Private debt is booming as stock exchange delistings multiply

Connie Queline

Private debt is booming as stock exchange delistings multiply

It is perhaps no coincidence that private debt as an alternative investment class is booming just as companies delist at ever-increasing rates.

The JSE delistings rush has been well documented – from 776 listed companies 30 years ago to around 300 today. In other words, the universe of available stocks has reduced by more than half.

Globally, the trend is similar: World Bank data shows that the number of US-listed companies has halved since 1996.

The reasons for this are varied, but some common themes emerge: listing is expensive, public scrutiny on directors is intense, and shareholder demands for short-term returns are unrelenting.

Companies opting to delist often cite the high cost of stock market rules, compliance and the desire to pursue longer-term strategies that are punished by investors on the hunt for quick returns.

Compare this against the phenomenal growth of private debt, which falls under the banner of alternative investments. It’s a market currently worth about $1.5 trillion and is expected to double to $3 trillion in the next five years, says Dino Zuccollo, head of investor solutions at Westbrooke Alternative Asset Management.

Alternative assets are reckoned to be worth $17 trillion globally and are expected to grow to $25 trillion over five years – with private debt likely to generate much of this growth.

“Private debt is one of the fastest growing asset classes globally, and there are a number of reasons for this,” says Zuccollo. “One of the key reasons behind the proliferation of private debt was new Basel banking rules introduced in 2008 that imposed regulatory restrictions on banks, making it sub-economic for them to do certain types of lending. That’s a market that has been filled by private debt.

“Unlike a bank, we don’t take deposits and are therefore less regulated. We raise funds from investors and lock them in for a fixed period.

“This means we can provide capital to our target market in a fast and nimble way, and often for smaller ticket sizes,” he adds.

“That allows us to make loans that banks are no longer able to do, but should be doing.”

The vacuum left by banks has opened doors that alternative asset managers are only too eager to fill.

Rising rates, inflationary pressures, and economic uncertainty offer a few unique advantages for investors, says research by EY, adding that “most of the major private equity players have been channelling an increasing share of their assets into the private credit market”.

This is an auspicious moment for private debt. Jonathan Gray, CEO of Blackstone, the world’s largest alternative asset manager, describes the current environment as a “golden moment” for this emerging asset class.

Private debt offers refuge from traditional market volatility by seeking to beat prime rates by 1-3% and generating better cash yields than that provided by most fixed-income funds.

Westbrooke Yield Plus – an offshore private debt option

An example is Westbrooke’s flagship Yield Plus fund, an open-ended fund based in Jersey, providing investors with a diversified portfolio of 48 predominantly floating-rate private debt transactions, mainly in the UK.

The fund is structured to offer an asymmetric risk-return profile, achieved by providing loans to lower and middle-market UK companies and real estate sponsors, a relatively underserved market in the UK.

With UK interest rates currently at their highest level in decades, the fund yields 9.5% net of fees and costs in sterling versus 3.5% available from the banks.

This is also more tax-efficient for South African investors. Capital preservation is core to the fund’s investment philosophy, with approximately 82% of the fund’s loan exposures benefitting from senior-ranking security, mostly in the form of real estate or tangible assets. The fund now has a track record of over five years of never having a down month.

Westbrooke Income Plus – a local private debt option

Another option is Westbrooke’s Income Plus strategy, which targets an investor return of prime plus 1.5-3% a year in rands, after fees and costs, which is paid to investors each quarter.

Last year, the strategy achieved a 14% yield to investors.

This provides protection against inflation with capital preservation and a low-risk investment profile. Investors are subject to a 12-month lock-up period and a six-month capital redemption notice period. This is a major benefit over private equity investments that typically require a five- to seven-year lock-up period.

Co-investor

Zuccollo says it is important for fund managers to discuss risk with investors. Westbrooke has R12 billion in assets under management, of which 10-20% is company and shareholder funds.

“Because we invest alongside our investors, our returns are aligned with theirs. This is core to our investment philosophy. We believe fund managers must follow the same advice they give to clients and share in the risks and benefits.”

To provide further comfort to investors, Westbrooke is licensed by the Financial Sector Conduct Authority and uses external administrators and auditors.

What is private debt?

Private debt is where a non-bank lender – such as institutional investors, debt funds, insurance companies and private investors – provides loans to companies.

Since the 2008 global financial crisis, regulatory reforms (notably Basel III) have increased costs and restricted credit appetites from bank credit committees, which have caused banks to retreat from certain areas of the debt market, particularly the lower to mid-market segment.

Zuccollo explains that Westbrooke focuses on operating in niches which are underserviced and where there is significant borrower demand.

“This strong demand, coupled with limited competition, presents a unique opportunity to earn attractive, risk-adjusted returns. Compared to traditional fixed income, private debt can provide investors with higher yields, portfolio diversification and lower portfolio volatility.”

Where the ultra-high-net-worth are putting their money

Most ultra-high-net-worth (UHN) South Africans have long understood the need to diversify their portfolios abroad. By some accounts, 90% of UHN funds are already offshore. This is in large part a reflection of rand weakness and a limited pool of investments available locally.

Zuccollo says the company raised R4 billion in 2023 from local investors – institutions included – mainly due to concerns about the limited scope of returns in traditional markets.

This is undoubtedly a sign that SA investors are starting to appreciate the benefits of alternative investments, such as private debt, as a safe harbour against market uncertainty.

Brought to you by Westbrooke Alternative Asset Management.

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