Briarcliffe may not even be two years old yet, but its team is at the heart of one of the biggest investment opportunities being embraced by institutional investors today.
To date, Robert Molina, Briarcliffe’s head of origination, has met with 360 general partners, and of that grouping the team at the placement agency has drilled down to focus on serving eight private credit firms since 2021. Chances are high that their client numbers are set to grow in the months and years to come as investor appetites evolve with the higher interest rate environment.
In Molina’s view, the direct lending scene has become pretty crowded, and even with leverage these strategies tend to average about 10% per annum. Much of the prevailing mindset as of late has been on moving beyond the traditional private credit strategies to those that can deliver 11-13% annualized gains without the leverage, Molina said in a recent interview with Alternatives Watch.
Specifically, the Briarcliffe team is eyeing the capacity-constrained asset-based lending sector that has garnered lots of interest from allocators lately.
“As investors become more risk averse, the idea of collateral helps,” Molina added. LTVs (loan-to-value) are different than in direct lending because there is a chance of full liquidation and capital recovery and that way an LTV ratio can be higher. “They have to add more risk and leverage in direct lending,” he said. “So, getting to the returns that investors want to get to will be more difficult going forward.”
One of the main issues is that direct lending strategies will need to add more risk and leverage in order to compete with asset-based lending performance. For instance, the Cliffwater Direct Lending Index through the second quarter of this year is up only 0.53%., after being up nearly 13% in 2021.
So far this year, Briarcliffe has met with over 26 asset-based lending funds, and Molina plans to continue to do more work in the space.
In a survey of investors at Briarcliffe’s Private Credit Summit held in September, Briarcliffe found that roughly 50% of LPs were planning on increasing allocations to private credit in 2022 and 2023. Next year roughly 86% said they plan to add one to four new GP relationships next year.
When it comes to credit strategies 78% of those surveyed are eyeing asset-backed strategies.
“As LPs get smarter in the space, you will see more allocators in the ABL space and it may come at the expense of direct lending,” Molina added.
These strategies are broad-based and may differ by regional focus or industry. What Briarcliffe seeks to identify is whether the fund is a deal maker or a deal taker. This is because in asset-based lending the deals are bilateral, so that allows lenders to have better term sheets and this helps LPs too in offering a yield with higher protection.
The investments they have seen tend to be 24 to 36 months in duration, which is shorter than what is the typical lending period in private credit broadly. The fund offerings may be closed-end, but some are evergreen funds. The evergreen offerings are popular in the interval space.
For Briarcliffe, the new interest just builds on the steady gains the firm has seen since its inception in 2021. Jess Larsen founded the group following his work as partner and CEO of FIRSTavenue Americas.
The New York firm has been focused on niche strategies outside direct lending with fund sizes of up to 1.5 billion and fund II or higher since the beginning.
In recent weeks, the firm has expanded its senior leadership to meet the increasing demand for private credit among institutional investors.
KKR alum Roger Li joined as managing director and co-head of GP Advisory. The hire supports the firm’s growth toward being a “full -ervice private credit advisory firm.”
“I am thrilled to welcome Roger to our team, especially as current market volatility is driving significant activity toward the private credit strategies investors require in search of contractual returns with downside protection,” said Larsen in a statement. “Roger’s vast private credit experience further bolsters Briarcliffe’s ability to navigate and represent the complexity of these strategies, including those currently on our platform.”
Li has more than 25 years of asset management experience, which includes more than a decade in private credit with work in product strategy, fund formation and capital raising. In his most recent role, he oversaw product management of KKR’s private asset-based finance and direct lending strategies working on commingled, customized separately managed account and registered solutions for institutional investors, insurance companies and individual investors globally.
“I am aligned with Briarcliffe’s vision of delivering advisory services, information, and insight that is critical to both asset managers and investors navigating this increasingly diverse asset class as it continues growing toward $3 trillion in the coming years,” Li said. “Briarcliffe is meeting the market at the right time, and I am excited to be part of a team committed to serving the firm’s growing roster of world class private credit managers.”
Additionally, Kyle Abel, who had previously been head of GP Advisory at Briarcliffe, has been promoted to chief operating officer. He will co-lead the GP Advisory team alongside Li.
According to Molina, the hurdles for getting niche credit strategies into the RIA channels has been the fund structure. Those structures are changing rapidly, including with the advent of evergreen interval funds offering greater liquidity.
Briarcliffe views the $1.5 trillion private credit asset class growing by double-digit rates over the next five years. The addition of Li also comes at a time when public markets have generated some of the lowest annualized returns in more than two decades. This in turn is set to spark rising investor demand for alternatives strategies like private credit, according to the firm.