Pantheon closes private debt secondary fund on USD 834m

Akin to the increased market adoption of infrastructure or in the PE secondaries market, Jain believes that the private debt secondaries market also has more room to grow as holders of such illiquid assets increasingly look for liquidity solutions that help them more actively manage their portfolios, he said.

From what is a relatively nascent strategy in the private debt space, the global private debt secondaries market has seen deal flow grow from around USD 5bn in 2018 to almost USD 18bn-USD 19bn last year, Jain said, citing the firm's own research. It is expected to reach more than USD 20bn this year, he said.

The current macro environment provides for rich pickings for the strategy, Jain said.

"On the LPs, more recently, you've seen a downturn in the equity markets, creating more of a denominator effect where people are over allocated to alternatives, which creates a need for liquidity," Jain said.

Other factors also come into play, such as changes in team, particularly at large institutions, or different views on portfolio construction that require them to think about what they hold and what kind of exposures they have or want in the future, he said.

On the GP side, some of the drivers include addressing tail-end funds, he said, noting that there are a lot of funds coming to the end of extension periods, and terms may not have the benefit of leverage facilities anymore, or investors are unwilling to extend. Credit secondaries can help solve some of these issues that are related to return, deployment, diversification and fund management, Jain said.

As for the current market more broadly, Jain noted that credit investors are facing similar challenges to their other private market peers. "As equity investors are facing repricing today of their potential assets, credit investors are also undergoing a process of how to potentially reprice a lot of their assets on a go-forward basis," he said of the wider private asset space. "There is a dramatic repricing of all risk assets, and people are trying to figure out ways to take advantage of those opportunities."

Private equity investors are recalibrating their views on price and valuation and the outlook for those businesses; given the rising interest rate environment, the market is in a different environment in terms of risk and reward, he said.

Meanwhile, credit investors are trying to project and understand how the rising interest rates and other issues such as supply chain, inflation and labour challenges are going to impact portfolio company performance, and how that is going to impact defaults or losses over time, he added.

Investors
Following multiple closes, PSD II has attracted investments from US, European and Asian LPs, including pension plans and insurance companies, as well as high net worth investors and family offices, Jain said.

The firm has seen some investors wanting to build exposure to private credit but doing it in different ways, Jain said. As an example, investors can look to credit secondaries as a way to benefit from being fully ramped up in their exposure, embracing diversification, and having attractive entry price points, as well as benefitting from shorter durations versus a blind pool.

Investments
The fund, which has deployed half of its dry powder already, is primarily investing in senior secured, floating rate first-lien debt, issued mostly by sponsor-backed companies. It is also exploring opportunities in direct lending and unitranche strategies across lower, middle and upper-middle market segments, as well as from non-sponsored opportunities.

Around 80-85% of the vehicle's exposure is in US senior credit, with the remaining exposure in European debt, Jain said. A 12-person team based in New York and London are originating deals through their network of GPs and LPs, he said, noting that over half of its deals have been closed from a non-intermediated basis so far.

"Our senior investments are primarily floating rate credit, of which a vast majority are first lien and combined with our entry pricing and diligence," he said.

Pantheon has a "high degree of confidence" that it will be able to generate absolute and risk-adjusted returns comparable to the underlying strategy – in this case, US senior direct lending, Jain said.

Diversification is a key focus for the strategy, he said, noting that it can build portfolios of 500 to 1,000 companies, diversifying not only by individual company, but by GP, strategy, industry and vintage year.

"We typically focus on industries which we think are attractive from a credit perspective, such as technology and healthcare. In contrast, we typically don't invest in in energy, highly cyclical companies, or retail," Jain said.

It is also buying seasoned portfolios that have much shorter durations left to them, which potentially lowers risk with better credit profiles. Investors in its funds are comforted by the additional level of credit underwriting and diligence in credit secondaries, which allows for heightened selectivity in picking deals, he said.

People
Pantheon – Rakesh Jain (global head of private debt).

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