HarbourVest highlights private credit resilience going into 2021

Karen Simeone and Jamie Athanasoulas, two experts in credit investing working at HarbourVest, are optimistic about the future of credit investing. The past year has thrown this investing strategy a lot of curves, as they note, and 2021 may throw it more. “I certainly hope 2021 is not as curvy as 2020 has been,” said Simeone, a managing director of venture capital and private equity at HarbourVest in Boston. She is confident that the type of credit investing practiced at HarbourVest will continue to prove resilient. Let’s back up four years, to a time before either Simeone or Athanasoulas, who is also a managing director, were working at HarbourVest. In October 2016, HarbourVest’s Peter Lipson, spoke at a Wall Street Journal Pro Private Equity event and observed that the shift away from traditional debt providers to private lenders was not a fad or cyclical and was here to stay. Lipson said, “What we’re seeing is actually the displacement of the commercial banks from the limited partners and the buyout funds. The buyout funds…what a lot of their LPs actually want is the senior paper, or is the second lien, or is the sub debt.” Across the capital structure That has remained the case. Simeone and Athanasoulas have both been in the thick of it for a long time. Simeone has two decades of experience and joined two years ago after working at TCW for more than five years on direct lending. She began her career at JPMorgan working on leveraged finance and high yield research. She has worked on lending “across the capital structure.” Athanasoulas seconded her assurance about resilience. He said one can go back to the global financial crisis a dozen years ago and find that the performance of private lending has been consistent and realize that “investors have gotten to know this asset class.” Even under great stress, they have come to recognize, it has “performed remarkably well”. Before coming to HarbourVest at the same time Simeone did, Athanasoulas worked at Bain Capital Credit for 13 years. He was still there in 2017 when it closed its first credit fund in Asia. Athanasoulas suggested one “look at the time series in the last five years”. For example, the spread of the 10-year Treasury maturity minus the 2-year Treasury began 2016 at 1.2. The spread soon dipped below 1, rose again to the not-especially stratospheric level of 1.3 in December 2016, and soon returned to below 1. This spread was briefly negative in August 2019, and just as quickly rebounded from that. It is now at a modest 0.8: which has become familiar terrain. Speaking to the same point, about what might the central banks do and how might it disappoint investors in the private lending space, Simeone said, “I don’t believe that I’m any smarter than those forward curves,” which indicate the market’s awareness that it will be some time before there are big changes in interest rates. Certainly, time will have to pass before the central banks attempt any upward move, although as Simeone also said, “Some see a push down to 75 basis points.” Rising skepticism? Early this year, writing in Institutional Investor, Daniel Rasmussen and Greg Obenshain suggested that a lot of “bad behaviors” are fueled by private credit. They wrote, “If high-yield bonds were the OxyContin of private equities’ debt binge, private credit is the fentanyl. Rising deal prices, dividend recaps, and roll-up strategies” are among the behaviors fueled in this way. In their view, it won’t end well. Today’s market in private lending offers returns in the high single and the low double digits. This is impressive in the context of the tail-end of 2020. But as Simeone observed, “You’ve got to pick your spots carefully.” Some deals in the market are over-levered, and the recent trend toward EBIDTA add backs has formalized the over-levering. Due diligence can avoid the click spots. HarbourVest has “a natural hedge,” Athanasoulas said, in that it uses LIBOR floating. Alternatives Watch also asked about HarbourVest’s investors. Who are they? High net worth individuals” Family offices? Institutions? Athanasoulas and Simeone responded: “all of the above.” Credit investing with private institutions isn’t for those who can’t bear some illiquidity. One must be willing to place a bet and allow it to play out over a period of five to 10 years. For this very reason, there is a lot of involvement in the field by foundations and endowments.

HarbourVest highlights private credit resilience going into 2021

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Christopher Faille

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