Over the past six months we have conducted close to 75 calls with direct lending fund managers to check on how things are going. The number one theme that we have heard time and again is that it is time to educate the Asset Allocator community about the direct lending asset class, which is one of the most compelling segments within the private credit spectrum.
The Asset Allocator community consists of Pension Funds, Insurance Companies, Ultra High Net Worth Family Offices, Sovereign Wealth Funds, Endowments, and Foundations. This community is in the business of allocating capital to various market segments most often through specialty fund managers. This market often works closely with ‘Gatekeepers,’ which include Discretionary fund of funds and Non-Discretionary Investment Consultants.
Why Gatekeepers Matter
Here is why the Gatekeepers play such a critical role. Let’s say you are the President of a mid-sized college with an endowment of about $500 million in assets. In addition to providing a top notch education for your students, your job is also to raise money for your endowment and to invest that endowment to achieve a targeted return while minimizing risk. A portion of the investment earnings will be used to fund the operations of the college offsetting the cost of tuition. Every dollar matters. Instead of hiring a full time staff, you rely on a group of College Trustees to meet on a quarterly basis to review the performance of the endowment and reallocate capital when appropriate. This is a volunteer staff that meets only four times per year.
The Role of the Gatekeeper
This is where the Gatekeeper comes in. A non-discretionary investment consultant is hired to advise the Board of Trustees on their asset allocation strategy. This consultant is paid a fee to provide unbiased advice. The consultant does not have any control over the investments (non-discretionary) and they are not allowed to take a fee from the managers so their incentive is to purely provide the best advice possible to their clients. In this case, a consultant advises that the board to consider reallocating a portion of their endowment to a new asset class, the online direct lending category, and they give their pitch as to why it is a good fit. The investment consultant then recommends 3-4 managers that have been vetted and fit the profile. The trustees will interview those managers at the board meeting and pick their favorite 1-2 managers for their portfolio. The consultant has performed all of the background due diligence so that the board can interview and decide. [Read more…]