Deal structuring hits confidence

In our annual survey of LPs, investors in private debt expressed more scepticism in deal structuring than investors in other alternative asset classes.

The private debt deal market is red hot: there is cash aplenty, more lenders than there are deals, egregious EBITDA addbacks – and investors are taking note.

In our PDI Perspectives 2019 survey, in which we polled limited partners that invest in private markets, our respondents were more cautious about GP deal structuring for the private debt asset class compared with private equity, infrastructure and real estate.

The question – “How confident are you that your GPs’ deals have been structured sensibly enough to withstand a downturn?” – offered possible responses ranging from LPs feeling “very confident” to “very not confident” in the way GPs structure.

While no one responded that they were very not confident, 15.5 percent of investors expressed some scepticism around the way private debt managers are putting together their deals.

With many investors making their first commitments to the asset class in this credit cycle, how their portfolio fares in the downturn may well affect their allocation to the private debt asset class in five, seven or 10 years.


Of course, first and foremost, credit managers have a duty to not only preserve their investors’ capital, but also to deliver solid risk-adjusted returns, in which deal structure is, of course, integral. By extension though, credit managers are shaping the future of the asset class.

Private credit hasn’t gone through a cycle in the way private equity or real estate went through the global financial crisis. Both were well-established – at least relatively so – alternative asset classes with institutional investor backing.

Granted, the survey wrapped up before December volatility crept in – before secondary loan prices fell and retail money began flowing out of the leveraged loan market. Direct lending, by contrast, theoretically is more stable, as most of the vehicles are either permanent capital vehicles or long-term, closed-end funds.

Covenant-lite transactions have ruled the day for some time now, but one market source noted there was a slowdown in the fourth quarter – something that may carry over into the first quarter of this year. Certainly, that could be a boon for lenders in deals already in the market or transactions about to hit the block.

But done deals are just that: done deals. The appeal of cov-lite from the private equity sponsor’s side is obvious: more space to manoeuvre and operate the business with less oversight. Of course, that doesn’t always go as planned, but credit managers can only hope that extra breathing room for the borrowers is used wisely or that the lenders don’t get to the table too late.

Many investors will cut their teeth on private credit for the first time during this credit cycle. Let’s hope they want to come back for more.

Check our our full, interactive LP perspectives survey below for more.