The fact that private debt fundraising took something of a tumble in 2020 should not come as a huge surprise. When the initial covid-19 outbreak swept many parts of the globe in March and April, investors hastily switched their attention from new allocations to existing exposures. Even those keen to continue writing cheques found themselves wading through treacle thanks to the difficulties of conducting meaningful due diligence while working remotely.
This does not mean, however, that fund managers wanting to shore up their coffers should be despondent about the period ahead. For one thing, government and corporate bond yields remain at historic lows. Many investors, if they have not done so already, will be looking to reduce these exposures and redirect capital into higher yielding opportunities. That can only be to private debt’s benefit.
Meanwhile, investors may also be looking to exit equity markets but for very different reasons. Prices on these markets have been incredibly bullish, despite the uncertain outlook for corporate profitability post-covid. As a result, it seems likely that there will be movement towards rebalancing (and de-risking) portfolios as investors seek more reliable cash generating assets. Again, private debt looks well placed.
On top of this, many market observers are predicting that 2021 will be a strong vintage for private debt deals. The imbalance between private equity fundraising (strong) and that of private debt (declining) over the past couple of years has created a strong bargaining position for lenders as sources of available debt financing diminish. These lenders can also look forward to plenty of refinancing opportunities arising from the lending boom of four to five years ago.
A further consideration is that whatever inadvisable deals may have been done prior to the initial covid outbreak, the months ahead are not associated with that legacy. There are signs of better documentation allowing lenders more comfort regarding deal terms than they have had for a while. Managers can now be more selective in targeting transactions offering the best risk/reward characteristics.
None of this is to suggest that private debt is in line for a rapid turnaround in its fundraising fortunes. With new variants of the virus causing renewed concern, optimism around vaccination programmes is having to be tempered. The ‘return to normal’ may take a while longer than hoped, but it’s clear that private debt managers have room for optimism, nonetheless.
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