Often, investors looking at the private debt market assume the terrain is primarily comprised of sponsored lending opportunities. Not so, says White Oak Global Advisors chief executive and co-founder Andre Hakkak. He believes that the real private debt opportunity is to be found in lending to businesses seeking financing but excluded from bank lending.
How does White Oak Global Advisors go about investing?
We focus on non-sponsored, traditional lending to businesses that a bank may perceive to be a little too risky to put on its balance sheet. When the bank says, “no, we can’t help you”, we are positioned to say, “maybe we can”. Unlike banks that fund loans with their liabilities, we match our loan assets with investor capital. We have 25 products in three categories: equipment and leasing loans, asset-based loans and bank term loans. A highly diversified portfolio is a better proposal to investors than a concentrated one, and our funds have thousands of underlying credits diversified by sector, loan type and geography.
Why don’t you look at sponsored deals?
Our addressable market in the US encompasses more than 350,000 small and medium-sized businesses, as well as a portion of 3.3 million merchants, some of whom will graduate into small businesses each year. In contrast, there are only 12,000-13,000 businesses owned by private equity sponsors to which private debt managers can provide leverage. However, there are 500-600 managers presenting sponsored lending as traditional lending. This means the investor base has a skewed view of the nature and volume of non-bank speciality lending.
What kinds of limited partners invest in your funds?
Our LPs are global insurance companies, pension funds, charities and sovereign wealth funds.
What comes up in conversations with investors?
Number one: they have heard so much about sponsored lending that we feel they need to take two steps back and look at the whole lending landscape and get educated. We provide them with a lot of facts and data.
Then there’s a lot of uncertainty regarding the macro environment and geopolitics. People are taking a more cautionary approach to their portfolios. We’ve heard investors say everything from “we want to have more of a liquid portfolio” to “it’s the top of the cycle, we’re not going to do any more private credit”.
Chief investment officers may say they are doing less private debt while continuing to allocate a lot of money to private equity. We would say at this point, at the top of the cycle, investors should be aiming to occupy a stronger position in the capital structure of a business.
Are there new types of LPs looking at private debt?
In the US, the larger alternative investment manager platforms are definitely moving downstream by launching business development companies and integral funds to target high-net-worth and accredited investors. On a leveraged basis, these structures have strong purchasing power and most are focused on providing leverage to private equity firms.
Where should investors and managers be cautious?
It’s easy to say you’re being very cautious and to be conservative. But, in reality, a lot of the risk we underwrite is idiosyncratic. You can find wonderful investment opportunities at the top or bottom of the cycle. If you only offer highly levered cashflow loans, then of course you are more susceptible to economic cycles. If you’re lending to businesses on an asset-based basis, that’s a safer bet and you can provide a more defensible portfolio. Sometimes investors take a big brush and paint a whole sector as hazardous when there are segments within it that provide very attractive risk-adjusted returns.
