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ILPA Private Markets Benchmark – Private Credit – 2018

PUBLISHED DATE: June 14, 2019
AUTHOR: ILPA, Cambridge Associates
CATEGORY: 2018, ILPA Benchmark, Private Credit

We are excited to announce the Cambridge Associates Senior Debt Index. The credit space has developed rapidly, and with the introduction of this index, we hope to provide industry participants with a more robust set of return statistics. The Senior Debt Index will be a component asset class within the Private Credit Benchmark and is included in Cambridge’s official Private Credit Benchmark report. The Private Credit benchmark will now include three component asset classes: Credit Opportunities, Subordinated Capital, and Senior Debt.

The Private Credits index is comprised of 3 sub-asset classes:

  1. Subordinated Capital (Mezzanine) – Managers that seek to develop relationships with private equity sponsors and senior lenders to provide junior capital to finance buyouts or acquisitions. Mezzanine managers tend to make subordinated loans to lower-middle-market and upper-middle-market borrowers and generate most of their return from current cash pay coupons in excess of 10%. These funds also generate returns from prepayment penalties and paid-in-kind (PIK) interest, although to a much lesser extent than funds pursuing capital appreciation strategies. Mezzanine managers can also capture equity exposure through purchased equity or warrants, as well as penny warrants. Their ability to negotiate documentation is constrained by the demands of equity owners and senior lenders, and pricing frequently takes a strong cue from the market.
  2. Credit Opportunities – This strategy seeks to deploy debt capital opportunistically wherever market liquidity is lowest or value is greatest. It can include rescue financings (which help borrowers stave off a liquidity crisis, upcoming maturity, etc.), specialty lending, regular-way credit in hung syndications, and distressed credit. Frequently, the most attractive opportunities for this strategy arise at the beginning of a distressed cycle, making these managers first cousins of distressed credit managers.
  3. Senior Debt – Senior debt funds, commonly referred to as direct lenders, are most closely related to traditional mezzanine lenders in their investment approach. The vast majority of these managers pursue a sponsor coverage model, developing relationships with private equity managers to finance their buyouts and platform company expansions. They generate most of their returns from current cash pay coupons composed of a fixed credit spread and a fixed reference rate (usually Libor).