Tech platform helping connect institutional investors with private credit opportunities
BY Yaelle Gang | July 6, 2020
In the current low-yield environment, many pension funds are looking for alternatives to fixed income to earn the returns required to pay pension obligations.
The answer for some may be private credit. “We like private credit because we see a lot of excess yield compared to the same risk and return that you can achieve in publicly traded markets on the fixed income side,” says Jon Barlow, the chief executive officer of Finitive, a technology platform that connects institutional investors with private credit borrowers.
Further, the Federal Reserve has started purchasing publicly traded fixed income in unprecedented structures and quantities. “They’re buying corporate bonds now, they’re buying asset-backed securities. They’ve never done this before.”
The difficult investment environment makes it tough for investors that rely on fixed income. “The population is aging and, as it ages, there has to be an allocation out of equities into fixed income,” he says. “But this is happening at a time where traditional fixed income offers very little yield. And so the ability to get superior risk-adjusted returns in private credit, I think, is a very compelling reason for pensions to do this now.”
Private credit also offers a solution to volatility in publicly traded markets, adds Barlow.
Investors with minimum assets under management of $50 million can sign up to use Finitive’s platform for free online. When they log in, they can see a menu of deal opportunities and access data on each deal. And the team at Finitive also invests in deals unless otherwise disclosed.
“Our goal as a firm at Finitive is to put in their hands 90 per cent or more of the due diligence materials that they need to close a private credit transaction,” he says. “It’s a few hundred documents typically in one of these data realms. We have investment memos, we have models and just about everything else you need to know about a borrower. And with that information, an investor is able to much more rapidly assess a transaction and prepare for their own internal investment committee.”
When the coronavirus pandemic hit, many investors froze or stopped all their investment activity, Barlow says. “A lot of those investors resurfaced slowly around mid-April, early May, but interestingly, I would say, from late May until present we’ve actually seen pretty robust investor activity. Yields are extremely low right now on publicly traded fixed income asset classes of all types.”
The coronavirus has also led to an increase in the number of borrowers seeking capital, including larger well-established borrowers, he says. “I think what that tells us is that pre-COVID there were a lot of borrowers who were able to line up their own sources of financing. They had relationships with banks or other investors that would provide them with funding. Some of the larger companies are struggling now to line up financing and so they’re coming to us.”
Investors have also traditionally preferred to hold face-to-face meetings with management teams, so travel restrictions were likely partially responsible for the pause on activity, says Barlow, noting that when it became clear the situation would extend for some time, people developed solutions.
“We are doing digital roadshows now. We’re having digital meetings between management teams and investors and, in some cases, we have locally-based field examiners. So if you’ve got a management team in Chicago or Toronto or Miami, we can find, in some cases, local field examiners who will go into the office of a specialty finance company or a manager and videotape a due diligence session, which an institutional investor can then review and somewhat rely upon for their own due diligence.”