Globally, private debt as an alternative asset class has tripled in size since 2014 and is double the size recorded in 2018. Predictions by firms such as BlackRock Inc. are that the market will double again to roughly $3.5-trillion by 2028.

Dino Zuccollo, Head of Investor Solutions at South African alternative asset manager Westbrooke Alternative Asset Management, explains that rethinking the traditional 60/40 equities/bonds portfolio is driven by structural changes in the market and a shift to a high inflation, low to moderate growth environment. In the current environment, bonds are no longer positioned to act as the portfolio ‘shock absorbers’ that they were in the past, and this is where alternatives may fill the gap.

“Private debt funds that are run by experienced managers with a track record of strong performance can be better investments than cash, bonds or fixed income, in that they can generate much higher returns. Private debt funds are also more diversified and less correlated to traditional markets,” Zuccollo says. He adds that there is a liquidity trade-off for the higher returns. Private debt investments basically work in two layers. At the bottom end are loans and at the top end are the investors looking to earn returns from the fund.

“In Westbrooke’s private debt funds, the lock-in period is designed to match how long investors are invested on average at the top of the fund with the average duration of the loans at the bottom,” Zuccollo explains. “This significantly de-risks investors when compared to other private credit funds who run a mismatch in these periods and then rely on mechanisms such as gating should there be substantial redemptions in the fund”

Increased liquidity

In recognition of the need for shorter lock-in periods, Westbrooke has made some changes to the liquidity on its popular Yield Plus Fund. The fund, which currently has more than £150-million of assets under management, previously gave investors the choice of an 18 or 36-month lock-in period, after which investors could give six-months’ notice to withdraw their investment.

Westbrooke’s recent amendments to the fund’s terms mean that investors can now give six months’ notice from the time of investment, effectively removing the 18 or 36-month lock-in period. However, investors do have the choice of a six-month or 12-month notice period, with the added incentive of a 20% discount on fees if they choose the 12-month notice period.

Zuccollo says there are three reasons this is possible. First, the fund has developed a bigger base of diversified clients as it has grown. Second, the average lock-in in the fund has gone up because there were so many investors on the old lock-in terms. Third, and importantly, the fund received a £25-million revolving credit facility from RMB at the end of last year.

Significant milestone

Richard Asherson, MD of Westbrooke UK said at the time that the transaction marked a significant milestone for Westbrooke UK and the Yield Plus Fund, reinforcing Westbrooke’s commitment to delivering innovative debt solutions to lower-mid market borrowers.

Xolela Albert, lead transactor in RMB’s Leveraged Finance team, commented that the leading bank believed in the quality of the Westbrooke offering and the brand they are building in the UK market. “This facility will enable them to leverage new opportunities and contribute to their continued growth,” he said.

The second big change that Westbrooke is introducing, based on client feedback, is that distributions will now be paid quarterly rather than every six months. In addition to the reduced lock-in periods and more frequent distributions, investors also benefit by investing in the UK via a company based in Jersey. “This means that the returns are much more tax-efficient for our South African investors,” Zuccollo says.

The Westbrooke Yield Plus fund is currently doing a capital raise, which closes on Friday, 21 June.

Source: Daily Maverick