private market investments. ELTIF 2.0 brought the fund structure into alignment with the distribution requirements of MiFID 2, so would-be investors such as insurers and banks are already familiar with the rules.
“There has been a noticeable rise in the number of insurers and banks choosing ELTIFs,” says Antonios Nezeritis, investment funds partner at Ashurst.
“Certain national legislators use the updated ELTIF regime to promote their insurance products through the creation of ELTIFs.”
Institutional investors can also use ELTIF investments to gain access to a higher level of liquidity than traditional private credit funds afford. In fact, one industry insider told Alternative Credit Investor that they are aware of some instances
where institutions have considered transferring their private credit allocations into ELTIFs. However, on the whole, institutions are comfortable with the illiquidity of private market investments, and are happy to accept limited liquidity in exchange for higher returns. While insurers and banks are financing this first tranche of ELTIF launches, the general consensus is that the future of the ELTIF lies squarely with retail investors, and what they want is liquidity and access. At the ALFI Private Assets Conference in September, the
liquidity of ELTIFs was a topic of sustained discussion. Fund managers and fund administrators appear to be confidently preparing for an influx of HNWI and retail money within the coming years, and the convenience and growing availability of the ELTIF plays a key role in these plans.
“ There has been a noticeable rise in the number of insurers and banks choosing ELTIFs”
The lack of retail money to date appears to be down to caution on both sides. ELTIF managers want to ensure that they are fully compliant with all incoming regulations before taking on the responsibilities of retail money. Meanwhile, retail investors
are still learning about private market investments, and are likely unwilling to put €10,000 or more into an unfamiliar asset class.
“Europe has generally been a little bit behind the curve in terms of driving professional and retail investment into private assets,” says Abram.
“You can draw some comparisons between the ELTIF regulation and some of the regulations over in the US, particularly interval funds.
“Over the last few years, they've seen 10 per cent annual growth year-on-year in those interval funds with a market cap of over $80bn. If you're looking for a predictive indication of where ELTIFs are going, that’s a very good one.”
The private credit sector is filled with people who are well used to taking a long-term view on their investment decisions. The ELTIF was first proposed by the European Commission way back in 2013, and it has taken more than a decade to finesse the fund structure and make it suitable for retail distribution.
Now that the regulations have been ironed out and the first wave of the new-look ELTIFs have launched, fund managers are looking at the horizon again. If Novantigo’s projections are correct, within the next decade there could be upwards of $13tn of retail money searching for a home in the private assets market and a well-established, well-distributed ELTIF market could meet these needs. Until then, fund managers and administrators have a little bit more time to smooth out the kinks and brace themselves for the unique challenges that come with non-institutional funds.
How tech and data can provide private credit managers with a competitive edge
With the private credit market growing at pace – it’s projected to be worth $3.5tn (£2.7tn) by 2028 – managers are looking for new ways to give their offering a marginal gain. One way is by optimising their operations to collect, assimilate and leverage their funds’ loan data effectively. Head of US private credit Todd Werner, and Group head of private credit Kevin Hogan, at the Aztec Group, a leading fund administrator, explore how integrating teams, technology and data creates the ecosystem to provide that competitive edge.
IN
THE
RAPIDLY EVOLVING
world of finance, private credit has become a vital component of capital markets. As companies continue to turn to private credit to meet their financing needs, the role of data in portfolio management has become critical. Accurate, timely, and comprehensive data is essential for assessing risk, valuing assets, servicing investors, and making investment decisions. A data ecosystem, integrated with the right team and technology solution, can sharpen a competitive edge where margins are thin, and investor demands are high.
The popularity of private credit as an asset class surged dramatically following the global financial crisis of 2008/09, reaching an estimated $1.5tn by the end of 2023, according to Preqin. This growth has been fueled by ongoing shifts in public markets, investor appetite for higher but reliable yields and portfolio diversification, and borrowers’ preferences for more flexible financing options.
According to BlackRock’s 2023 report, ‘Private debt: a primer –unpacking the growth drivers’,
the private credit market could be worth $3.5tn by 2028.
Structures and strategies in private credit
This asset class can offer higher returns and greater protections for investors compared to public market debt. This is due to the lenders’ ability to negotiate loan terms, exert pricing power, and enforce
covenants to monitor and restrict borrower activities. Covenants provide transparency and enable early detection of potential financial issues of the borrower, safeguarding lender interests. In the public markets, an investor must rely on the evaluation by the underwriters at the financial institution and are relatively inflexible on covenants. Investors range from limited
partnerships and registered alternative funds (business development companies, interval funds, tender offer funds) to separately managed accounts, insurance companies, and private wealth managers, all of which necessitates tailored product structuring and reporting.
