As private equity and other private markets investment firms move into private credit, the benefits of having multiple alternative asset investment programs under one roof are becoming increasingly apparent. Among the reasons why they can be a recipe for success include the strategic benefit of sharing deal flow and the practical ability to leverage common legal and regulatory tasks. David Ross spoke with Private Debt Investor to discuss some of the advantages of a platform approach, given Northleaf’s experience in expanding its private markets offerings, from its roots in private equity to infrastructure and most recently private credit.
Q: What are the benefits for private market firms that have an investment platform with multiple strategies as opposed to those firms that pursue a single strategy?
DR: This is a very relevant question both for Northleaf and the broader market. Looking back over the past few years, there are several examples of institutions with single strategies that have successfully extended their platform into new private markets strategies and have been able to offer a differentiated value proposition to investors as a result.
One common trait that is consistent and incredibly important for the success of multi-strategy firms is a common message and mission that links the different segments of the broader platform together for both investors and investment partners. The more integrated the platform, the more successful the firm is likely to be.
The ability to drive growth is certainly a key benefit of developing a multi-strategy private markets investment platform. Platforms will typically have an increased ability to grow geographically. At the same time, evolving from a single-strategy firm to a platform approach also diversifies the business and provides greater stability. Given the complex and costly compliance, tax and regulatory regimes of multiple geographies, it is more efficient for a platform to manage these risks across multiple strategies. Building a platform is a great opportunity for any single-strategy asset manager to achieve growth, if that’s one of the aspirations for the institution.
There are some practical benefits that come from a multi-strategy platform approach, whether that be generating additional deal opportunities, capturing the information flows and insights across multiple markets, or leveraging the benefits of shared centralized functions such as legal, compliance, tax, investor relations and operations. Another very tangible benefit of a platform approach is that it increases the firm’s ability to attract and retain top talent across these critical areas of the business. While these are clearly efficiencies that benefit the firm, this in turn can provide a more seamless and efficient experience for investors.
Q: Are there any specific ways that deal origination or deal sourcing is different for a single-strategy firm as opposed to a multi-strategy platform?
DR: Sourcing the best investment opportunities is mission critical for any private markets investor, whether for a single-strategy manager or a firm with a platform of investment strategies.
The key differences in the way deals are originated and sourced for a multi-strategy firm lie in the enhanced breadth, depth and intimacy of the relationships that a multi-strategy platform can develop.
For firms such as Northleaf, that have both private credit and private equity fund investment capabilities, the ability to leverage relationships with private equity sponsors and their advisors to source deal opportunities provides an advantage over single-strategy firms. Other things being equal, private equity sponsors are more likely to favour private credit providers that are supporting them as investors in their funds.
Similarly, limited partners that can also bring the potential for credit to the table may be viewed as more desirable limited partners in the eyes of difficult-to-access fund managers which have choice in terms of the fund investors they bring on board. A key component of Northleaf’s private equity strategy is investing directly in leading mid-market private equity funds, which means our private credit business has both benefited from and deepened these relationships.
In recent years, we have also seen an increased focus on non-sponsored transactions and private equity co-investments. Often these opportunities require both debt and equity to support the transaction. Firms that are able to provide both private credit and private equity capabilities across their platform can have a leg-up in these situations, and are often able to offer innovative and flexible financing solutions for underlying companies.
Q: Can you talk about the information and connections that a private markets platform can generate for a private credit fund?
DR: Any time that a platform has the capability and capital to effectively execute multiple investment strategies, there are many layers of information that firms can leverage, if they have the structures and processes in place to do so. At the most fundamental level there is market data that can help firms both manage transaction flow and dynamically assess the relative risk and return trade-off across strategies. Firms that have multiple strategies are in an advantageous position as they can seek relative value across various private markets opportunities and asset classes to the benefit of their investors.
With an integrated private markets platform, not only can a firm achieve very compelling synergies in terms of information flow and connections across strategies, there is potential for the development of strategic relationships.
Q: You alluded to how a platform can assist in generating non-sponsored deals – can you elaborate on that?
DR: Non-sponsored deals are generally more difficult to source. They tend to have more dynamic capital structures which typically require both debt and equity to execute the transaction. In addition, independent sponsors tend to raise additional equity to invest alongside them.
Firms with both private credit and private equity capabilities across their platform are often seen as desirable partners because of their ability to offer both debt and equity and participate in more dynamic capital structures.
But beyond that, firms with multi-strategy platforms also have an advantage in sourcing transactions. Firms such as Northleaf, with active direct investment programs – whether in private equity or other asset classes such as infrastructure – have direct relationships with many independent sponsors.
This allows for warm introductions not only to independent sponsors themselves which can generate non-sponsored deals, but also to the network of advisors – including bankers, lawyers and consultants – that work with independent sponsors in completing their deals. We have seen that this can be a powerful benefit for firms that effectively leverage relationships across their broader platforms.
Q: What opportunities do partnerships between private investment firms present?
DR: Partnerships (either formal or informal) between private markets firms can be very synergistic, particularly when it comes to collaborating on deal flow. However, it’s worth noting that while people focus on the clear benefits that partnerships can offer, they are very difficult to build and oftentimes even more difficult to maintain over a long period of time.
That said, when they work well, partnerships can be very powerful and beneficial. As an example, Northleaf has a strategic relationship with Antares Capital that’s important to both firms. As you know, Antares is the leading provider of financing to mid-market private equity-backed companies in North America. Northleaf owns a 16% stake in Antares alongside CPPIB and Antares management and our strategic partnership covers both North American private credit transaction origination and execution as well as collaboration on fundraising in Canada. Our partnership with Antares is working very well and demonstrates the value that can be achieved for private markets firms and investors when there is strong strategic alignment.