westbrooke targets high-yield debt
30 January 2019
Source: HedgeNews Africa
Focused on debt opportunities in the UK, portfolio manager Richard Asherson is building the firm’s private-debt portfolio with capital preservation at its core
Westbrooke Alternative Asset Management has extended into the UK market, with Westbrooke Yield Plus Limited. The fund, led by Richard Asherson, was established to source and maintain a diversified portfolio of higher-yielding private-debt opportunities investing predominantly in the United Kingdom, with the ability to invest into other developed economies.
Founded in 2012, Westbrooke is a multi-asset, multi-strategy asset manager with offices in Johannesburg and London. It creates and preserves wealth on behalf of its clients, partners, managers and shareholders, managing significant shareholder funds and over R3 billion of third-party investor funds across the spectrum of private equity, listed equity, real-estate and credit.
“We wanted to build offshore investment opportunities for ourselves, our partners and our clients,” says Asherson of Westbrooke’s offshore foray. “Since 2008 and the banking crisis, the emergence of the private debt industry has become the fastest growing alternative asset class, with over US$1 trillion under management. Globally, private debt accounts for 3%-5% of many high-net-worth investment portfolios, yet it is largely unknown to South African investors and high-net-worth allocators.”
Core to the fund’s investment philosophy is capital preservation. Investment opportunities are typically in the form of debt instruments with robust security packages, significant equity cushions and a clear exit strategy.
The fund aims to offer stable, low-volatility returns that are non-correlated to traditional fixed income and equity markets, offering investors both asset, sector and geographic diversification.
The fund targets individual opportunities that deliver gross returns of 8%-12% per annum in British pounds, with the aim of delivering a gross blended portfolio return of around 10% per year, resulting in a net return for investors of between 6% to 8% after all fees and costs. A portion is held in cash for liquidity and treasury management. The fund offers both pound sterling and US-dollar denominated share classes.
As at October 31, the portfolio is producing a gross yield of 9.6%, with 87% benefiting from first ranking security, with 82% real-estate/asset-backed. The portfolio currently has about 17 transactions on book, and is aiming for 25-30 at any given time, with a focus on deal-by-deal diversification. Deals currently have an average life of 18 months, with 55% loan to value as an indication of the implied leverage in each transaction. The fund does not use gearing or direct leverage.
“We believe this is a very attractive shorter-term income product,” notes Asherson.
Examples of transactions executed thus far include short-term finance for property deals in central London, a commercial site in London, a hotel conversion in Bristol, a buy-and-build strategy in the nursery school sector and the acquisition of a Spanish property portfolio. These include backing South African affiliate businesses as they expand into the UK or the EU.
Investments are sourced primarily through Westbrooke’s extensive relationship network, and that of its shareholders, primarily throughout the UK, Europe and the US. Group shareholders include Capricorn Capital.
Importantly, Westbrooke does not seek to do transactions alone, aligning itself to specialist loan arrangers, managers, originators, sponsors and syndication partners with specific industry experience, knowledge and proven track records. It co-invests alongside these originating partners to ensure alignment.
“From a risk-management perspective we align with other parties that have real knowledge and extensive track records in a sector or geography. We ensure we are absolutely aligned from a risk and return perspective, generally investing into senior secured debt where we look to have primary security, such as property, business interests or shares.”
Westbrooke undertakes a multi-stage credit analysis before proceeding with any deal, starting with full due diligence on the originating partner as a first line of defence. “At the end of the day, it is all about the people. In every transaction, the people behind it must be credible and reputable. If we can’t establish that at the outset, we won’t do the deal.”
Asherson has been in London for the past two years. He joined Westbrooke in 2015, where he founded its Section 12(J) product offering, which has grown to become the largest 12(J) asset manager in South Africa. Prior to joining Westbrooke, he gained extensive investment banking experience with a specific focus on the debt capital markets. He was previously a consultant in the structured and acquisition finance team at Investec Bank.
Westbrooke has identified a long-term, sustainable and scaleable investment opportunity within the lower to mid-market private-debt sector, driven primarily by structural and regulatory change as banks’ historic dominance of debt finance has shifted towards the institutional market.
