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Cost of direct private credit highlighted as giant AIMCO shutters New York office
by Lisa Fu
The Alberta Investment Management Company, one of the largest institutional investors in the world, has closed a New York office used to source private credit deals, highlighting how the costs of ‘going direct’ may outweigh the benefits.
Canadian investor AIMCO, like other giant pension, sovereign wealth fund and insurance investors, had championed an approach of investing directly in deals alongside private credit managers. Recently, however, AIMCO has highlighted the cost of running its investment programme and made moves that indicate the institution may be rethinking its strategy.
Large institutional investors started direct private credit investment programmes to save on management fees associated with funds. However, private credit managers that have faced fundraising difficulties in recent years are now lowering fund fees to attract investors.
“In the past four to five months, we’ve been offered, unsolicited, fee discounts from a lot of general partners,” said Scott Roberts, senior managing partner at investment consultant Belvedere Direct Lending Advisors. “I think the empowered limited partner knows how to negotiate for lower fees, which lessens the need to build their own internal sourcing team.”
AIMCO’s New York office, which closed last month just one year after opening, was home to a team tasked with sourcing, evaluating and executing investments to grow the firm’s private credit portfolio.
Creating an internal investment team is not cheap
Scott Roberts
Senior managing partner
Belvedere Direct Lending Advisors
Global head of private assets and strategic partnerships, David Scudellari, who had opened the New York office, left the firm. A spokesperson for the institution said the decision followed “a careful evaluation of the operational costs and overall impact on our investment objectives”.
Creating an internal investment team is not cheap. An institutional investor would need a minimum of five people, which could be adequate for underwriting, assuming they all had different sector expertise, Belvedere’s Roberts said. But five would not be sufficient to source deals.
An LP that plans to co-invest USD 50m to USD 100m, building on the USD 500m committed to various GPs, will do so across four to five deals, Roberts said. This means that USD 50m to USD 100m in co-investments are very concentrated and if one of the deals defaults, it puts the underwriting analyst and LP in difficulty.
A larger team may be able to mitigate this problem, but attracting staff to execute on co-investment or direct deal opportunities is hard. Staff members would have to be paid well, especially if they are quality hires working from a major city like New York.
Another problem for institutional investors is that, unlike GPs, they do not pay incentives such as carried interest to their staff.
“You have this mismatch of interests because a lot of these people that work for the LP want to keep their jobs,” Roberts said. “Why would they want to stick their neck out on four to five co-invest deals?”
Nevertheless, a direct investment programme can save an investor millions of dollars. The Alaska Permanent Fund Corporation said fees associated with fund investments in its private income portfolio, which includes private credit and infrastructure, were USD 70m for the first half of the fiscal year ended 31 December. The investor plans to increase private credit co-investments to reduce fees, according to a February presentation.
Though institutional investors have been stereotyped as slow-moving bureaucracies, there are pension funds that have a commercial reputation and can keep up with most GPs in speed of execution, said Ryan Ochs, managing partner at RDP Advisory. Being a pension fund that invests directly does not necessarily mean losing deals through inefficiency.
“At scale, the economics will always be in favour of these large institutional investors running their own capital,” Ochs said.
