Caution is the watchword for investors it seems. Apparent evidence of this is to be found in the fundraising figures for the first half of 2018, showing that – after the hard-partying record-breaking year of 2017 – this year has seen the private debt market sober up.
There may be other reasons why fundraising has approximately halved compared with the same period last year, but a likely one is that investors have taken heed of warnings that the asset class is becoming overheated – and have responded by pouring some cold water on the fire.
There has been so much talk of the imminent ending of the credit cycle as well as a more challenging economic environment that it would be remiss of fund managers and investors not to plan for such eventualities.
At our recent Germany Forum in Munich, the view was expressed that investors in pan-European funds have traditionally wanted geographic diversification – and have been keen to include less developed markets in the mix. That seems entirely logical, but the Forum heard that – in anticipation of tougher times ahead – some investors are seeking to weight their portfolios more towards perceived safe economic havens, with Germany especially receiving increased allocations for this reason.
The argument was made that, as the strongest economy in Europe, Germany offered the best downside protection and was therefore worthy of this special treatment. It was a view that did not go unchallenged, however.
One panellist pointed out that the UK had emerged from the last big recession faster than Germany (though the latter suffered a less severe downturn than most European countries) and added that the UK is Europe’s friendliest environment for those engaging in restructurings. “Economic strength is all very well, but how do you protect your rights?” asked this participant, pointedly.
This should not create the misleading impression that pan-European strategists have the UK at the top of their priority lists. Still surrounded by the fog of Brexit, there’s no doubt that ‘less UK’ rather than ‘more UK’ sums up current LP thinking. However, there is a danger that this could lead to reasons for taking a punt on other countries’ prospects based more on hope than logic.
Furthermore, another panellist told delegates that the focus on geographies only had so much merit in any case. Don’t forget to focus on the experience – and increasingly the workout skills – of individual managers, he said, urging the adoption of a more micro rather than macro perspective.
In the current environment, it is undoubtedly sensible for investors to be favouring downside protection over upside risk. The ways in which LPs will seek to achieve this will differ, however, and there is plenty of healthy debate about it – even if there is no single right answer.
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