Opportunity from volatility for private credit

Partners Group’s Navigator report is the latest in a series of studies highlighting the strong position private debt finds itself in.

A new study from alternative assets specialist Partners Group has found private debt gaining market share in the US and acquisition financing driving private credit opportunities in Europe.

The Navigator report for the second half of 2016 finds sponsors in the US continuing to look for alternative financing sources as the leveraged debt market moves away from the traditional syndicated debt model.

The traditional model has been impacted by market volatility, with CLO formation reduced in the face of increased regulation, trouble in the energy markets having knock-on effects on the CLO and high yield markets, and increased regulatory guidelines around leveraged loan underwriting.

In H1 2016, according to the report, CLO issuance declined to €7 billion in Europe (down 8 percent) and €23 billion in the US (down 57 percent) versus H1 2015 levels. The US market has been particularly badly hit by regulations around risk retention taking effect in Q4.

In this environment, sponsors are coming to rely more on private debt capital, especially for junior capital tranches such as second-lien financings. This reliance is in turn giving private debt providers more negotiating power with regard to economic terms and credit documentation.

In Europe, the Partners Group report points to attractive investment opportunities in the mid-market space where companies are expanding their market presence across borders as well as scaling up and consolidating in their market segments. Even in stronger high yield and syndicated loan markets, these companies struggle to gain access due to their limited size.

The report notes that while Brexit has caused short-term volatility, this could provide opportunity for private lenders who can offer certainty of execution.

Partners Group said it was currently overweight in mid-cap first lien debt investments and mid- and large-cap second lien investments in both Europe and the US.

The report comes on the heels of other recent upbeat studies about private debt prospects from bfinance and Elian.