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Buy the full book: de-to-private-debtTHE GLOBAL GUIDE TO PRIVATE DEBTTHE GLOBAL GUIDETO PRIVATE DEBTThe practitioner’s handbook to navigating the asset classPublished byPEILONDON140 London Wall, 6th FloorLondon EC2Y 5DNUnited KingdomNEW YORK16 West 46th Street, 4th FloorNew York NY 10036-4503United StatesHONG KONG14/F, Onfem Tower29 Wyndham StreetCentral, Hong KongEdited byDaniel Roddick, EPIC Private EquitySponsored by

Buy the full book: de-to-private-debtPublished in December 2016 byPEI6th Floor140 London WallLondon EC2Y 5DNUnited KingdomTelephone: 44 (0)20 7566 5444www.privateequityinternational.com/bookstore 2016 PEIISBN 978-1-911316-07-7This publication is not included in the CLA Licence so you must not copy any portionof it without the permission of the publisher.All rights reserved. No parts of this publication may be reproduced, stored in a retrievalsystem or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher.Disclaimer: This publication contains general information only and the contributors arenot, by means of this publication, rendering accounting, business, financial, investment,legal, tax, or other professional advice or services. This publication is not a substitute forsuch professional advice or services, nor should it be used as a basis for any decision oraction that may affect your business. Before making any decision or taking any action thatmay affect your business, you should consult a qualified professional adviser. Neither thecontributors, their firms, its affiliates, nor related entities shall be responsible for any losssustained by any person who relies on this publication.The views and opinions expressed in the book are solely those of the authors and neednot reflect those of their employing institutions.Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within thispublication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication.PEI Commissioning manager: Ashwin RattanPEI Managing editor: Helen LewerProduction editor: Julie FosterPrinted in the UK by: Hobbs the Printers (www.hobbs.uk.com)

Buy the full book: de-to-private-debtContentsFigures and tablesixAbout EPIC Private EquityxvAbout PennantParkxviiIntroductionxixBy Daniel Roddick, EPIC Private Equity LLPSECTION I: LP PERSPECTIVES123iii1Private credit strategies: More choice and new risksfor investors3By Tod Trabocco, Cambridge AssociatesDefining private creditStructured equityDistressed debtMezzanineCredit opportunitiesDirect lendersSpecialty financeThe changing profile of private credit fund managersConclusion345566779The whats and whys: Illiquid credit in a broader fixedincome portfolio11By Edward Goldstein, David Zhong and Jake Van Koevering,Morgan Stanley Investment ManagementThe surge in private credit and direct lendingOpportunistic credit and the case for portfolio diversityA look at concentration riskManaging duration in the secondaries marketConclusion1315182021Developing a global private debt programme23By Sanjay Mistry and Tobias Ripka, Mercer Private MarketsPrivate debt and the fundamentals of credit investing:Some general thoughtsGlobal investment optionsPortfolio construction and global diversification considerations232426

Buy the full book: de-to-private-debtContents456Implementation challengesSummary3031Private debt investing in Europe and the United States33By Peter Schwanitz, Portfolio AdvisorsDefining private debtThe rise of private debt in the US and EuropeEvolution of target sectorsPrivate debt investors in the US and EuropePrivate debt investing: Challenges and risksConclusion333435353738Private debt funds: The investors’ perspective39By Matthias Unser, YIELCO Investments AGImportance of private debt for institutional investorsInvestors’ risk appetite for different forms of private debtHow investors assess different private debt fund strategiesKey areas for investor due diligenceFuture of private debt in institutional portfolios3940414345Private debt as part of a family office asset allocation47By Stefan Armonat and Silvan Roth, Woodman Asset Management AGObjectives of a private debt investment strategyCharacteristics of private debtRelative value of private debt as part of portfolio allocationThe private debt opportunity setImplementation and operational considerationsConclusion474849515458SECTION II: GP PERSPECTIVES78iv59Sponsor-focused mid-market lending in a robustcredit market61By Arthur H. Penn, PennantPark Investment Advisers, LLCMarket backgroundAsset characteristicsA relationship businessMid-market structure: Creditor protections and lower credit lossesPositioning capital in today’s mid-market6162636467US lower mid-market credit: The allure of aninefficient market69By Brett Hickey, Star Mountain CapitalThe lower mid-marketWhat does a lower mid-market company look like?Private equity-style returns for lendingSponsored vs. non-sponsored69717374

Buy the full book: de-to-private-debtContents9101112Public Private PartnershipFinal thoughts7576Private debt in Asia: Early stage growth79By Dr. Chris Heine and Nicholas Brooks, ICGMarket evolution of AsiaGrowth driversRegional differencesCommon types of debtConclusion7979818384Investing in commercial real estate debt:Sustainable opportunities for alternative lenders87By Paul House, Venn PartnersBanking reformsWhat is CRE debt?Benefits of CRE debtDemand for CRE debtAlternative lenders coming of ageLeverage levels compare favourably to historical levelsAttractive relative valueConclusion8787888990909091Growth lending: A global view93By Craig W. Netterfield and Joyce Liu, Columbia Lake PartnersBackgroundNorth 0Prelude to a yard sale: The New Default Cycle101By Thomas M. Benninger, Global Leveraged CapitalThe cycle begins anewWhat makes the next default cycle different?Is now the time to invest? Where we are in the distressed debt cycleOpportunities for distressed debt investors in the upcoming cycle101102105106SECTION III: LEGAL PERSPECTIVES10913Private debt fund terms: A transatlantic perspective111By Sally Gibson, Geoffrey Kittredge, and Michael Sabin,Debevoise & Plimpton LLPEmergence of private debt funds111v

