PDI European Conference: LPs are listening

Now it’s up to managers and the wider debt community to work together to facilitate investment, PDI hears.

One of the over-riding conclusions from PDI’s second annual European conference in London is that LPs are increasingly interested in private debt and what it can provide in terms of yield or “enhanced returns”.

Relative to fixed-income private debt is “an attractive opportunity” offering good risk adjusted returns. John Bohill, senior advisor at StepStone Global, said on an investor panel discussion that he was “compelled” to present this option for investment to LPs.

LPs have been cautious after capital was committed in the wake of the global financial crisis in expectation of an abundance of distressed and mezzanine plays, he said, but the expected returns hadn’t borne fruit: that ‘distressed’ opportunity failed to materialise in Europe.

And according to Mathieu Chabran, co-founder of Tikehau Capital, in a discussion on the opportunities in investing in debt, the distressed ship has sailed. Banks did sell some assets but he didn’t see them selling very many more apart from perhaps some of their operating companies. The way now, he said, was to work with them to source opportunities.

Direct lending to corporates, or lending which bypasses private equity-led companies or sponsors in his view, is where the current opportunity set is. It’s where enhanced returns in the corporate lending market reside. This opportunity was also highlighted by another industry expert.

Also up for discussion during the two day event were the opportunities available in real estate and infrastructure. John Atkin, director of fixed income at M&G, said that it depends on the asset and in particular the cash flows it generates when he decides whether to invest via debt or equity. It further highlighted the flexible approach many managers are taking in the way they approach investing.

Deborah Zurkow, managing director head of infrastructure debt at Allianz Global Investors, renamed the ‘illiquidity premium’ the ‘complexity premium’ when investing in private infrastructure debt when describing the amount of work that needs to go into assessing an asset. However, the long-duration nature of the asset certainly matches what a lot of institutional investors are looking for.

According to many, LPs are increasingly looking to allocate to private debt from their fixed income bucket. One question raised was in times of crisis, is a fixed-income instrument always that liquid anyway?

Peter Schwanitz, managing director at Portfolio Advisors, had some suggestions for improvement. He called for more transparency in reporting by managers in a way which could help develop a private debt benchmarking database. And he suggested that more liquid debt structures, such as the Business Development Companies which operate in the US, would be a much needed boost for institutional investment in Europe. He said the key to cracking it was the “fixed-income” barrier.  “[Investors] would like to see more rated products. A BDC would be great here in Europe and could enable smaller institutional investors to invest as well.”

Craig Snider, head of risk and due diligence at Crowd2Fund, also talked about the online lending platform and his description on how all deal terms are available for investors to see, underlines the plethora of data that could be at this industry’s fingertips, which is no doubt useful when making investment decisions, in terms of due diligence and risk.

Peer-to-peer lending is an area that is generating a lot of interest in terms of its potential and the seemingly passive approach to investing it takes relative to other credit intensive approaches in the industry, according to James Newsome, managing partner at Arbour Partners and PDI’s conference chairman.

It’s certainly an area that PDI will continue to watch with interest.