Investors for world’s ultra-rich plough money into private debt
• Family offices with large piles of cash are taking advantage of cheaper valuations while avoiding the volatility of stock markets
Michel Andre Heller is looking to lend when credit is tight. The London-based real estate adviser to a billionaire family from the Middle East is lining up deals of as much as £5m for UK residential developments and more than double that amount alongside other investors for bigger properties, such as hotels or offices.
The private debt market “is more than trickling along for us”, Heller says. “From a family office perspective, you don’t want to take on too much risk, but you still want to deploy capital.”
As the coronavirus upends financial markets, family offices with money to spend are boosting private debt and credit holdings to take advantage of cheaper valuations and avoid the volatility of stock markets.
Meanwhile, central banks are keeping economies afloat with policies of cheap money and negative yields, making assets that used to preserve and grow family fortunes less effective.
“We’ve seen a lot of clients saying ‘where should I invest if I want to be in the debt market?’” said Luigi Pigorini, region head for Europe, the Middle East and Africa at Citigroup’s private bank.
Yields on risky and private debt have surged during the pandemic, and a March survey of investors gave the most pessimistic outlook on defaults since the 2008 financial crisis.
Markets recovered in April, and yields on junk-rated US bonds have dropped to about 8.1% from a peak of 11.7% at the end of March. That remains elevated, though, and there remain areas of extreme distress in energy and retail, signalling potential defaults.
Loan prices have also recovered from their lows. The S&P/LSTA leveraged loan price index has climbed to 86c on the dollar, after plunging to 76c in March. Both markets, though, contain areas of extreme distress in energy and retail, signalling potential defaults.
That may deter some investors, but few have longer horizons than family offices, which aim to grow fortunes across generations and have fewer constraints than institutional firms.
The number of family offices active in private debt has more than doubled since 2015, says research firm Preqin.
“Family offices were quick to acknowledge the extent to which asset class risk premia had increased,” in the wake of the pandemic, Jean-Damien Marie and Andre Portelli, co-heads of investments at Barclays’s private bank, said in a written reply to questions. “They have been active in both liquid and private credit.”
Family offices are loosely regulated, privately owned companies that manage money for the wealthy. Some of the world’s richest people, such as Alphabet chair Eric Schmidt, Italy’s Ferrero clan and Hong Kong telecommunications tycoon Li Ka-shing, have highly sophisticated investing operations more commonly seen with institutional investors.
Those lending privately often focus on real estate, with property developers turning to family offices for extra flexibility and faster access to cash than with most banks. In return, family offices typically get the security of an asset-backed loan that provides consistent cash flow from interest payments.
Like other lenders, they can also take control of the asset if the borrower defaults on a loan, and a minority of wealthy families in this scenario have then kept homes they have financed for personal use, says Paul Welch, the founder of largemortgageloans.com. “The first question for some families when they lend is: do we want to own the asset?” he said.
Wealthy investors active in private debt include former Los Angeles Dodgers owner Frank McCourt and British billionaires Simon and David Reuben, who finalised a private loan in February for the Apthorp, a building in New York. For now, rich families lending privately are cautiously opportunistic.
“We’re still looking to lend and we’ve got the internal family capital available to do so,” said Avamore Capital founder Michael Dean, who helps to fund the UK lender through his family’s investment firm. But “we’re not going to have the same degree of flexibility as we would usually”.
LIKE OTHER LENDERS, THEY CAN ALSO TAKE CONTROL OF THE ASSET IF THE BORROWER DEFAULTS ON A LOAN