Loan Note: Discipline holds amid deal boom; S&P forecasts default rate rise

Amid the boom in deals, there is no evidence that fund managers have lost their discipline, according to Lincoln International data. Plus: S&P predicts a rise in the default rate amid much uncertainty, and all the latest from the hiring front line. Here's today's brief for our valued subscribers only.

They said it

“The surge in the oil price is terrible news for businesses and consumers, and fundamentally this clarifies one of the key impacts of the Russia/Ukraine war – it will serve to further stoke inflation.”

Russ Mould, investment director at investment platform and stockbroker AJ Bell, quoted in The Guardian.

First Look

Deals boom driven by ‘capital oversupply’
The M&A boom is clearly apparent in the latest European Valuations Perspectives report (Winter 2021) from Lincoln International, the Chicago-based investment banking advisory firm. It shows global M&A deals reaching around €250 billion last year, the highest level since 2011 and easily beating the previous peak years of 2017 and 2018.

Richard Olson, Lincoln’s managing director in the UK and European valuations and opinions group, told Private Debt Investor he sees no reason why the boom will not continue given the “significant oversupply” of capital in private equity and private credit. In private credit, he says there is two-and-a-half years’ worth of capital available for deals at the current pace of deployment.

The deals frenzy has led to some speculation about whether market conditions may be getting out of hand, but Olson says looking at European deals’ enterprise values and EBITDA multiples suggests that “extraordinary discipline” has been maintained. Out of five sectors analysed, the consumer sector saw leverage peak the highest at 6.7 times in the first quarter of 2021. But, by the end of the year, this had fallen to 5.5 times.

The average leverage multiple for all European deals was 5.1 times at the end of last year, down from a high of 5.5 times in Q1 2021. The average enterprise value in European deals was 11.6 times at the end of the year, compared with a high of 12.2 times in the second quarter of last year.

European defaults poised to climb
The era of the low default rate could be coming to an end, according to S&P Global Ratings. The rating agency predicts in a new report (log-in required), that the European trailing 12-month speculative-grade credit default rate will rise to 2.5 percent by the end of this year from 1.8 percent at the end of last year. This forecast would see 20 speculative-grade companies default.

“This forecast puts the default rate squarely back to pre-pandemic norms, but downside risks are growing, which could lead defaults to rise late this year and into 2023,” said Nick Kraemer, head of S&P Global Ratings Performance Analytics, in a press release announcing the report.

Current indicators are of a subdued default rate: strong market liquidity, economic projections above historical averages, and positive credit indicators. But the report says risks are increasing with inflation rising amid tighter monetary policies and the political situation in Russia/Ukraine.

Perhaps in acknowledgement of a volatile backdrop, S&P has what it describes as an optimistic scenario of a 1 percent default rate by the end of the year (eight defaults) and a pessimistic rate of 5 percent (39 defaults).


Runway makes management changes
Runway Growth Capital said it has named Greg Greifeld, managing director and head of credit, to the additional position of deputy chief investment officer at the lender to both venture and non-venture backed companies.

Greifeld, one of Private Debt Investor’s Rising Stars 2020, will work alongside Runway’s founder, chief executive officer and chief investment officer David Spreng, to oversee investments. The new role will expand his responsibility for due diligence, portfolio monitoring and deal structuring. He will retain his two other roles.

The company also said it has hired Rachel Goldstein for the new role of senior vice-president of growth, to improve the quantity and quality of dealflow. Goldstein, who previously led marketing and operations at Lighter Capital, will be charged with growing the deal pipeline and implementing operational best practices to ensure the firm’s origination efforts are more targeted.

Duo to spearhead credit risk sharing at Man
Man Global Private Markets, Man Group’s private markets investment business, has hired Matthew Moniot and Jonathan Imundo as co-heads of credit risk sharing. Both join from alternative credit manager Elanus Capital Management and will report to Eric Burl, head of Man GPM.

Moniot will be responsible for managing Man GPM’s new CRS strategy and team, including portfolio management and origination. He founded Elanus in 2010 to execute CRS transactions with European banks and, as one of the first specialised asset managers in the space, also served as chief investment officer, managing bank, speciality finance and insurance risk sharing transactions. He is based in London.

Imundo will continue to spend most of his time on the existing Elanus business, retaining his role as president and head of client solutions with primary responsibility for the ongoing management and return of capital to existing Elanus investors. In his Man GPM role, he will be focused on business development, working with the sales team and clients on new CRS solutions. Prior to joining Elanus, he spent a decade at Barclays, where in his most recent role as managing director, he led the origination and distribution of CRS investments and private credit. He is based in New York.

Comvest signs up to PRI 
Comvest Partners has become a signatory to the United Nations-supported Principles for Responsible Investment.

The PRI is the leading global network of investment managers, asset owners and service providers committed to investing responsibly by incorporating environmental, social and governance factors into their investment practices and business operations.

“We are proud to further demonstrate our commitment to corporate responsibility as a signatory to the UN-supported Principles for Responsible Investment,” said Michael Falk, founder and chief executive officer of Comvest.

LP Watch

Institution: Virginia Retirement System
Headquarters: Richmond, US
AUM: $107.2bn
Allocation to alternatives: n/a

Virginia Retirement System has confirmed $675 million in commitments across two private debt funds, according to its February investment advisory committee meeting.

The pension committed $350 million to HPS Strategic Investment Partners V and $325 million to Ares SSG Capital Partners VI.

VRS’s current allocation to credit strategies sits at 14.2 percent. The US public pension’s recent private debt commitments have concentrated on corporate sector funds that are focused on either global or North American investments.

Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.