The changing focus of European private debt

A recent roundtable revealed managers have new strategic priorities and different sources of capital to target.

What’s at the front of European private debt professionals’ minds today? This was the question posed to representatives from EQT, Patrimonium, Paul Hastings and Pemberton at PDI’s Europe roundtable. Below is a selection of highlights, with the full version to be found in our upcoming Europe Report.

Preferences are shifting, appetite remains strong

With Deloitte’s Alternative Lender Deal Tracker showing a 9 percent increase in direct lending deals and Europe’s share of global fundraising at 29 percent in 2018 (just shy of the 31 percent peak in 2014), the data suggest that LPs are continuing to view the continent as an attractive place to commit capital. Assuming a downturn will arrive at some point – though one participant wryly observed that they had been calling the top of the market since 2015 – LPs are showing more interest in special situations. Europe is still waiting, however, for a material number of restructurings to arise – a trend that is beginning to be detected in the US.

Fundraisers need to cast the net far and wide

Although the private debt deal market is still strongly biased towards North America and Western Europe, pools of LP capital targeting the asset class are popping up across the globe. A relaxation of laws relating to investment scope has seen South American institutions – in Argentina and Brazil, for example – take a keener interest. Meanwhile, regulation in Japan is now more closely aligned with European regimes, and investors in the country are becoming more comfortable with private debt as a result. The same is true of South Korea, where the perception of private debt firms as “shadow bankers” has diminished and regulations have been tweaked to simplify the process of committing capital.

There are concerns around fund finance

Is the amount of fund leverage being offered to fund managers sustainable? It’s a rhetorical question until such time as market stress puts the matter to the test. One thing’s for sure: there has never been such competition as there is now to provide facilities for private debt funds as banks pile into the market, thereby putting pressure on terms and pricing. Fund leverage has been around for a long time in the US and the structures there are consequently well tested. There are doubts that some of the structures being seen in Europe will prove equally robust as and when the current benign conditions take a turn for the worse.

The UK is a no-no … almost

There are industry-specific concerns in the UK, where the retail sector in particular is being viewed with caution. But there are no prizes for guessing that the big drag on activity is Brexit. The expected tightening of UK lending is now a reality and pan-European managers have never kept a tighter rein on their UK exposures. However, some fears may be overblown, and managers are finding themselves educating investors on the differences between a domestic business focused on the UK and an international business with its headquarters in the country. There is also a kind of ‘QE’ aimed at UK private debt, with the British Business Bank and some insurers supporting small speciality funds and the government examining potential tax breaks and the possible facilitation of new fund structures.

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