Moody’s makes room for high-net-worth LPs in final sub lines doc

Moody’s will include certain high-net-worth individuals in its calculations for subscription line credit ratings, a move that comes as sponsors are eager to add individual LPs in their push for democratization of private markets.

The ratings agency is accommodating them in the final version of its methodology for rating the instruments, which it released on Wednesday.

A draft version of the document that was published in November excluded capital commitments from wealthy individuals. Moody’s will use commitments in models used to project overall losses, which in turn are used in an LP weighting section for overall ratings.

Under the final methodology, some affluent individuals and family offices may receive a Caa1 LP-level substitute rating, which is a low, non-investment-grade one.

Obtaining this rating isn’t guaranteed but Moody’s has outlined the criteria it follows for issuing one.

These include whether individuals invest via wealth management platforms (these would tend to have at least Baa1 ratings), the size of their liquid assets and the proportion of their capital commitments to those assets. Moody’s also wants to know about funds held in escrow or brokerage accounts that can be tapped for actions such as meeting capital calls.

The ratings agency is including HNWIs as GPs look to make funds more accessible to retail capital, a push that’s known in the industry as “democratization.”

“The approach that we’re taking to high-net-worth is a reflection of the fact that high-net-worth investors are an increasingly important part of the source of capital flowing into private funds, and the expectation that they will continue to be very important,” said Moody’s associate managing director Rory Callagy.

He explained that the agency faces a challenge in assessing individuals’ credit worthiness: it lacks a methodology to do so. This contrasts with unrated entity LPs, for which Moody’s can turn to sector-based methodologies.

But the ratings agency may look at wealth management platforms’ quality and size, along with their high-net-worth clients’ traits in order to ascertain the creditworthiness of affluent individual LPs.

Callagy said that Moody’s can rely on the platforms of banks like Morgan Stanley and UBS, among others, because they have their own criteria for high-net-worth clients, such as liquidity. These criteria helped the agency “get comfortable” with assigning ratings to individuals, he said.

Moody’s said it will place a 20 percent limit on the proportion of Caa1-rated LPs within the unfunded commitments pool, which it will include for its calculations. Half of this limited amount, or 10 percent for the total, will be for high-net-worth and family office LPs, Callagy noted.

And Callagy said that individual LPs’ amounts need to be under 1 percent each in order to be included.

For pools with amounts of affluent individuals’ capital above Moody’s threshold, the ratings agency won’t count the excesses in its calculations. Excluding them could potentially lead to lower overall ratings, Callagy said, although this isn’t inevitable because final ratings include other factors like those pertaining to GPs.

Meanwhile, Moody’s is also changing its scorecard factor weightings to emphasize the LP assessment over the GP portion. The draft split them evenly – the sponsor side included sub-weighted criteria such as size and performance – but the final document gives investors a 60-percent weightings and GPs just 40 percent.

This change was made because LPs’ commitments are used to repay the sub lines, Callagy said.

The LP and GP assessments are followed by a third scorecard factor, where various “considerations” such as fund borrowing limits and replacements of LPs are considered before a final rating is produced.