From boom to bust? Last year, as we have previously reported, was record-breaking for private debt deals in Europe. According to Deloitte’s Alternative Lender Deal Tracker, direct lending transactions saw an increase of 89 percent compared with the prior year and a 51 percent jump on the previous highest annual total recorded in 2019.
Partly, this was a reflection of pent-up demand following the covid-induced hiatus in 2020. But it also reflected confidence in Europe’s private debt markets – not just the mature UK market but increasingly those on the continent as well. By and large, European companies had battled their way successfully through the challenge of the pandemic. Signs of stress, including the default rate, remained surprisingly low.
Sentiment could not have been much more bullish heading into this year – and then, with the sudden escalation of the Russia-Ukraine conflict in late February, we were given a stark reminder of how quickly things can change. So much so that, at our APAC Forum 2022 earlier this week, Tom Tull – who spent 12 years as chief investment officer at the $36 billion Employees Retirement System of Texas before his departure in December – stated: “I would definitely avoid Europe.”
Tull was providing the limited partner perspective on the investing environment in general, and cited geopolitical conflict and stagflation as the biggest threats. “As we all know, times can change, and they’re definitely changing now, but with that comes the opportunity to pick and choose throughout the world depending on where the best risk-adjusted returns are,” said Tull.
He suggested there were now “tremendous opportunities” in Asia, a view supported by a newsletter published this week by Hong Kong-based fund manager Zerobridge Partners.
Also at our APAC Forum, Dong Hun Jang, former CIO of Korea’s Public Officials Benefit Association, said now was a good time to expand in emerging markets at the expense of developed markets. This was noteworthy, since POBA has tended to have a strong bias to the US and Europe.
Of course, when tectonic plates move, they don’t move fast. Limited partners have, on the whole, been ramping up their allocations to a European private debt market that has been growing rapidly and is perceived to have plenty more growth ahead of it. Perceptions of the opportunity set also differ: while Europe may not necessarily seem as attractive today for direct lenders, it may offer juicy prospects for those at the distressed debt/special situations end of the spectrum.
One thing’s for sure though: the shocks to the system that started with covid and carried on into inflation and now conflict, will force investors into some fundamental evaluations (or re-evaluations) of where their capital is best deployed.
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