JPC Online 4th Held Report
PennantPark Investment Advisors
About the attractiveness and elasticity of the "US Middle Market Direct Lending Strategy" and investment opportunities after corona
Corona is still difficult to end due to the spread of mutant strains in Japan, but if you look around the world, vaccination is progressing and economic recovery is progressing in some countries, so-called "K-shaped economic recovery". The economic environment is difficult to read, and I think the pension fund will continue to struggle this year.
Under these circumstances, Market Makers held a conference on "Direct Lending", a category of "Private Asset Investment", as the second part of the theme "Exploring the New Normal", sponsored by PennantPark and Monitor Capital.
The founder of PennantPark, etc. introduced examples that the company's direct lending is an investment strategy that mainly lends to private equity investment destinations, and is also focusing on credit protection by making various ingenuity. It was reported in the video, including. By appearing from the United States, I think you could feel the dynamic energy and flexibility of the United States, such as investment activities and corona countermeasures, as well as diverse human resources.
It was an introduction of "direct lending" which is not very familiar in Japan, but it is said that it is a sufficiently large scale as an investment target asset, so is it possible to make it an investment target for pension assets? Please verify it.
US Corona Situation Updates and Credit Market Status
Speaker: Art Penn
PennantPark Investment Advisors (PPIA)
Founder and Managing Partner
Today, a year and a half after the outbreak of coronavirus, vaccines are rapidly spreading in the United States and economic activity is gradually returning. It is believed that this was influenced by various measures taken by the US government. In particular, it can be said that the federal government's aid bill totaling 5.3 trillion yen and the Fed's low interest rate policy, "considering any means as a countermeasure," were effective. Although it is difficult to predict future policy responses due to the polarization of the federal parliament, the US economy is steadily recovering from the stock market and employment statistics.
Pennant Park is a loan (direct lending) that provides senior secured capital with first mortgage to relatively small companies with EBITDA of $ 50 million or less, which is mainly funded by a private equity sponsor company in the middle market. ) Is running. With 200,000 US middle-market companies, it is an attractive market that generates about one-third of the revenue of the US private economy. Loans have a cushion of 35-65% of stocks at the bottom of the capital structure, which is a relatively safe asset in terms of debt protection, but is affected by the business cycle in terms of profits. Future investments in the credit market will need to be more selective. Twelve years after the 2008-9 global financial crisis, the credit cycle has reached its final stage in the second half. Even without the corona bruise, the market correction was near. Even under these circumstances, middle market direct lending strategies, especially loans to companies with an EBITDA of $ 50 million or less, have been carefully researched, have low liquidity, have financial covenants, and have sufficient equity equity. If solicited, you will get a low-risk, yet illiquid premium return.
Impact of Corona on Private Credit Markets
Speaker: Jose Briones
Pennant Park Investment Advisors (PPIA )
Under the corona storm, some sectors performed better than expected, as opposed to the sectors that were heavily affected. As such, sector selection, low leverage, and the ability to deal with problems as they arise may avoid default risk and, as a result, reflect performance. Pennant Park has focused on five sectors that provide stable and consistent cash flow (government services, healthcare, etc.) and avoided those that are susceptible to economic fluctuations. Having a strong field had the advantage of being the first to call for the selection and acquisition of loan projects, but the negative impact of the default of the corona sickness could be minimized.
In addition, Pennant Park provides various advice so that the lender company and the stock investee (private equity fund) can work together to create a solution. This will benefit all stakeholders of the company, equity investees and lenders. Since the middle market direct lending strategy enables such elastic transactions, it is also possible to strengthen capital conservation.
Pennant Park and Senior Credit Strategy
Speaker: April Lee
Pennant Park Investment Advisors (PPIA)
Investor Relations Director
Pennant Park is an independent private credit company founded by Art Pen in 2007. Currently, it has total assets under management of approximately $ 4.7 billion (as of the end of March 2021) and specializes in the US middle market direct lending strategy. In particular, since the senior credit strategy is mainly for senior secured loans with direct underwriting first mortgage, it is possible to obtain higher returns than leveraged loans and high yields and build a low-risk portfolio while prioritizing capital preservation. .. From multiple levels of risk management, we constantly monitor credit risk, interest rate risk, diversification, etc., and also incorporate ESG policies. Pennant Park offers a variety of vehicles, including closed-end funds, CLOs, and listed business development companies (BDCs), to meet the needs of investors. There is also a Japanese gatekeeper window, so if you are interested, please feel free to contact us.
At the end:
Advice from Art Pen on inflation measures for pension funds
First of all, senior loans in the middle market direct lending strategy are almost 100%, with floating interest rates. In addition, Pennant Park's direct lending also comes with a lower limit of LIBOR, so you can avoid interest rate risk even if the current LIBOR drops below 1%. Inflation is also usually a reflection of economic gains, in which case the borrower's performance can be improved and the default risk can be reduced. Therefore, by incorporating the direct lending strategy into the bond portfolio, I think we can adapt to inflation risk countermeasures.
First of all, senior loans in the middle market direct lending strategy are almost 100%, with floating interest rates. In addition, Pennant Park's direct lending also comes with a lower limit of LIBOR, so you can avoid interest rate risk even if the current LIBOR drops below 1%. Inflation is also usually a reflection of economic gains, in which case the borrower's performance can be improved and the default risk can be reduced.
Therefore, by incorporating the direct lending strategy into the bond portfolio, I think we can adapt to inflation risk countermeasures.