At a time when investors have become cautious about immediate prospects for private equity, but are bullish on corporate debt, a new asset sub-class seems to be emerging – private debt. Specialists in the field say that assessing companies for debt instruments requires a different set of skills to that of private equity investments. Causeway Asset Management, a private debt manager formed in 2003, is offering a new strategy for Australian institutional investors, which will focus on the SME corporate debt market. Until 2007, Causeway focused on running proprietary portfolios for its joint-venture partners, including a Canadian consortium bank.
The current fund, Private Debt Opportunities Fund, has been closed to new investors. The new strategy, with a similar risk/return profile, will be available as discrete mandates or in a co-mingled vehicle. Causeway is looking for about $200 million before the next close, with a draw-down over the next 12 months. Funds will be invested typically over three years in loans ranging between $5 million and $15 million.
Over the past five years the manager has reviewed more than $3 billion in loans and written about $350 million. Causeway is owned by joint managing directors, Mike Davis and Tim Martin. Davis was the founder of the former Merrill Lynch Investment Management in
Australia in the 1990s, prior to its merger with Mercury Asset Management, and Martin was the Merrill Lynch investment bank treasurer and head of debt syndication for the Asian region.
The firm has six full-time and three part-time staff in
Davis says there is a great opportunity in corporate credit at the moment, in particular in the SME sector which has been starved of funding from traditional sources due to the credit crisis. “Bank lending for this sector has largely dried up and there are a lot of good companies out there which meet our criteria for loans, “ he says.
Unlike private equity managers, Causeway does not look to influence investee companies but does require transparency as a debt investor. The firm assesses companies based on a range of security factors, including underlying collateral, inventories and contracts. It aims for a return of about 1 per cent a month after fees and charges. Its own fees are a bit less than the average for private equity.
Davis says the new strategy will have little to no leverage, but can be levered at the discretion of investors. Causeway’s management is advised by a credit committee and an investment committee, both of which have independent members. “The big difference between us and private equity managers who have gone into debt instruments recently is that we start by looking at the creditworthiness of the company.