Cashed-up family offices are keen to invest in private debt, but they are proceeding cautiously, preferring opportunities that present shorter lock-ups and prospects for exits as liquidity remains king given current market uncertainty.

“The key is finding disciplined managers that are being opportunistically thesis-driven, meaning that they are not jumping into this just because this is ‘a great time to lend’ but because they have an existing and proven thesis that is simply taking advantage of the current situation,” said Champ Suthipongchai, the chief investment officer of Thai family office Ferretto Capital.  

Champ Suthipongchai
Champ Suthipongchai

The asset class has drawn increased attention from investors and fund managers alike, with close to a third of 143 private equity fund managers across Europe, North America and Asia polled by Intertrust indicated their interest to diversify into private debt over the next 12 to 24 months. The survey – carried out in April –was published on June 8

However, private debt has historically been a highly specialised asset class in which skills ranging from industry expertise and negotiation techniques are required to hammer out terms surrounding interest rates and necessary covenants.  
 
“When you talk about private debt, you really need to understand the space, all the investment parameters; have someone who's really negotiating the debt in their favour, so we tend to like situations where we are co-investing with people we know,” said Kenneth Ho, Hong Kong-based managing partner of multi-family office Carret Private Capital.  

The firm currently has just under 5% of its $3 billion AUM allocated to private debt, with real estate debt constituting a large portion of the portfolio in the asset class. 

Kenny Ho
Kenneth Ho

He said his top concerns were: who is going to do due diligence on the private debt structure, who is going to structure the deals, and how deals are being sourced. 

As the number of managers looking to offer private debt strategies grow, it’s become even more important for family offices to partner with the right one. While Ho has had experience in structuring private debt, he would “never take it on in-house" given that it is a highly specialised field.  

It’s also crucial to note that, many of the direct lenders in the market today have never done direct lending before and have not seen the global financial crisis of 2008-2009, Shawn Khazzam, head of the alternatives solutions group for Asia Pacific at JP Morgan Asset Management, previously told AsianInvestor

“If we put investors in a wrong structure or if it wasn't structured well ... it's a huge issue, we can get quite a bit of investor feedback, to say the least, so we have to be extremely careful on all private deals,” Ho said.  

LIQUIDITY REIGNS

Champ’s and Ho’s comments came on the back of mounting appetite for private debt among family offices as they opt for investing in private assets, leaning towards the liquid end of the spectrum, given that these assets typically require a shorter lock-up period compared to early-stage private equity.

“I think the new way in the foreseeable future would definitely be even more private debt because family offices have already invested a lot in private equity,” said Eric Poon, senior executive vice chairman of the Association of Family Offices in Asia (AFO). 

Some, for example, are rolling up their sleeves to invest on a deal-by-deal basis, while some are accessing the opportunities via private funds.  

“If you are referring to family offices that have in-house investment managers ... then 70% to 80% of them actually do direct [private debt] deals for their private debt allocation, rather than via funds,” said AFO's chairwoman Eva Law. 

Even before Covid-19 became a pandemic, Chris Miller, managing partner of Shearwater Aero Capital, said the firm’s research showed that last year 32% of family offices and wealth managers interviewed expected the allocation to private debt would rise from 10.7% to over 12% by 2022

But at the end of the day, private debt is not the most liquid asset class, so Ho said the firm would maintain its current allocation. 

“There is definitely a lot of strength in the [private debt] asset class, but we are still a big believer in keeping liquidity, so I'd say the allocation now is about right,” he added.