It is safe to say 2020 will remain in our memories for a long time as the coronavirus pandemic caused unprecedented government reactions which severely impacted day-to-day life for billions of people across the globe. It also saw one of the most dramatic global GDP contractions ever seen in peace time and also one of the biggest public market rebounds.
For private debt investors in particular, the economic crisis provided the fist major test of the industry since it first grew to prominence out of the ashes of the Global Financial Crisis in 2008. For many managers, 2020 will be a make or break year which demonstrates whether their underwriting and portfolio management was robust enough to handle an economic downturn of unprecedented speed.
We take a look back at the major moments of 2020 and how private debt managers reacted to the crisis as it unfolded.The year began with a lot of promise. Private debt funds were sitting on significant piles of dry powder and there was an expectation that deal flow would continue to grow. However, even in late 2019 there were growing concerns about a viral outbreak in Wuhan province in China and the virus would start to hit European and North American shores as the winter closed out.
Things took a dramatic turn in March when many countries around the world began to impose severe restrictions on their populations intended to control the spread of the virus which saw almost every type of business deemed “non-essential” to close or find ways of working that would keep people apart. Millions of commuters were suddenly told to stay at home and even private credit fund managers were finding they had to do deals and pitch to investors via video conferencing instead of around the board table.
“We didn’t make any new investments in Q2 and for a part of Q3,” says Andre Hakkak, CEO of specialist investor White Oak. “There was a lot of uncertainty as we had no idea when the country would start to reopen.”
The early days of the crisis saw many fund managers pivot towards working on their existing portfolios to help companies facing difficulty make it through the worst of the shutdowns, and the full extent of damage to individual portfolios may not become apparent for some time.
“Private debt portfolios are very concentrated and are likely to see a wide range of outcomes,” explains Craig Bergstrom, managing partner at credit investor Corbin Capital Partners. “There will be a lot of luck involved, though typically private debt players have avoided many of the worst-affected industries, there will still be some exposure.”
However, once the initial shock of the crisis passed and firms were better able to understand the financial impact it would have, private debt firms have entered an environment that could be ore conducive to profitable deals than they had pre-covid.
“Between Q1 and Q3 it was hard to close private deals but there is now a lot of pent up demand for finance and we’ve seen spreads widening [for smaller transactions] which enables us to look at a much broader range of potential investments,” says Fabian Chrobog, founder and chief investment officer at North Wall Capital.
Private debt funds have gone from a market dominated by cov-lite deals and competitive pricing but are now able to better set terms and achieve better pricing and demand greater information from financial sponsors.
Chrobog says: “We can now impose much stricter due diligence requirements on our counterparties than we could before.”
There are also signs the market is beginning to pick up in the later third quarter and fourth quarter of 2020, which could bode well for 2021. Check out Private Debt Investor tomorrow for our look at what could be the major themes of next year.