Jacobson: The other shoe will drop

Direct lending opportunities in Europe will continue to improve as CLOs reach the end of their reinvestment periods. 

If the opportunity for direct lending in Europe is strong now, just wait.

“We take the view that opportunity sets are getting bigger, and that it’s going to affect larger companies,” said Blair Jacobson co-head of Ares Management’s private debt group in Europe during a keynote interview at Private Debt Investor’s Capital Structure Europe conference on Tuesday. “The other shoe’s about to drop as well.”

Although the banking industry’s pullback from lending has been overstated, it has created significant levels of opportunities for Ares and other private debt players, he said. The market opportunity will only improve when active CLOs conclude their reinvestment periods, as the volume of new Europe-focused vehicles has failed to keep pace with the amount of capital that will be leaving the market.

European CLO issuance for the year stood at €4.5 billion across 14 deals, according to S&P data cited by The Carlyle Group earlier this month. While that represents a significant improvement over the stagnant period that followed the financial crisis, it’s a far cry from pre-crisis issuance.

Many of the older funds are still in their reinvestment periods. As such, the lack of CLO capital has yet to be fully felt by the market, said Jacobson. Although that may create complications for companies, the dearth of financing will further Ares’ ability to take a selective deal approach, he added, a key part of its disciplined strategy.

In addition to his comments on the CLO market, Jacobson also touched on how investors have responded to his firm’s continued focus on private debt in Europe. As the market has evolved – Ares launched its European direct lending business in 2007 – limited partners have begun establish separate allocations for private debt and direct lending strategies, he said. In the past, the firm’s debt funds were typically included in investors’ fixed income or private equity portfolios.

“We’re getting calls where it’s guys who have a [discreet] private debt allocation,” he said. “The bulk of capital raised for this asset class has been raised in the last 18-24 months. So we take the view that we’re really in version 1.0 for direct lending in Europe.”