A bit of stress would do no harm

If the cycle is about to turn, it would not come as an unwelcome development to some investors.

The first thought you had on waking up this morning was probably not ‘I could do with some more stress in my life’. That’s my assumption of course, and it may be a misplaced one based on our recent Europe roundtable – a full summary of which will be published soon.

It seemed that at least one or two participants at the roundtable had had enough of an environment where the impression is that almost everyone is broadly doing fine. In the long-benign credit cycle, differences between GPs have become hard to distinguish. Winning deals comes down to who can scrape together an extra few basis points over the nearest competitor.

Therefore, it’s perhaps not too surprising that some are keenly awaiting a more stressed market, where pricing really matters, as does the ability to work through portfolio issues and identify new opportunities demanding niche skills. It would provide the best managers with the opportunity to put distance between themselves and those that have merely clambered on the latest bandwagon to come rolling through town.

To this end, a video published this week – which was shot at our New York Forum towards the end of last month – is worth viewing. Asked what keeps them up at night, delegates cited the likes of leverage, pricing, yield and documentation. It doesn’t take much prompting before you arrive at a fairly long list of current concerns.

A survey out this week from S&P Global will also have added fuel to the fire, asking whether the credit cycle had “finally peaked”. It found that “the median debt level among rated US corporate borrowers now exceeds comparable metrics immediately prior to the most recent financial crisis” and concluded that this level of leverage could leave companies vulnerable in the face of trade wars, geopolitical tensions and interest rate normalisation.

However, also at the forum we took the temperature of investors in the room – results of which can be found in our downloadable presentation here. Although it revealed that the prospect of a hard Brexit is a real worry, with inflationary pressures and deal terms also cited as fear factors, only 6 percent expected a recession in the next 12-18 months and almost half of those polled said they expected returns in Europe to be better than the US in the period ahead.

Indeed, it’s striking how favourable is LP sentiment towards Europe. Again at the forum, around 70 percent of those who expressed an opinion said their allocations to the region would either stay the same or increase by more than 5 percent over the next 12-24 months.

Taking into account what appears to be conflicting evidence, it’s hard to form a view on whether the asset class is about to experience the kind of stress not seen for many years. Perhaps the best stance is one of laid-back pragmatism. In which case, Avenue Capital’s Marc Lasry may have provided the optimal answer to what keeps him awake at night: “Probably nothing. I don’t worry about things I can’t control.”

Write to the author at andy.t@peimedia.com