BOSTON--(EON: Enhanced Online News)--NEPC, LLC (www.nepc.com), one of the industry’s largest independent, full-service investment consulting firms to endowments and foundations, has announced the identification of an innovative investment opportunity, Direct Lending, which seeks to exploit inefficiencies in capital lending to small- and mid-sized businesses (SMEs) in Asia.
“We believe Direct Lending to be a secular long-term opportunity given the limited supply of capital and great demand on the part of Asian SMEs”
After several years of “on the ground” research into Direct Lending opportunities and identification of the appropriate asset management partner, NEPC has been communicating with clients about this strategy.
“We’ve seen strong levels of interest amongst our endowment and foundation clients,” said NEPC Partner, Scott Perry. “This investment idea syncs with a number of themes we are pursuing with clients: emerging market growth, being a liquidity provider and investing at the top of the capital structure.”
Demand for timely, discreet and creative capital persists from capital-starved SMEs and even larger firms (with credit-worthy fundamentals) seeking non-traditional (growth) capital. NEPC believes the supply demand imbalance to be a long term secular opportunity for private creditors. This is in contrast to cyclical “alternative” financing needs of SMEs in more developed markets (US, Europe) arising out of capital market dislocations tied to government imposed regulations on the worldwide banking sector.
It’s especially difficult for SMEs in Asia, many of which are family-owned businesses, to obtain growth capital given the region’s less developed credit markets. Local governments, who’ve historically served as lending sources, have largely ignored SMEs in favor of larger companies. Beyond this, increased regulation has forced European and local banks who served as lenders to retreat, resulting in further funding gaps and an increased demand for flexible capital in the region.
This, in-turn, has led to a select number of local investment managers, with deep knowledge of and experience in these local markets, stepping in to function in the capacity formerly occupied by banks and other traditional providers of growth capital to SMEs.
“We believe Direct Lending to be a secular long-term opportunity given the limited supply of capital and great demand on the part of Asian SMEs,” said NEPC partner, Neil Sheth. “The investment strategy is driven by themes intrinsic to the local markets, which are less correlated to global macro-economic factors. Consequently, investors can participate in regional growth, while simultaneously exploiting lending inefficiencies.”
Mr. Sheth noted that depending on investor needs, Direct Lending can fulfill several roles in a portfolio.
“U.S. and European Direct Lending strategies generally have a fixed income-orientation in terms of return and strategy, while Asian Direct Lending skews to market growth within a hedge fund like structure,” he said. “Because of its unique characteristics, it can serve as an exposure to emerging markets, as a private investments allocation, or even as an opportunistic allocation within client portfolios.”
After multiple years of significant on the ground due diligence, NEPC’s research department has identified an Asia-based investment manager who they believe can best capture the opportunity in Direct Lending. The fund represents a hybrid structure, in that it will have liquidity terms somewhere between typical hedge fund and private equity funds. While investment management fees in this area have historically been similar to those of hedge funds, NEPC has been able to secure a significant fee discount for clients.
NEPC® is an independent, full service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. We work with institutional investment programs and high net worth clients on both an advisory and discretionary basis.
The Endowment and Foundation Practice services 95 Endowment and Foundation retainer relationships, representing assets of $48 billion, from offices in Atlanta, Boston, Charlotte, Chicago, Detroit, Las Vegas and San Francisco. Learn more at http://www.nepc.com/ and http://www.nepc.com/clients/endowments_foundations.