Flying into headwinds is a test of nerve

Private debt fund managers are not yet gripping their arm-rests, but some stress is evident in light of recent events.

Regular travellers know very well that sensation of mild turbulence when the plane starts bobbing up and down over what feels like a potholed road. You tense a little, you’d rather it wasn’t happening, but at the same time you know that it’s entirely within normal flight parameters.

Those gathered for PDI’s recent European roundtable (watch out for a full summary in our December/January issue) appeared to be experiencing something akin to this. Not surprisingly, Donald Trump’s presidential victory was a major preoccupation and it would be misleading to suggest that the attendees were completely untroubled by it. They were, however, capable of rationalising this latest development – and even demonstrate that noted ability among private debt fund managers to turn an apparent negative into a positive.

So, it was acknowledged that we are now in a period of heightened geopolitical risk following the unexpected votes in the UK and US. But this could present additional opportunity for private debt managers as traditional lenders’ risk appetite reduces even more.

The word “retrenchment” was mentioned frequently at the roundtable, in reference not just to capital and the banks’ lending constraints, but also their physical presence across the region. In the good times, banks have a tendency to roll out their operations into new markets – whereas today’s trend is towards pulling in their horns and focusing closer to home. Again, opportunity was identified for fund managers prepared to operate across borders.

Another popular word at the roundtable was “isolationism”. This was most obviously with reference to politics and the possibility that the US may pull back from the world stage. But it was also noted that regulatory frameworks, which had been becoming more uniform across borders and less nation-specific, were now perhaps moving in the opposite direction. While this demands close attention be paid to regulatory developments in each target market, it was also seen as increasing the prospects for fund managers to deploy relative value strategies.

However, there is always the possibility that mild turbulence may develop into something more severe, rocking the aircraft violently and tipping drinks into laps as the ‘fasten seatbelt’ signs ping into action. “The downside could be challenging,” announced one participant ominously, referring to the possibility of further unwanted outcomes in the upcoming referendum in Italy and next year’s elections in key European countries.

The idea was even posited that the returns offered by many private debt funds may cease to appear attractive at the outer edges of political risk. Is 8-10 percent really enough when faced with a very real chance of wipe-out? Meanwhile, those either preparing new funds or actively out on the road seemed to be nervously weighing up the prospect of investors deciding to sit on their hands amid the volatility and uncertainty swirling around them.

Ultimately, in the same way that passengers can reasonably expect their plane to land safely, private debt fund managers have confidence in the long-term future. But few are expecting anything other than a bumpy ride.

*Whatever the current concerns, the private debt asset class has continued to grow at an impressive rate in 2016 with many notable deals and fundraisings illustrating its progress. Hence we had no shortage of strong contenders for this year’s PDI annual awards, which have now officially launched. Click HERE to submit your votes.