PDI Europe Summit 2023: Returns strong, but a lack of deals

A great return opportunity but no way of achieving it: that’s the irony of a private debt market where panellists acknowledged the possibility of making returns of 11-12 percent gross from senior debt but deployment opportunities are thin on the ground due to an ailing M&A market and challenging refinancing environment.

This translates to a subdued fundraising scenario, but one that is maybe looking better than was expected towards the end of last year, delegates at the PDI Europe Summit in London heard. “Things look quite bright now compared with September/October last year, when fundraising looked quite horrible,” said Richard von Gusovius, co-head of global private credit at placement and advisory firm Campbell Lutyens.

“Back then, investors were trying to figure out what comes next and the first thought was to go back into public markets. But there’s since been a rethink – private markets have come back and the one that’s come back quickest is private debt.”

However, von Gusovius acknowledged that fundraising remains a challenge, especially in direct lending. “To raise a large direct lending fund is taking at least 18 months,” he said. “LPs don’t feel compelled to make decisions as they don’t see mid-market direct lending as especially differentiated.” With a lack of ‘must-have’ offerings, investors feel it’s a market they can dip in and out of without too much time pressure.

Von Gusovius said he saw “opportunities everywhere” in private debt currently, with the interest rate increases “changing everything” and luring back investors driven away by margin compression three or four years ago. But he also said rates were a “doubled-edged sword” due to the pressure on borrowers of debt that becomes hard to afford.

Christopher Bone, a partner at Switzerland-based private markets firm Partners Group, said he saw a good investment opportunity for GPs starting in the second half of this year but cautioned that private debt was not an asset class where you should be investing opportunistically rather than over the long term.

The panel also touched on a rise in appetite for private debt from Asia-Pacific and Middle Eastern investors as well as the growth of the retail base. “If there is a good way of managing that retail flow with appropriate liquidity windows, it’s a good thing for the market,” said one panellist.