It’s funny how fortunes can change. Back in March, if you had asked a private debt manager how the year ahead was looking you are likely to have found yourself listening to a plague of problems stemming from adverse market conditions. According to PDI Research & Analytics, fundraising in Q1 was down to just $15.4 billion, compared with $109.5 billion a year earlier. Many publicly traded firms were posting mark-to-market losses and managers grumbled to PDI of scarce dealflow or subdued fundraising.
Cut to a few months later and we appear to have turned a corner. Equities, high-yield bonds and oil prices are rising again, private debt managers are reporting large final or interim closes and we’ve seen a recent significant uptick in LP activity in private debt.
Several large pension funds have been active with private debt strategies:
– The Korea Post Savings plan recently posted a search for European and North American senior direct lending managers;
– The Chicago Police Annuity & Benefit Fund is in the midst of selecting a second direct lending firm;
– The Iowa Public Employees Retirement System committed as much as $400 million in its first direct lending mandate;
– The Denver Employees Retirement Plan invested in a direct lending fund with Bain Capital Credit;
– The Oregon State Investment Council recently invested $500 million in Centerbridge Partners’ latest distressed fund.
The list goes on.
A month or two ago, there was debate over direct lending vs distressed, with some experts saying it was a better time for the latter. Now, though, it seems there is room for both.
For one thing, many US LPs are getting into direct lending for the first time as they try to enhance returns in an otherwise low interest rate fixed-income environment.
Meanwhile, distressed and special situations managers like Centerbridge, Oaktree, KKR and TPG maintain that opportunities look interesting in specific sectors or regions. Some of these firms are managing global funds and claim they can still tap into lucrative investments across the globe.
At yet no one is sure how the market will play out.
“The good times are rolling again … but you can’t really predict what will happen given the relatively muted financial fundamentals of the economy, but very aggressive minority technical out there,” said Apollo Global Management’s co-founder Leon Black in May.
Most managers think caution is still necessary. Oil prices are back up at $50 per barrel, but are unlikely to go much higher any time soon, while indicators such as US M&A activity and CLO issuance are down.
“There is this battle between fundamentals and technicals. One month fundamentals win and the next month technicals win, and you just have to be on your toes to navigate what is a very challenging environment,” Black added.
It seems “being on your toes” might very well be the way to go for many of these firms. And managing strategies that can tactically allocate between regions, or performing vs distressed credit as opportunities arise, could be a way to tackle this environment. Some of the big-name firms are already at it, while others tell PDI they plan to follow suit.
Who do you think is going to win the battle: the fundamentals or the technicals? Email Anastasia.firstname.lastname@example.org