What are the main trends in the private debt fund market?
Until recently, the market was dominated by large funds brought in by established players. Increasingly, however, specialist houses with either sector focus or a local focus have managed to secure investment for first time funds.
What are the main differences between the North American and European markets?
Europeans are getting more enlightened but the Americans switch on faster. Debt as an investment theme has been performing pretty robustly in the US, and frankly it's getting a little overcrowded and overheated again. Fund managers are finding better opportunities in Europe because there is more room to manoeuvre into different credit streams and gain a competitive edge.
Have you had to work harder than expected to sell debt as a concept to institutional investors?
Yes, much harder. Although in 2013 the fundraising market has picked up and Avebury is now able to take on new mandates. The key problem has been an issue for most European fund managers has been grappling with macroeconomic challenges. Asian and American investors for instance have not until the last twelve months been comfortable with the euro currency. Recent progress, however bumpy, has been felt positively in the European market. Also, the dramatic tightening in the high yield bond market has now finally led institutional investors to look at private debt, not only for yield but also because of the floating rate structures we typically see on the assets.
Do you have some tips for new debt fund managers?
First, have deals already in place that you can present to investors to prove your investment thesis. Second, over-invest in the team if anything so that investors can see that you are well-resourced. For smaller start-up managers this is a better way to deploy founders' start-up capital on a euro-for-euro basis than investing in the fund itself, although that will also be needed.
It is also essential for niche private debt managers to have at least one strategic investor in place before they go to the wider market. For a required first close of €70 million, for example, managers have been bringing €20 million to €30 million of friendly strategic backing and then working with the EIF and one or two specialist investors to reach a first close. After that breakthrough it is then possible to go to the mainstream private debt investors.
What's your final prognosis on how to fundraise effectively and anything in particular fund managers should avoid?
Avoid greed, arrogance and complacency. Managers who care more about raising money than investing are struggling to deploy capital; managers who do not take into consideration the “market view” about their strategy are having to rethink in between raising and deployment; and managers who thought their biography would be enough are being scrutinised in every aspect of their fund. Also, be wary of poor team dynamics; this is a big red flag for investors.