For fund managers to thrive in this complex and competitive arena, they must have in place infrastructure that supports a seamless integration of people, technology, and a data ecosystem.
Real-time data speeds up reporting
A data ecosystem is a network of users, processes, data sources, and tools used to assimilate and manage data. Key to building a fit-forpurpose data ecosystem is instilling a culture of data as an asset, creating a data governance framework, maintaining data quality, integrating data effectively, and investing in scalable infrastructure.
A robust data ecosystem, once created, can more easily fulfil the requirements for borrowers, lenders, and investors across structures and strategies. It helps ensure all regulatory requirements are satisfied and makes the delivery of real-time reports possible.
Creating a process that allows stakeholders to access, review and amend data on a timelier basis streamlines the creation of these reports and so expedites the filings. An example is that of large brokers who, as a requirement to be listed on their brokerage sites, require daily NAVs. To support daily NAVs, firms must have access to high-quality data and a technology solution that supports daily processing and includes comprehensive reporting capabilities.
How data boosts operational efficiency
A well-designed data strategy improves operational efficiency and elevates the investor experience. To do this it must address the needs of all stakeholders, including front-, middle-, and back-office teams as well as investors.
Front office personnel require upto-date information on the financial health of the borrowers so that loans can be restructured to avoid defaults. Minimising default rates is a source of alpha for private credit funds and firms that limit defaults stay ahead of the competition.
Middle- and back-office teams need detailed, real-time information to effectively monitor the financial health of the borrowers, and to support the settlement, tracking, valuation, and reporting processes associated with various investment products. Investor services personnel, meanwhile, need data to efficiently onboard new investors, support investor queries, and ensure compliance with regulatory obligations (AML, KYC, FATCA and CRS). Investors too need access to data reports through easy-to-access investor portals.
What a data ecosystem should deliver
Disparate data sources, varied and often incompatible technology solutions, and data integrity are all challenges to an effective data ecosystem. These must all be navigated effectively to build a cohesive data model that optimises processing, supports high transaction volumes, captures granular data efficiently, and provides transparency through flexible reporting capabilities.
A key component of a robust data strategy includes establishing
a reliable process for collecting and reporting data on loans.
The ideal solution includes:
• Flexible loan set-up options
• Robust discount and premium amortisation functionality
• PIK and cash interest payment calculation modeling
• Undrawn commitment fee tracking
• Interest rate feed automation
Other functionality should include deal-flow monitoring, a dedicated data capture process, and cashflow projections.
To deliver significant operational efficiencies, the loan solution should integrate with the general ledger to streamline entries, which significantly reduces errors relating to the management of multiple applications.
How we bridge the data gap
Aztec’s Loan Servicing Unit combines the specific loan expertise of our people with the specialised experience of our eFront Debt loan processing system, to provide specialist, end-to-end support for your private credit fund. The team are loan and system experts and are agnostic to NAV cycles, resulting in more efficient processing and the ability to provide position reporting in real-time to clients. They focus predominantly on updating the Investment Book of Record (IBOR) integrating seamlessly and immediately to the eFront General Ledger thereby creating the Accounting Book of Record (ABOR).
We’ve invested heavily in our private credit offering, turning it into a product that differentiates it in the private credit market. For more information on how we can support you, please visit aztec.group/private-credit
Bridge the Gap
We’ve fully integrated our market-leading private credit loan reporting and accounting systems to provide you with a single source of truth.
Don’t accept disconnected data... in Fund and Corporate Services
The results? Information on demand, data you can trust and real time decision-making. And with our dedicated team of private credit professionals by your side, you’ll have specialist expertise you can call on every step of the way.
To find out more visit aztec.group/private-credit
Alternative Credit Awards 2024
The Alternative Credit Awards, hosted by Alternative Credit Investor, will take place on 6 November 2024 at the Royal Lancaster London.
The winners of the awards will be announced on the night, celebrating the most influential fund managers, lenders and service providers making their mark on the alternative credit space.
Attendees can expect a glittering evening, comprising a drinks reception, gala dinner and awards ceremony.
Tables:
Table of 10
Bubbly on arrival
3 course dinner
Coffee and petit fours
5 bottles of wine
Still/sparkling water
£5,500 +VAT
Premium table of 10
2x bottles of champagne at the table
Prime position near stage
£6,000 +VAT
For more information on tables, please contact sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor.com.
The shortlist for the Alternative Credit Awards has been released, recognising the most influential players in the private debt industry.
