Cast your mind back 18 months ago, and the future of private debt could best be described as uncertain. Distressed debt funds were all the rage and even the most bullish of commentators voiced concerns.
That makes the optimistic tone struck in our Future of Private Debt 2021 edition all the more remarkable. With $1 trillion in assets, more than 2,000 GPs active and as many as 650 private credit funds in the market raising funds right now, the issue has become how to stand out from an increasingly crowded marketplace. That’s where the need for fresh thinking and innovative approaches comes in. Here are seven ways that private debt is adapting to meet the growing appetite from institutional investors.
1 Targeting opportunities in Asia
Regional expansion is an area of increasing focus, with investors targeting the Asia-Pacific market. APAC is far less saturated than markets such as the US and Europe, and therefore, has growing potential, says OCP Asia partner Dan Simmons: “There is very robust demand from borrowers across our Asia-Pacific markets. This demand is partly fed by the dislocation created by covid-19 and resultant lockdowns. From an investor perspective, while we continue to see most LPs under-allocated to Asian private debt, many are looking to diversify their private debt allocations into Asia-Pacific.”
Global sustainable debt issuance in 2020
Investors are also beginning to consider private debt as a more reliable investment than equity. “There is growing interest in private debt from US, European and Asia-Pacific investors as they seek growth, at a time where one could argue that asset classes like equities have reached full valuations,” adds Simmons. “Increasingly, private debt can be a more protected alternative to private equity for investors looking for Asia-Pacific exposure.”
2 Investing in the energy transition
As companies race to meet global net-zero targets, there lies a huge opportunity in switching away from harmful energy sources to more sustainable ones.
Proposed US infrastructure bill
John Tanyeri, head of infrastructure and project finance at MetLife Investment Management, says: “On the infrastructure side, as the world shifts its focus from fossil fuels to sustainable assets, we see growing opportunities in renewables. In addition to traditional wind and solar generation, we see energy transition assets growing substantially with a focus on financing electric vehicles, battery storage, biomass and hydrogen.”
And it looks like governments across the globe are putting more effort into this transition – in the US, the Biden administration recently proposed a $1.2 trillion infrastructure bill, which is set to add around $550 billion of new federal spending to the renewables market, as well as around $65 billion for high-speed broadband internet; $110 billion for roads and bridges and $25 billion for smaller airports.
3 Demonstrating a positive impact
The climate crisis is accelerating and, as a result, impact investing has taken off with managers under pressure to be transparent about their investments.
Total AUM of funds focusing on North America
“Asset managers must justify their claims to be investing sustainably. There is justifiable scepticism that in some cases there is more marketing spin than substance,” argue Kartesia’s Coralie De Maesschalck and Frantz Paulus.
“As a first step, the incentives and mechanisms in a private debt impact fund must be sufficient to fulfil the broad definition of impact investing: to generate positive, measurable social and environmental impact, alongside financial return.”
In order to have a significant impact, Kartesia recommends that private debt funds join in on negotiations during the investment process by requesting a seat on the board. “With a long holding period of typically four years, a private debt fund can influence real change at a company,” De Maesschalck and Paulus say.
4 Scaling up operations
Scaling up has become a huge priority for fund managers as it opens up a whole host of investment opportunities.
Percentage of H1 funds that closed on or above target
Mark Brenke, head of private debt at Ardian, argues that scale is crucial when it comes to sourcing dealflow, execution and portfolio management.
“Since our strategy is a high control, mid-market focused, direct-lending strategy, the scale benefit of sourcing deals is particularly important,” Brenke says.
“Thanks to our scale, we can afford to make long-term and costly investments into building up our local office network and our teams on the ground. And, for our type of strategy, having a local approach is crucial to sourcing the broadest and deepest dealflow, which ultimately allows us to choose the most attractive opportunities.”
5 Embracing technology tools
Over the past two years, the demand for technology in all sectors, not just private markets, has accelerated substantially. This has opened the door to private debt becoming more mainstream, argues Eddie Kelly, global head of loan services at Apex Group: “Where technology has spent many years catching up for secondary market traded loans, the focus has now shifted to private debt, making it more accessible to new jurisdictions and industries.”
Number of private credit funds in market raising capital
Companies are also increasingly looking to offer innovative, personalised solutions and technology is a huge enabler of this.
“We are always moving forward from a technology perspective and increasingly focusing on products that can support managers and open new opportunities for investors,” adds Kelly. “Whether the target is real estate and infrastructure debt, trade finance or other industries, there is going to be a requirement for much more detail on the underlying assets and technology can provide those solutions.”
6 Building a multi-credit platform
Collaborating and building a platform that spans across numerous credit lines guarantees a seamless service for consumers. It means they will be working with not as many but more trustworthy partners.
Amount of capital that sits in private debt
More and more, firms are prioritising multi-credit platforms in order to have greater market penetration, says Andrew
Konopelski, managing partner at Bridgepoint Credit, whose owner Bridgepoint is the owner of Private Debt Investor publisher PEI Media. “We have obviously built a multi-credit platform and it has actually become increasingly necessary to be relevant,” he says. “How can you be relevant to the market as a whole – the sponsors, the entrepreneurs, the companies you’re dealing with and the investors – if you can’t provide the creative solutions they need across the capital structure in good times and bad?
“You need a set of funds to deliver against those needs, and that’s a competitive advantage because, regardless of the situation, you have the knowledge, skillset and cost of capital to address a particular requirement. You can listen to what’s needed and come up with a solution. Increasingly, people want to deal with fewer people and work with trusted partners.”
7 Bolstering their sector expertise
In a bid to win deals, there will be a continued focus on hiring diverse teams that include sector specialists, says Mark Affolter, co-head of Ares Direct Lending: “First, having a team of specialists means that you can build a strong brand for your organisation within a specific industry vertical.
Number of GPs active in the sector
“By strengthening our specialisation, we can originate a greater quantity of high-quality investment opportunities and become more selective. At Ares, we believe asset selectivity leads to improved performance. We believe that having in-house dedicated expertise helps strengthen our private credit business, benefitting from the industry-specific knowledge and relationships. We see this both in specific sectors as well as in the non-sponsored space.”