Ropes & Gray: U.S. loan origination leading credit strategy

Global law firm Ropes & Gray found that while COVID-19 has stalled the emergence of new credit investment strategies, it has also forced managers to focus on their existing credit platform products with loan origination leading the way. The report, "Challenges and Opportunities in Post-COVID-19 Credit Fund Platforms 2020" analyzes the responses of 100 senior-level executives at U.S.- and U.K.-based credit funds. Executives were surveyed twice to get a sense of how the economic and market conditions brought on by COVID-19 impacted their views. Early in 2020, managers surveyed by Ropes & Gray said they were considering launching new investment strategies. Six months later only 20% said they would raise new strategies. "There had been some concerns around systematic risk issues with these products, but by-and-large, the system held up pretty well,” said Jessica O’Mary, Ropes & Gray asset management partner and head of the credit funds practice. The findings mirror the Alternative Credit Council survey, which was released earlier this week and said that $100 billion in financing would be completed by credit firms in 2020. A total of 72% said their strategies involve U.S. loan origination, which generates effectively connected income. A larger subset, 77%, said that investors firstly are interested in strategies that provide increased return potential. On the transactional side, 63% of investors began the disruption period with a focus on downside protection, though 33% of those shifted their focus to upside returns later in the period. A total of 60% of respondents say access to liquidity has been the most significant characteristic of value preservation for deals during the COVID-19 disruption. "There has been robust deal flow in the rescue and bridge liquidity arena, where companies that have struggled have sought to raise additional liquidity to carry them through this period," said Ropes & Gray finance and capital solutions partner Alyson Gal. Going into 2021, 30% of firms say that general investor uncertainty will pose the biggest challenge to fundraising. This year nearly one-quarter (23%) of firms said they moved to close their less popular investment strategies.

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