CASE STUDY

Due Diligence, US Direct Lending

UK Public Pension Fund | Winter 2020

Engagement at a glance

A UK local government investor appointed bfinance to conduct due diligence before seeding a new fund being launched by one of is incumbent managers. The strategy was the manager’s first fund dedicated purely to US Corporate Senior Direct Lending with an extremely compelling fee discount for investors able to commit at least US$50m by the first close.

Client-specific Concerns

The investor was under pressure to make a swift decision, given that the deadline for the first close was fast-approaching. The main concern was the manager’s lack of track record specifically in Senior Direct Lending.

Outcome

  • While bfinance’s credit specialists were already familiar with the manager’s private debt capabilities, this engagement involved extensive scrutiny of an ad hoc data room, an in-depth Q&A session with the direct lending team and continuous engagement with the manager on more problematic points.

  • Although the manager lacked a specific track record in Senior Direct Lending, scrutiny of senior credit investments within the firm’s broader private credit strategies over a considerable period of time revealed consistent strong results. The volumes were somewhat limited, although this was largely offset by the impressive individual track records of the senior staff leading the strategy, who had been hired relatively recently.

  • A review of the target fund’s offering documents uncovered weaknesses in the Key Person Provision, wherein the departure of the key Direct Lending professionals would not necessarily have triggered the clause. Concerns were raised at the highest level of the firm and the manager ultimately agreed to include an additional trigger, centred more narrowly around the relevant key investment professionals.

  • Conflicts of interest represented a key area of focus, particularly as the manager’s core activity is its Private Equity Fund-of-Fund business. One of the main concerns was whether the manager could potentially be under pressure to participate in debt transactions on borrower-friendly terms to support relationships with key sponsors. Scrutiny of relationships with sponsors made it clear that the balance of power was strongly weighted in favour of the manager, with sponsors highly incentivised to show them attractive debt transaction opportunities and a historical rate of approval of less than 1%.

  • As a result of the support provided, the client was able to get their Investment Committee comfortable with the proposed offering and made substantial cost savings by doing so before the first close.

Our specialist says

  • A long-standing relationship with a manager does not mean that due diligence standards should be loosened when it comes to a potential further investment. By the same token, the need to make a quick investment decision to avoid missing out on a very appealing early bird fee discount, should not compromise the quality and depth of due diligence process

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