Ghose: next credit cycle “not far away”

Although he urged caution, 3iDM head Jeremy Ghose was emphatic regarding the opportunities in the senior secured loan market. 

After highlighting investment opportunities in senior secured loans during a keynote at Private Debt Investor’s Capital Structure Europe conference, 3i Debt Management chief executive officer Jeremy Ghose cautioned that the next credit cycle could be on the horizon. 

“The next credit cycle cannot be far away,” he said, adding that downward shifts in credit ratings and rising leverage multiples (from 5.4x on average in 2012 to 5.7x through 2013) indicates that another down-cycle could be imminent.

“As you know, in credit, the next cycle is always around the corner,” Ghose told Private Debt Investor afterwards. Despite the possibility of clouds on the horizon, he was clear that opportunities continue to outweigh possible risks in the sector.

In Europe, Basel III has forced banks to delever their portfolios, which has created a financing gap for companies seeking access to capital. That gap has been amplified by the amount of private equity dry powder that needs to be put to work in the next five years. Although refinancings having generated a significant portion of this year’s deal flow, a burgeoning M&A market will provide even more opportunity for alternative financing. 

“There is substantial private equity dry powder in the world today. There is currently more than $300 billion in funds available for private equity in the US and Europe. This is the first time since 2008 since we’ve seen a year over year increase for dry powder,” he said in his remarks. “Assuming a circa 1-to-1 debt to equity ratio, that translates to a $60 billion issuance of debt per annum over the next five years.”

The strong pipeline of deal flow for private debt general partners will be apparent to institutional investors, he added, many of whom will continue to turn to the strategy in pursuit of consistent yield. Furthermore, although the Federal Reserve has backed off its plan to taper quantitative easing, which would have relieved downward pressure on interest rates, investors have increasingly turned to managers in the leveraged loan market to protect against rising rates.

“Loans provide a hedge against interest rates and loan duration. We all know that if you’re printing money constantly at $85 billion per month, interest rates will have to increase when tapering kicks in,” he said.

“As we continue to live in the near-zero interest rate world, we’re going to see a complete rewiring of the system … Private debt as an asset class is likely to grow exponentially over the next 10 years. It feels like PE was in the late 80’s or early 90’s.”