Capital Structure Europe – A précis

The Capital Structure Europe Forum debuted in London this week. If the response was any indication, it will be the first of many conferences under this publication's umbrella. Delegates and panelists engaged in spirited discussions on the progress of the debt opportunity in Europe, how the market has evolved and, most importantly, how it can continue to improve and grow. It also brought advisors, managers and investors in the asset class together to network.  

In case you missed it, we’ve pulled together a handful of takeaways from the conference.

• 3i Debt Management’s Jeremy Ghose started the conference with an emphatic statement on current investment opportunities in Europe’s private debt space. That Ghose sees opportunity is no surprise – low interest rates, private equity sponsors bloated with dry powder and a revival in the M&A market should allow investors to put capital to work in short order over the next few years. The funny thing about good times, however, is that they will one day come to an end. As such, Ghose urged caution: “As you know, in credit, the next cycle is always around the corner.”

   

• With many LPs’ debt portfolios still in their nascent stage, many investors have yet to find normalcy in management fee structures. They do agree that those structures must reflect the difficulty of strategy to which they’re tied, however. Distressed-for-control investments require active management of assets on the part of the fund manager. LPs are willing to pay a premium on fees and terms for that effort. More passive strategies warrant more investor friendly structures. As panel moderator David Waxman of Azla Advisors put it: “We may end up with different fee structures for different market segments over time.”

   

• Yes, US CLO issuance has gone gangbusters for the better part of the last year. But what about the value of the underlying assets? Could Europe – with its paltry-by-comparison €4.5 billion in issuance – actually offer better value for investors? The Carlyle Group’s Colin Atkins certainly thought so. “The supply of assets is OK for the US. The demand for the CLOs exceeds the size of the assets however,” he said. “The better value is in Europe.”

   

• Speaking of CLOs, opportunities for direct lenders such as Ares Management will likely improve as existing European CLOs reach their reinvestment periods. With a dearth of new issuance to fill the breach, and banks taking a more conservative tack, private debt funds will likely be able to choose from a strong selection of deals, said Blair Jacobson, co-head of the Ares’ private debt group in Europe, during his keynote interview. “We take the view that opportunity sets are getting bigger, and that it’s going to affect larger companies,” he said “The other shoe’s about to drop as well.”

   

• Pitching emerging market debt strategies to a conservative LP base isn’t easy. Private debt’s emergence as a unique, full-fledged asset class has made the case easier, however. “Initially, it was some of the larger, sophisticated – if you wanted to use that term – pension funds to have that ‘Aha!’ moment [with emerging market debt strategies],” said Cordiant Capital president and chief executive officer David Creighton. “The more conservative investors, like insurance companies, are looking for stronger cash flow.” As such, they’ve begun to turn their eyes to emerging market debt.

   

• The pipeline for infrastructure debt deals will improve as investor commitments increase, said Allianz’s chief investment officer Deborah Zurkow. With governments increasingly turning to private capital for infrastructure project financing, expect investors to respond by upping their allocations to what’s been characterised as a long-term, highly stable investment strategy.

   

• RBS’ Malcolm Hassan made clear the banks’ retreat from lending, while temporary, would alter the future terms of engagement permanently as the banks would have to figure out how to work alongside the funds for the long term. Today’s nascent private debt market was thought by many to herald a fundamental shift.

   

• Provided of course GPs remember to man their receptions and pick up incoming calls. Astonishingly, Nick Shaw of the Cambridge University’s Endowment fund had to remind GPs of their benefits of receiving inbound inquiries for their product: really slick marketing is a two-way street. And it shouldn’t just be at the GP’s convenience.

Hearing the insight of some of the industry’s brightest lights made for a compelling two days. Opportunities to engage the market at large, and gauge opinions from participants, are few and far between and we hope the event proved useful. There’ll be plenty more where that came from. We’ll see you next year.