We’re far from alone in making this particular forecast. Both Henry McVey, KKR’s head of global macro and asset allocation, and private equity advisory firm Altius Associates flagged the market in their 2016 outlook pieces published this week.
Altius limited itself to saying that private credit will remain an important sub-asset class for investors globally. McVey, on the other hand, didn’t mince his words when he pronounced it a “huge opportunity”.
While there’s no guarantee that continued high growth rates and the eventual normalisation of interest rates will mean that private credit will remain as attractive in five years, the opportunity is there in 2016.
Further consolidation, more failed deals
The consolidation within private debt took off in 2015 with GE’s decision to divest most of its financial business, GE Capital. But it wasn’t limited to just the GE sell-off; Cairn Capital, Renshaw Bay and Mount Kellet also went under the hammer.
Given that GE has already managed to sell most of its businesses, 2016 is unlikely to match last year in terms of volume. But Pandora’s box has been opened and more debt businesses are likely to be sold this year.
It’s started already; PDIexclusively reported this week that Fifth Street has been put up for sale.
Hand-in-hand with that, however, will come more failed deals – another 2015 trend that claimed a few high-profile scalps from the aborted Ares/Kayne Anderson merger through to the sale of Hayfin, which was also dropped.
Private debt, when compared with other asset classes, is niche. But it’s hard to think of another asset class that encompasses such a wide variety of sub-strategies.
From distressed debt to rescue financing, from consumer lending through to $200 million-plus corporate debt, from shipping finance to divorce financing: alternative lenders have dived into every type of debt in every geography. And they haven’t finished yet.
Greater concern/anticipation regarding China
China has been the stick bears used to beat everyone for several years now. Concern about the region became more widespread after Chinese stock market volatility claimed the attention of the world last summer (and continues this month).
Debt is at the core of these worries. Non-financial debt has grown to 250 percent of GDP and has accelerated as the growth rate of the most populous country in the world has slowed.
From a private debt perspective, China represents a concern from the macro-economic point of view. But there are also plenty of distressed debt investors positively salivating over what they see as potential opportunity.
In Europe, deals like Chiltern, Fintrax and Ibstock demonstrated the firepower of private lenders, while on the other side of the pond American Seafoods, Data Device Corporation and Lightower Fiber Networks did the same.
Lenders are promising even more deals of a scale to rival both the syndicated loan and high-yield bond markets. One London-based manager said his firm has done large deals in the UK and France, but that in 2016 the goal is to compete on the larger deals in other parts of continental Europe.
Lending is a scale business – there’s a basic cost to the infrastructure so the bigger you go, the better the return – or so is the argument of those seeking these bigger deals.
There’s also cachet to being the biggest – and it’s clear that this is driving some managers as much as the business case.
Over the coming year we’ll be covering these issues in more depth in the magazine, but for now what do you expect to see in the next 12 months? Email me your predictions at email@example.com