Buy the full book: de-to-private-debtContents14StrategiesEconomic termsOther economic terms to watchConclusion111112113114Europe for US alternative lenders:A regulatory minefield?115By Alex Amos, Macfarlanes LLPMarketing fundsLocal EEA lending regimesA pan-European loan origination regimeConclusion115120121121SECTION IV: THE BANK PERSPECTIVE12315Private debt: A banking perspective125By Stephen Quinn, Robina Barker Bennett and Ian Brown, Lloyds BankOverviewDevelopment of private debt as a core asset classInvestors in private debtSupporting private debt managers at the fund levelSupporting private debt managers at the underlying investment levelConclusion125126127127129130SECTION V: CURRENCY HEDGING13316FX hedging for private debt funds135By James Stretton, JCRAForeign Exchange (FX) exposureMethods of mitigating FX riskDealing with/avoiding negative cash eventsThe forward curveFX optionsHedging coupons, capital or bothFeeder funds and sub-classesOverlay N VI: THE EVIDENCE IN SUPPORT OF PRIVATE DEBT14517Making the case for private debt in LP portfolios147By Dr. Daniel Schmidt and Christopher Godfrey, CEPRESTarget-driven portfoliosBasis of analysisA note on methodologyPrivate debt vs private equity: A simple comparison147148148149vi

Buy the full book: de-to-private-debtContentsPrivate debt and private equity vs public equities:A correlation approachPrivate debt vs traded fixed income and market cyclesConclusion1819LP survey150153155Profile of respondentsAllocation plansA closer look at private debt allocationsStrategies and sectors of interestGeographies of interestInvestor confidenceSpecial focus: Distressed debt marketConclusion by Daniel Roddick157157158159162165167168170Q&A: Talanx Asset Management AG173PDI’s David Brooke, and Daniel Roddick, EPIC Private Equity,interview Andreas Asche and Michael Kebbel ofTalanx Asset Management AGAbout PEIvii180

Buy the full book: de-to-private-debtFigures and tablesFiguresFigure 1.1:Credit in the return spectrumFigure 2.1:Performance of leveraged loans, high-yield bonds and equitiesin up and down markets12Growing popularity of private credit markets,by geographic focus (Q4 2015 to Q4 2016)13Figure 2.3:The credit landscape15Figure 2.4:Performance of equities, credit and oil16Figure 2.5:The benefits of an opportunistic credit allocation21Figure 3.1:Classification of the global private debt universe25Figure 3.2:Capital raised by strategy, vintages 2008–2015(and forecast for 2016)26Figure 3.3:Capital raised by geography, vintage 2009 and vintage 201526Figure 3.4:Structured investment planning based on classification ofthe global private debt universe27Generic cash flow profile: single partnership subordinated debtvs. portfolio of partnerships, 3 years initial investment period29A comparison of non-bank lending in Europe and theUnited States34Figure 5.1:Participants in the US and European leveraged loan markets40Figure 5.2:Comparison of risk measures for mid-market loans vs.broadly syndicated loans42Figure 6.1:Private debt in the investment universe – sample allocation49Figure 6.2:Relative value of asset classes50Figure 6.3:Implementing a private debt allocation54Figure 2.2:Figure 3.5:Figure 4.1:ix4

Buy the full book: de-to-private-debtFigures and tablesFigure 6.4:Build-up of private debt exposure56Figure 7.1:US bank share of mid-market leveraged loan issuance61Figure 7.2:Senior leverage for LBO transactions64Figure 7.3:Total leverage for LBO transactions65Figure 7.4:Interest coverage for LBO transactions65Figure 7.5:Covenant-lite loan volume as a % of total institutional loan volume66Figure 7.6:Average default rates and default rates & net loss ratesby tranche size66Figure 8.1:Number of commercial banks in the United States70Figure 8.2:Number of companies and capital under management inthe United States71Figure 8.3:Leverage levels in the mid-market vs. lower mid-market73Figure 8.4:Leverage is the most significant risk factor73Figure 8.5:SBA lending rates in the lower mid-market76Figure 9.1:Asia remains the fastest growing region in the world80Figure 9.2:Asia’s middle class is rising80Figure 9.3:Transformation of Asia: Services sector takes off81Figure 9.4:Rising private debt fundraising in Asia-Pacific82Figure 10.1:CRE debt returns compared to other credit types(as at December 2016)88Figure 10.2:CRE debt maturity in Europe (at end of 2015)89Figure 10.3:Real estate offers vastly improved credit protection91Figure 12.1:Corporate debt issuance versus default rates101Figure 12.2:Total debt multiples of institutional leveraged loans102Figure 12.3:Ratio of downgrades to upgrades for leveraged loans103x