Climate transition fund manager of the year
Apollo Global Management
SUSI Partners
ILX Management
BNP Paribas Asset Management
Distressed debt manager of the year
Oaktree Capital Management
Arrow Global
NorthWall Capital
Balbec Capital
Fund manager of the year
Ares Management
Permira Credit
Federated Hermes
Eurazeo
Fund of the year
$1bn+
Ares Senior Direct
Lending III
Oaktree Special Situations Fund III
Kartesia Senior Opportunities II
Kayne Anderson BDC
Fund of the year sub $1bn
Fintex Private Debt
Eiffel Impact Debt II
TwentyFour Income Fund
Leste Credit Opportunity Fund
Impact fund manager of the year
Allianz Global Investors
Eiffel Investment Group
BNP Paribas Asset Management
Eurazeo
Infrastructure debt manager of the year
Macquarie
Edmond de Rothschild
AXA IM Alts
Rivage Investment
Innovative fund $1bn+
Ares Pathfinder Fund II
Audax Direct Lending
Solutions Fund II
Avenue Europe Special
Situations Fund V
Pemberton Strategic Credit Fund III
Innovative fund sub $1bn
AxiaFunder
M&G Corporate Credit Opportunities ELTIF
NorthWall European Opportunities Fund I
L&G Private Markets
Access Fund
Junior lender of the year
ICG
Kartesia
Churchill Asset Management
CVC Capital Partners
Lower mid-market lender of the year
Kayne Anderson
Federated Hermes Man Varagon
ThinCats
Market commentator of the year
Oaktree Capital Management
Ares Management
Benefit Street Partners
Churchill Asset Management
Mezzanine lender of the year
Shojin
Fintex Capital
HPS Investment Partners
Goldman Sachs Asset Management
Performance $1bn+
Ares Senior Direct
Lending II
Apollo Diversified Credit Fund
Fasanara Capital Global
Diversified Alternative
Debt Fund
Benefit Street Partners Debt Fund V
Performance sub $1bn
LibreMax Dislocation Fund
Vibrant AMBAR Fund
Fintex Private Debt
Blend Network
Real estate debt manager of the year
LaSalle Investment Management
Blackstone
Precede Capital Partners
Leste Group
Private credit secondaries fund of the year
Coller Credit Secondaries –Opportunities Fund I
Pantheon Credit Opportunities Fund II
Portfolio Advisors Credit
Strategies Fund
Senior lender of the year
Triple Point Private Credit
Pemberton Asset Management
Permira Credit
Ares Management
Special situations debt manager of the year
Arrow Global
NorthWall Capital
Oaktree Capital Management
Tikehau Capital
Wealth market proposition of the year
M&G Investments
Eurazeo
Carlyle
BlackRock
IFISA provider of the year
easyMoney
Kuflink
Folk2Folk
Simple Crowdfunding
P2P lender of the year
Folk2Folk
CrowdProperty
Kuflink
The Money Platform
UK bridging lender of the year (sub-£1bn)
Kuflink
Somo
Shojin
easyMoney
UK property development
lender of the year (sub£1bn)
CrowdProperty
Blend
Relendex
CapitalRise
UK SME finance provider of the year (sub-£1bn)
Folk2Folk
ThinCats
Rebuildingsociety
Compliance service
Vigilant Compliance
Ocorian
Acuity Knowledge Partners
Turnkey Trading Partners
Fund administrator
Aztec Group
BNY
Ocorian
MUFG Investor Services
Socium Fund Services
Law firm – fund structuring
Linklaters
Simmons & Simmons
Macfarlanes
Debevoise & Plimpton
Law firm – transactions
White & Case
A&O Shearman
Dechert
Cahill Gordon
Placement agent
Rede Partners
Campbell Lutyens
Devonshire Warwick
Capital
Stone Mountain Capital
FIRSTavenue
Ratings provider
S&P Global Ratings
Moody’s Ratings
Fitch Ratings
KBRA
Technology provider
Oxane Partners
Broadridge Financial Services
Allvue Systems
Dilligenz AI
The fintech funder
VIOLA CREDIT
specialises in providing asset-based lending to fintech companies and the innovation economy. The firm manages approximately $3bn (£2.29bn) in assets under management, with offices in New York, London, Tel Aviv and Sydney.
Alex Ginzburg (pictured), partner and head of risk at the global asset manager, explains how the firm is helping to address the fintech funding gap.
