In an analytical look at the current phase of Europe's debt market development, delegates at the Germany Forum 2016 were told to expect a surge of distressed situations in the next two to three years.
James Newsome (pictured), managing partner at advisory firm Arbour Partners, said that, in the current environment, private equity firms were paying high multiples and leverage was back to 2007 levels. He said it was “safe to assume” another crisis at some point.
In light of a slowdown in fundraising so far this year, Newsome suggested that LPs were waiting to see how current funds are deployed. He pointed out that almost a third of distressed situations being seen now were originated in 2007 in a similarly hot market.
So how to proceed? Newsome said the focus in a 'toppy' market should be on discipline and being underweight in hot sectors. He advised supporting teams that have shown they can operate through cycles and also to beware of the 'relative value' argument – just because a strategy looks good relative to something else does not necessarily make it a good strategy.
He also urged a focus on diversification and credit control and cautioned that no amount of innovation could shortcut good old fashioned credit principles.
“Be prepared for a lower margin world,” was another message. “Raising a debt fund is hard now and fees are down,” said Newsome. “Margins are lower but you need to have a lot of resource up front. You have to recognise this is not a 'get rich quick' business.”