The news this week that Avenue Capital, the distressed debt-focused hedge fund founded by Marc Lasry, is poised to launch a Europe-focused senior loans fund, was indicative of a trend that’s become apparent in recent months.
Private debt funds appear to be shifting their emphasis from distressed situations to healthier ones. Paul Buckley, founder of placement agent First Avenue, identified this trend in a keynote interview that will feature in PDI’s fundraising supplement bundled with our next issue. “In Europe, there’s a forgotten middle between pure syndicated senior debt and distressed debt at the other end – lightly or moderately stressed debt, where you can get an interesting double digit return associated with doing hard credit work. Your goal isn’t loan-to-own, but simply to identify a situation where issues can be fixed and covenants restored.”
Avenue appears to have gone from one end of the spectrum (distressed debt) to the other (senior debt) and bypassed that ‘stressed middle’, but there are firms out there eyeing that middle space with intent. It’s a prudent move, because Europe’s distressed debt market hasn’t lived up to expectations since the financial crisis.
Ivan Zinn, founding partner of US firm Atalaya Capital Management, suggested one reason for this during our recent US roundtable in New York: “European banks don’t sell.”
There have of course been piecemeal loan portfolio sales by European banks, and some have made significant headway: Lloyds Banking Group has reduced the amount of risk-weighted assets on its balance sheet by £210 billion since 2008, while RBS and Barclays have reduced theirs by £47 billion each, according to a report this week by DC Advisory Partners.
But the tsunami of distressed situations predicted by firms hasn’t happened – banks have been largely supportive of troubled companies. [There’s always an exception of course: step forward RBS, which this week came in for more criticism for forcing viable companies into insolvency for its own profit.]
The case on which distressed debt funds’ fundraising activities was predicated duly undermined, some are turning to other strategies.
Let’s be clear – we’re not suggesting Avenue or firms like it are abandoning distressed debt investing. The point is simply that savvy investment groups are looking at ways to modify their strategy in response to changing market conditions. There will be distressed situations in future – as interest rates rise when the recovery really takes hold, expect to see plenty more – but for now, the few that do arise are picked off by a handful of behemoths like Oaktree Capital Management, leaving few opportunities for the rest.
For the forthcoming issue of Private Debt Investor magazine, we interviewed Olivier Berment, head of private debt at Ardian (formerly AXA Private Equity). He started off at AXA PE investing in distressed situations, but the firm abandoned that strategy in 2005 because it was too small a fund to justify the resources allocated to it. Since then, the firm has focused on providing finance to sponsor-backed companies. Initially it did this via mezzanine loans, but when it became apparent midway through the investment period of its second fund that sponsors wanted something different, the firm sought approval from investor to modify its strategy to include unitranche financing packages, then a new idea. Permission granted, Ardian grew to become one of the pioneers of that form of financing in Europe.
It’s a good example of a firm that has listened to investors, and the market, and evolved accordingly. The British Army has a saying: “Improvise, adapt, and overcome”. It seems many private debt firms in Europe are heeding that advice.
Next week, Private Debt Investor will be launching voting for its first Annual Awards. We’re hard at work drawing up shortlists in the 30+ categories spanning the American, European and Asian markets via consultation with market participants, and will publish those shortlists at the end of next week. We urge you to take the time to complete the online voting pro forma. Results will be published in Q1 next year as part of our Annual Review.