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Apr 25, 2018

Sun Life eyes private debt expansion via acquisitions this year

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Sun Life Investment Management is expanding its private credit business, adding to the raft of money managers boosting exposure to the assets in pursuit of higher returns.

The unit of Canadian insurer Sun Life Financial expects to make a number of acquisitions this year and beyond, including in private credit, according to the asset manager’s president, Steve Peacher. The company hired Sam Tillinghast to help expand its U.S. private credit group, which allows investors to lend directly to companies, bypassing public markets.

Money managers have stepped in to fill a void created after banks constrained by post-crisis regulations retrenched from lending to riskier small and midsize companies. BlackRock Inc. agreed to buy private credit manager Tennenbaum Capital Partners this month, while Brookfield Asset Management bought a stake in alternative investment firm LCM Partners in March. Demand for yield associated with less liquid debt will likely lift the market beyond US$1 trillion in 2020, according to an estimate from the Alternative Investment Management Association, an influx of money that’s sparked warnings of excess.

“When you think of some of the biggest private credit players in the U.S., I want to be in that zone,” Peacher said in an interview. “At some point these markets are going to roll over, spreads are going to widen, there’s going to be credit distress. I sure as heck want to have teams on board because that’s where all the opportunity is.”

Compelling Benefits

Private credit deals typically don’t register with the U.S. Securities and Exchange Commission. The loans are often more complex and can be made to firms who want to keep financial information confidential. While interest rates on the debt will generally be higher-- and subsequently a lure for lenders-- borrowers benefit because they don’t pay SEC registration and ratings fees, and gain flexible terms, such as longer maturities.

“The benefits are so compelling,” said Tillinghast, who started in January. “You’ll continue to see capital come into this space, with more strategic moves by independent private credit firms as well as insurance companies. There’s no going back.”

MetLife Inc.’s asset management unit is among the market participants, having struck US$11.2 billion in private placement deals last year, the most it’s ever done. JPMorgan Chase & Co.’s asset management unit is raising $250 million for distressed debt as part of its private credit expansion. Credit Suisse Asset Management’s Private Fund Group set up a group for direct investments this month.



Middle Market

Sun Life Investment Management’s private credit group has more than $30 billion of assets, and did some 176 deals last year. Its transactions include lending to large, mostly investment-grade companies; project finance; private securitizations and middle-market deals.

The middle market is an acquisition prospect for Peacher, who said ramping up that and the whole private credit business is a way to diversify its portfolio held mostly in investment-grade debt.

“There are firms out there and that’s exclusively what they do and maybe that’s something we’d be interested in,” he said. “We look at it as broad diversification. We expect to be invested in a prudent way across the risk spectrum.”

Middle-market lending is also where lender protections have weakened, an affliction seen in the riskier loan market more broadly. In a survey earlier this year, lenders expressed concern about how the loans will fare when economic conditions sour and interest rates rise. Sun Life Investment Management is steering clear of weaker deals in private credit, Chief Investment Officer Randy Brown said.

‘Front Line’

“There’s so much money chasing these private debt markets and high-yield markets that they are willing to concede covenants for spreads. We’re not,” he said. “We’re at the front line negotiating covenants and my instructions to the team are very clear -- we’re not conceding. I would rather we walk away from a deal than concede on a covenant.”

Brown oversees Sun Life Investment Management’s general account, a portfolio of more than $140 billion that’s mostly investment-grade bonds. Lately the account’s been shedding high-yield debt exposure and moving up in quality amid expectations the economic climate will turn and because investors aren’t being compensated enough for risk, he said.

Sun Life Investment Management is also looking at other acquisitions, including in infrastructure equity and real estate, according to Peacher. It bought three companies in 2015, Prime Advisors Inc., Bentall Kennedy and Ryan Labs Asset Management. In March Ryan Labs hired a five-strong team to manage senior loans and third-party managed collateralized loan obligation securities. The team is being led by Mark Pelletier.

“We need to make more acquisitions and not just one,” Peacher said. “Our aspiration is to have a global firm that has a range of alternative investment capabilities. We’re actively back on the hunt.”