When examining manager appetites across sectors and regions, common themes emerge, but there are also key differences. This is what Proskauer discovered when it polled US private credit managers on their preferred sectors as part of its annual Trends in Private Credit report last year. When asked which industries they considered investing in over the following 12 months, 95 percent of managers cited business services as an attractive sector, followed by healthcare (89 percent), software and technology (87 percent), manufacturing (79 percent), and transport and logistics (76 percent).
European respondents offered similar responses, but they were significantly more likely to consider investing in software and technology than their US counterparts – 95 percent included it among their target sectors. They were also far more likely to consider investing in education – 88 percent compared with 51 percent in the US. We spoke to industry participants to get deeper insights on what trends they are focusing on and why.
1. Evolving consumer sectors
According to Alexander Griffith, partner at Proskauer, roughly 10 percent of European survey respondents saw consumer retail as a sector to watch in 2019. This is despite the previous 12 months seeing a lull in activity in this sector. The London-based lawyer says some investors in Europe are taking a long-term view of the consumer retail sector despite its current travails.
“You would wonder why there is still interest in the sector given the number of distressed areas in retail last year, such as casual dining and high street retail,” he says. “But deals are still being done by private credit institutions in that space. That’s something to remark on – while there are challenges in that sector there are still some opportunities. People are still able to see through the short-term pain and see the long-term potential and are therefore able to back them.”
Not everyone agrees. Stephan Caron, head of European private debt at BlackRock, says that while opportunities may exist in retail, they are from the equity side, not debt. “The amount of destruction going on in retail makes it a difficult sector to invest in,” he says. “Even the technology disruption in those sectors means there is a lot of risk in consumer retail and fashion from a credit perspective.”
Instead Caron says there needs to be a distinction between retail investment and consumer services, with the latter proving to be more attractive for debt investors. Although it is a broad category, there is greater potential in this area, provided businesses meet a set number of criteria. He adds: “The firms that we prefer in the consumer sector are ones with contractual revenues and regular cashflows where essential services are being provided to companies that are resilient to economic cycles.”
2. Innovations in transport and aviation
Germany has seen its private debt market share increase rapidly both in terms of deal activity and volume over the last two years, explains Daniel Heine, a managing partner at Zurich-based Patrimonium. Heine sees several opportunities forming in the country’s automotive market in 2019. Much of this change will come as car manufacturers require capital to fund the switch from combustion engines to electric vehicles in the coming years. This trend has in part been driven by strict emissions targets and clean air rules brought in by the European Parliament.
“Sourcing behaviour will be dramatically affected by this engine change,” explains Heine. “As a consequence, refinancing and growth, but also special situations, will drastically increase in terms of dealflow and volume.”
3. Seniors debt
Europe’s ageing population is creating opportunities, and problems, in various areas of the economy. However, Proskauer’s Griffith believes private debt providers are well placed to capitalise on this development. He points to increased activity in the care home sector and specifically cites the UK, where the health service is increasingly looking towards the private sector to provide certain services.
“There is a certain element of increased demand for healthcare as the population ages,” he says. “But it’s also a case of more and more acceptance of privately owned businesses supporting healthcare. The spin-offs from the National Health Service, parts of what would have been publicly owned businesses or services, are now being provided to the NHS. So, we are seeing opportunities for private credit to come in and support new business in this area.”
4. New frontiers in the old world
According to BlackRock’s Caron, while Germany may have been the European private debt success story of the last two years, the next frontier for the asset class is in the Mediterranean – regardless of sector. Data from the Deloitte Alternative Lender Deal Tracker shows that there were 110 deals in Europe – outside the major markets of the UK, France and Germany – for the year leading up to September 2018, more than in any other 12-month period.
“We can continue to expect further penetration in the Benelux in 2019,” says Caron. “Southern Europe is also very underrepresented in terms of private debt but we are starting to see an increased recognition of its value from both corporates and financial sponsors in Spain and Italy than we have seen previously. However, I wouldn’t expect the shift that we saw in Germany, which was really quite dramatic.”
5. Opportunities in technology and communications
Consensus was reached across both European and US private debt managers polled in the Proskauer survey, and by everyone spoken to for this feature, that software and technology will continue to be a major driver for private debt managers in 2019. According to Griffith, the drivers of this growth are software-as-a-service (SaaS) providers, which have all the characteristics that Caron outlines as making consumer services attractive: repeat revenues and resilience to the business cycle. “There seem to be particular funds out there that like software and technology and that can get their heads around the recurring revenues and the risks involved,” says Griffith. “They will really go all out to do those kinds of deals. Most funds are more generalist and look at all the different sectors and, providing the credit stacks up, they will go for it. There are certainly a lot of SaaS deals being done in Europe at the moment.” Examples of specialists include TPG, which concluded a number of deals in Europe last year, and more generalist firms such as Ares which provided a £1 billion ($1.3 billion; €1.2 billion) loan at the end of February to UK telecoms and IT firm Daisy.