View from the top: panellists at this year’s PDI Germany Forum discussed the way forward for private credit once the market turns

A mismatch between available capital and dealflow is one of the biggest problems facing private debt today, panellists told the PDI Germany Forum 2019, which took place in Munich in June. Panellists were of the view that political issues posed threats to the asset class, though some felt these could be turned to the advantage of private markets.

Patrick McAuliffe, managing director and head of direct origination at First Eagle Investment Management, said: “We’re seeing lots of capital coming into the market and not much dealflow, and these are a volatile combination.”

He said the challenge of deploying dry powder was the key issue for industry professionals, rather than underlying portfolio performance and economics, both of which remained healthy.

“American mid-market companies are doing really well,” McAuliffe told the forum. “And while we are seeing some indicators of a market correction taking place, we just aren’t seeing it within our portfolio.”

“Uncertainty right now is very high. Between Brexit and trade wars, it’s a very complex environment”

Thierry Vallière
Amundi Asset Management

Thierry Vallière, head of private debt at Amundi Asset Management, agreed that although talk of the credit cycle turning had been commonplace, this had not been reflected in portfolio performance. However, he added there were some political issues that could become economic issues in the near future. “Uncertainty right now is very high,” he said. “Between Brexit and trade wars, it’s a very complex environment.”

Nevertheless, Jurij Puth, managing director at GSO Capital Partners, believed political crises could be beneficial for private debt providers. “Brexit and trade wars will create pockets of volatility and panic, which will cause the capital markets to shut down,” he explained. “[This] could allow private debt providers to step in and plug that gap.”

Politics has been rising up the private equity agenda in recent months, with S&P Global warning in an analysis that political issues, rather than underlying business performance, pose the biggest threat to European credit markets.

Panellists also cited higher leverage levels and lower covenants as potential risks. McAuliffe said his company’s portfolio in recent years had typically had leverage levels of 3.8-3.9x, but that these had increased slightly, to 4.2-4.3x, since late 2018.

“While leverage levels have increased, they have not grown as much as valuation multiples, so we still have healthy equity cushions,” he said. “Covenants have loosened as well. Where we used to have two covenants, we now typically have one, and it’s a leverage covenant.”

LGT’s head of private debt, Philipp Wagner, added that conditions were still less risky than they had been in the run-up to the 2008 financial crisis. “There is still a healthy equity cushion in the market, with an average of about 50 percent,” he said. “This is far better than we saw pre-crisis, when equity cushions were often just 35 percent.”