Friday letter: The grass is always greener

If the biggest US managers are claiming that European opportunities are the most interesting, why are their cousins across the Atlantic arguing the opposite?

When PDI asked Tony James, president of Blackstone, about credit opportunities earlier this month he said he preferred direct lending in Europe versus the US, despite pressure on pricing: “Europe is in some ways the most difficult market in terms of pricing for private equities but for direct lending, we feel very good … We are finding the returns to be excellent.”

This week his faith in European credit was echoed by Oaktree. Chief executive Jay Wintrob told analysts on a quarterly earnings call that his firm had started fundraising for its second European direct lending vehicle, European Capital Solutions Fund, the successor to European Private Debt Fund. 

“The fund will primarily target proprietary direct loans to middle-market companies requiring a customised financing solution,” Wintrob said.

On the same call, he added that some of Oaktree’s strongest returns this year were generated in Europe. 

The views of James and Wintrob are not dismissed easily. Why then are some European-headquartered managers, as well as some European investment advisers, suggesting that the US is a better source of opportunity at the moment

The Europeans who have suggested to PDI that the US offers a richer deal-making environment have operations on both sides of the pond and are well placed to assess the relative merits of each market. 

Similarly, the advisers that are sending the same message look across both regions to recommend managers and strategies to their clients.

Swiss Capital Group is raising up to $400 million for its first direct lending fund. The vehicle will source opportunities in both Europe and the US, Hans-Jörg Baumann, the firm’s chairman and senior partner, told PDI

The firm will target first-lien mid-market corporate debt strategies in the US and Europe with a leaning towards the American market. “On a risk-adjusted basis, one is best compensated in the US. There were times when it was more attractive in Europe. However, Europe is a limited market with over-demand from investors as there is simply too much liquidity,” Baumann said.

But of course despite the fact that the terminology matches up, when the huge US asset managers talk about European direct lending, they are not talking about the same thing as most of their European-based counterparts. 

Explaining his preference for the European market, Blackstone’s James noted that the US is more competitive with public debt and securitisation markets offering borrowers more options.

But that’s only an issue if you’re writing tickets up to €250 million, as GSO Capital Partners, Blackstone’s credit arm, is able to do in Europe.

When ICG closes its second European direct lending vehicle at €3 billion shortly, €150 million will be the upper limit for commitments by the vehicle – €100 million short of GSO’s largest cheque. The largest European lenders have an upper limit of around €150 million and that figure is smaller for all but the biggest managers.

So this difference is less a fundamental disagreement and more a case of managers talking about different things. European managers like the fact the US market’s depth means GSO faces more competition when deploying large tickets – there are plenty of borrowers and private debt is well established as a regular financing option for companies seeking $50 million to $100 million. 

So in this case, perhaps, the grass really is greener on both sides.