Alternative Credit Investor (ACI): Who are Viola Credit’s investors? Alex Ginzburg (AG): We operate through our commingled funds, which we raise from institutional investors. We have quite a wide institutional investor base, and we manage funds on their behalf in our commingled fund, but also through separate managed accounts that we manage mostly for insurance companies in the US and in Israel. We also have a quite significant number of high-networth investors and family offices but in terms of volume, most of our capital comes from asset managers, pension funds, insurance companies and banks.
Our positioning in this market is basically a combination of being an expert in structured finance, together with being an expert credit provider to tech companies. This is a combination that we think is quite unique in this market.
ACI: And who are your borrowers?
AG: About 50 to 60 per cent of
our business is in the US, and about 30 per cent is in Western Europe, mainly UK, France, and Germany. The remaining 10 per cent of our business is in Australia.
In terms of our focus, we are looking to transact with disruptive originators that leverage technology for better underwriting or better distribution of their credit products, with better efficiency, better operations, and better cost structures.
ACI: Do you ever work with the peer-to-peer lending market?
AG: This is something we have stayed away from, for two reasons. One is that plain vanilla consumer long-term unsecured credit is something that we have not identified as a differentiated asset that creates added value.
“
from many sectors, specifically small businesses or more complicated credit solutions, and embedded solutions that they just don’t have the tech to support. On the other hand, a lot of the economy is transitioning. We saw this in consumer e-commerce, where a lot of the trade has moved online.
The traditional credit providers didn’t have the capacity and the infrastructure to support this transition in commerce with adequate financial solutions. So what happened was that tech originators just came in and solved some of these big problems. One of the most clear examples is the buy now, pay later solution that grew after this move to e-commerce, where they provided the solution to the
Credit funds and banks don’t have the capacity to deal with these early stage [fintech] originators”
Secondly, we are mostly focused on balance sheet lenders.
For us, it’s important to create an alignment of interest with the originator so that the originator itself will be the first to bear the risk of the asset. It creates a very healthy alignment of interest between the two parties.
ACI: What is it about the fintech space that is particularly appealing to your investors?
AG: The banks and traditional lenders have been pulling back
consumer for point of sale finance. Now we see the same transition happening in the business-tobusiness trade, where a lot of that trade is also moving online. There is a new wave of solutions that we see fintechs provide to these platforms. They create a lot of value, both to the shareholders, but also to us, the lenders, where we can get an excess return through innovative distribution channels.
ACI: Is there a funding gap in the fintech space at the moment?
AG: Fintechs are closing finance gaps in their respective markets, whether it’s a point of sale for consumers or for businesses or corporate credit cards or invoice finance, or auto loans. Wherever they identify a gap, they close it with technology. The same thing happens between the fintechs and capital providers.
Credit funds and banks don’t have the capacity to deal with these early stage originators for two reasons – firstly, a lack of sufficient track record; and secondly, it’s just too small and too intensive operationally. Because these transactions are very active, you need to keep providing capital on a daily basis against the assets. Many funders don’t know how to handle these challenges at a small scale.
This is where what we identified the gap in this market. We decided that we would try to close this gap by using technology on our end.
We started an R&D department in-house. We have a CTO and four full stack developers. We just built our operational system for this business to allow us to do these transactions earlier and at a smaller scale. And we use technology not just to overcome the operational challenges, but also the informational gap. So we use technology to collect a lot of data on the performance of multiple asset classes in multiple credit risks and in multiple geographies to build our proprietary benchmarks for performance that allow us to underwrite these deals, even with limited track records at earlier stages.
ACI: So you actually had to create your own technological system in order to do these deals? That must give you a first mover advantage? AG: We are typically the first institutional lender to these
originators. In many cases, they are looking for our guidance on how to institutionalise their infrastructure. Because of our need for real-time data, we drive them to step up their game to start to be able to work with funders such as ourselves and later on with banks, and then even move to the securitisation market and be able to securitise their assets. By working with us, it drives them to build this institutional funding infrastructure that allows them to bring in additional funders and more banks later.
ACI: How many companies do you work with at the moment?
AG: It’s a highly, highly selective process. We started this strategy in 2017 and we are now in our third fund. Over the years, we have examined more than 700 originators, and we have transacted with 26. And we have a very wide perspective. We are asset agnostic, so we have commercial credit, consumer credit, secured, short-duration, long-duration. We have many types of assets, and we have quite a wide perspective on the market of what are the better production practices and products and what are the more favourable offerings. Based on that, we develop our thesis on what type of assets we want to fund that we think create the most value and also can have the most potential to scale up.
ACI: Do you have any plans to open any further offices?
AG: Right now, we are expanding our offices in New York. We’re also expanding our London office. We’re hiring more people, but right now we are not planning to open any more offices.
