Friday letter: Friend or foe?

Players from across the private debt market were upbeat about the asset class at PDI’s second annual Capital Structure Forum in London this week, where over 200 delegates and speakers gathered to chew the fat. 

One theme came up repeatedly was the complicated relationship between private debt funds and traditional lenders.

On the one hand, private lenders and banks ultimately provide the same service to the same clients. They are competitors.

For Bluebay’s head of direct lending, Anthony Fobel, the situation is very clear: banks are the biggest threat to the nascent private debt market.

Fobel pointed out that without leverage, private debt funds are dependent on pricing as dictated by the loan market – which is still dominated by banks. He highlighted the rise in leveraged loan margins after a global market wobble four weeks ago resulted in banks pulling back. Aggressive activity from the banks had already seen margins compress through 2014.

What’s more, another panelist added, the major fear of investors is that private lenders will not be able to battle the banks and establish market share.

That said, for all this talk of competition, the relationship between the two groups remains ambiguous.

Private debt funds are increasingly partnering with banks – and when each provides different yet complementary services to the same client, all sides can benefit. Ares and GE Capital’s partnership recently reached over $1 billion in commitments. Macquarie and Tikehau Investment Management continue to co-operate through their French Credit Programme. And Bluebay itself has an agreement with Barclays on unitranche financing for mid-market companies.

But while these tie-ups suggest a collegial relationship between alternative lenders and their older, more established partners, it doesn’t change the fundamental dynamic. Banks and direct lenders are essentially in competition – which suggests that the trend for partnerships is likely to wane as alternative lenders’ market share reaches critical mass in Europe.

The intensity of that competition will ebb and flow, but it isn’t going away. And given the extent to which private lenders are making inroads into the banks’ market share, all the signs suggest that for now at least, the private debt market is winning.