“We have identified an opportunity in the low- to mid-market segment,” says Asherson. “That sector in our view is underserved by large banks and mid-market debt funds, creating opportunity primarily within the UK and Europe. We believe we can get better risk-adjusted economics because of a lack of supply of capital and the complexity in structuring these transactions.
Westbrooke Yield Plus has almost a year’s track record, having launched in February 2018, initially seeded with internal capital and then opening to third-party investors in June of last year. The Westbrooke Yield Plus platform currently has over £50 million (R900 million) invested, either directly via the fund or co-investment arrangements. The aim is for the fund to reach about £250 million in this specific strategy.
Asherson is assisted on the fund by associate Kieran McKenzie, who spent three years within the growth and acquisition finance team at Investec Bank. He holds an MSc in International Business from the Grenoble Graduate School of Business, France, as well as an MCom in Management from Stellenbosch University, and is currently a CFA level III candidate.
Paul Stevens, a seasoned property financier and banking professional with over 40 years’ banking experience, is a strategic advisor and member of the advisory board. In 1995, he established Investec Bank’s European property finance business, which saw assets increase from £40 million to over £3 billion under his leadership. In 2010, he assumed a wider role as co-head of the Investec Specialist Private Bank.
“The product was designed with South African investors in mind,” says Asherson. “In general, South African investors see investment terms differently, favouring a shorter-term investment horizon and a path to liquidity if required.”
Therefore, the fund mandate has been formulated to facilitate liquidity for investors. The fund does not invest in instruments longer than five years, with a target weighted average term of the portfolio less than 24 months.
Westbrooke continues to see attractive opportunities in the space where High Street banks and bigger debt funds don’t typically play – looking to write deals at less than £10 million each.
Westbrooke Yield Plus is established as a Jersey private fund and regulated by the Jersey Financial Services Commission, benefiting from a tax-efficient structure through an intermediate company in Luxembourg. The fund is open-ended, with investors having the ability to exit on a regular basis at NAV, post an initial lock-in period.
“For South African investors, they can either utilise their foreign direct investment allowance or can be facilitated via asset swap,” says Asherson. Westbrooke is also in the process of setting up a rand-based South African feeder fund, which will be registered with the Financial Sector Conduct Authority as a QIF and allow for a minimum investment of R1 million.
Other investment opportunities offered by Westbrooke Alternative Asset Management include the Westbrooke Special Opportunities Fund, a South African-focused special opportunities fund investing in the small-mid cap segment of the JSE. It takes a private-equity approach to the listed markets by looking to actively extract value from undervalued businesses and also invests in event driven/special situations. Managed by Jarred Winer, the fund added 10.6% last year, bringing its net annualised return to around 10% since inception in June 2012.
The firm also has four different section 12(J) funds, which comprise South African assets housed in tax-efficient structures that are active in the real economy (see online news, page 8). These products have helped it to establish a robust base of investors, looking to diversify some of their assets offshore, including high-net-worth investors, wealth managers, IFAs and family offices, many of whom are now showing interest in the Westbrooke Yield Plus strategy.
Globally, in addition to Westbrooke Yield Plus, Westbrooke also manages Westbrooke USA Residential, a BVI-domiciled investment in a diversified portfolio of US-based multi-family residential property. Fund manager Dino Zuccollo explains: “Westbrooke USA Residential leverages relationships with our US-based partners in order to deliver an attractive, US-dollar-denominated, asset-backed investment opportunity focused on investing in a defensive asset class, which offers a compelling return profile from a cash yield (currently around 6% per annum) and capital growth perspective (targeting an overall investment IRR in the mid-teens over a five-year investment period).” Westbrooke USA Residential currently owns interests in six properties, alongside three operating partners across Hartford (Connecticut) and San Antonio (Texas), with a combined gross property value of $156 million.
“The market is at a very uncertain time and investors are taking a more conservative approach to allocating capital,” notes Asherson of the general investing climate. “We find that global diversification is a core theme, not just for South African private clients but for high-net-worth investors everywhere.”
“There is a need to diversify and the private-equity and private-debt alternatives are becoming more prominent as investors look to diversify away from liquid public market portfolios. We aim to offer stable, low-volatility compelling returns that are non-correlated to public markets. Our aim is to protect capital, manage risk and deliver steady returns. For us, the core focus is on capital preservation.”