Brexit could be a boon for US private debt

The reality of Britain’s departure from the European Union could bring more capital into the US private debt market, as managers and LPs search for investments with higher yields and less risk.  

It’s been more than a month since Britain decided it would be better off outside the European Union and private debt professionals are still wondering how it will affect their businesses. The public markets may have recovered from tanking in the immediate aftermath, but the divorce that looms will make the break-up between PIMCO and its founder, Bill Gross, look like a schoolyard quarrel.

In the US at least the uncertainty appears to be opening to the door to an influx of capital into the asset class. Numerous sources have told PDI that if risk rises in Europe and investors want both yield and a safe haven to stash their cash then private debt becomes an attractive option.

One manager pointed out that when it comes to the choice between debt and equity, debt markets could be the better option, because equities are underpinned by tepid economic growth. Exhibit A: the US Bureau of Economic Analysis just reported GDP growth of 1.2 percent for the second quarter. And the safest place for money in the roughest times might be US Treasuries, but who wants yields of 1 percent or less when more attractive and largely stable investment options exist?

Bruce Karsh, Oaktree Capital Group’s co-chairman and chief investment officer, might have sounded cautious when he said on the firm’s second-quarter earnings call that it is too soon to feel the full ramifications of Brexit, but he was probably rubbing his hands when he did so: “We haven’t seen immediate great opportunities in the aftermath of Brexit, but it’s early days and I think we will start to see some that will be more and more interesting.”

More US pension funds are certainly looking at private debt. Though private equity still makes up a larger share of an LP’s portfolio, adding a small allocation to private debt can be a first step. After all, funneling a good chunk of money into a new and untested, if promising, asset class hardly represents the move of a cautious investor.

As the industry has seen, the rush toward our asset call has been real. PDI sources often cite the retrenchment of bank lending, creating a void that non-bank lenders filled as they began extending more and more credit. Brexit will likely present another reason for more investors to give the private debt world a first, if not second, glance.