Insights from the PDI Europe Summit
The Summit, staged in London this week, put industry luminaries in front of packed audiences keen to hear what they had to say. Here are five talking points from three days of fascinating reflection on the issues facing the asset class today.

1. Increasing moves by private credit firms into net asset value-based financing are in keeping with the growing recognition that private credit is the natural supporter of private equity rather than the banks. This shift “makes a lot of sense” according to one panellist as private equity and private credit are arguably natural bedfellows: “They are pools of capital with similar timeframes and risk appetites and the private credit track record can now be trusted as it goes back over a reasonably long time period.”

2. Some strategies are shifting away from the bank and bond markets to private debt – a convenient development given one panellist’s observation that the asset class needed to diversify away from corporate risk in the current environment. Cited in passing were the likes of trade finance, auto rental and leasing. “There’s all sorts of new ways of getting the risk-adjusted return that you want,” said one panellist.

3. In a tough fundraising environment in general, it’s unsurprising that the biggest and longest established managers are the ones tipped to account for the vast majority of whatever capital gets raised. But one panellist insisted that “you still have to look at emerging strategies because that’s where the best returns will be over the coming years. If you get your homework right, they will make your portfolio more robust”. Lending to lenders, leasing, consumer/SME lending and debt for growth companies were all mentioned in dispatches.

4. The pointed words of one panellist raised a few smiles: “If we don’t see distressed now, we won’t see it ever.” Covid had led to some brief deployment opportunities for distressed funds but a lull followed. Some feel that now things really are set to change, but the point was made that diversification is crucial; while the median return for distressed strategies in previous cycles was high, so too was the level of dispersion between the best and worst performers.

5. There were opposing views on the dangers of being over-concentrated in certain industries. One train of thought was that sector exposure would be a big differentiating factor as, in the last cycle, a handful of industries accounted for most of the losses. But there was also a view that distress this time would be sector-agnostic. Citing EBITDA addbacks and high leverage, one panellist said the problem was capital structures across the board, not particular industries.

Direct lending deal slowdown predicted
More than half (55 percent) of 150 respondents to law firm Proskauer’s latest annual Private Credit Survey said they expected a slowdown in deal activity in the direct lending market.

While almost all respondents were actively looking for new deals, they were expecting to be hampered in their deployment efforts. Inflation/macroeconomic risk, dry powder and sponsors seeking realisations were cited as the main drivers of dealflow.

More than three-quarters (76 percent) said they expected a higher level of defaults over the next year compared with the past year – a sharp rise from the figure of 31 percent recorded last year. Nearly all respondents said a recession had either started or would start within the next year.

Favoured sectors include business services, software/technology and healthcare. Respondents from the UK and Europe were more likely to invest in education, while those in the US had a more favourable view of manufacturing, transportation and logistics than their European counterparts.

Private credit firms participating in the survey – the seventh of its kind – represented approximately $2.18 trillion of assets under management.

Interest rates, banking troubles cripple US mid-market issuance
US mid-market debt issuance slowed in the first quarter of 2023, according to a Fitch Ratings report. Fitch attributed the slowdown to both the elevation of interest rates and banking sector turmoil.

The report, incorporating data from LevFin Insights, said mid-market issuance declined 24 percent in the first quarter year-over-year. This was the largest such decline since the shock of Russia’s invasion of Ukraine and its impact on Q2 2022 numbers.

In the latest quarter, direct lending was dominant, accounting for 82 percent of issuance. In 2022, direct lending accounted for 65 percent, compared with only 15 percent in 2021.

Only one syndicated mid-market deal took place within the quarter. That one deal was a $250 million term loan backing the leveraged buyout of AgroFresh, a chemical company.

In Fitch’s privately-rated mid-market portfolio, downgrades outpaced upgrades, and defaults accelerated. Fitch recorded zero defaults in Q4 2022, and only one in Q1 2022.

LevFin data included all syndicated deals for companies with less than $50 million in EBITDA and all publicly announced club/direct lending deals, the report notes.

Essentials