ACG Eurogrowth: Pragmatism needed amid uncertainty

The first day of the ACG conference was dominated by the prospect of Brexit but, for those able to take a pragmatic approach, opportunities are there.

In front of a picture of US presidential candidate Donald Trump, Jamie Murray, EMEA chief economist at Bloomberg, concluded his presentation on the global macroeconomic situation on the first day of the ACG Eurogrowth conference in Barcelona by noting that “unlikely things can sometimes happen”.

The election of the property developer and reality television star as President of the US next month may provide the next surprise, but for attendees at the ACG event their concern was coming to terms with the previous shock: the UK’s vote to leave the European Union.

Murray kicked off proceedings with an assessment of the impact Brexit may have on the UK and European economies in the short and medium term. The plunge in the pound (20 percent since November 2015) was the one of the biggest effects to the UK economy identified by Murray.

Murray said we have not seen the disintermediation of financial services predicted by some in the lead up to the vote. But he anticipates inflation to reach 3 percent next year and another potential cut in interest rates from the Bank of England in February. However, he added that the Brexit vote is likely to lead to a slowdown in growth rather than a full calendar-year recession.

Amid the pessimism felt by many at the conference at the prospect of Brexit, Chis Smith, partner at Clearwater International – a firm that advises mid-market borrowers on sourcing capital – offered a calm approach, stating that dealing with Brexit required “pragmatism”. He reported that opportunities are still there as he noted Q3 was the busiest period for the firm.

“While hard Brexit seems inevitable, the fundamentals of the UK economy haven’t changed,” he said.

He added that a slowdown in growth will contribute to banks becoming more restrictive in their lending practices, opening up avenues for private debt funds to deploy capital.

It was a sentiment echoed by one London-based banker who told PDI that working with private funds under the current economic climate was necessary as restrictions on lending meant banks have to hold back on certain deals.

“If we don’t work with private debt funds then we will lose market share,” he said.

Quite what the relationship between banks and funds will look like in the future is up in the air, but he noted that banks will consider further outsourcing of risk management and origination of loans to private debt funds, a point made by Ares President Michael Arougheti at the PDI Capital Structure Forum in London earlier this week.

2016 has been a difficult year for many in the private debt industry. Fundraising has been down and deal transactions have reportedly fallen. But one of the key factors leading to the growth of the asset class was the decline of the banks’ presence in the mid-market. If Brexit results in a downturn, it is possible that an even bigger space is created for the debt funds to deploy capital.