Attractive yields and downside protection make private debt the most interesting area for Partners Group at present, according to René Biner.
Q – Where do you focus your attention in Europe at the moment: on mezzanine or senior debt?
In Europe the supply / demand imbalance for private debt favourably impacts both senior and mezzanine lending opportunities. Both instruments provide attractive risk adjusted returns and we expect this to continue as European banks’ lending activity remains constrained and CLO reinvestment periods expire. We target mid-market opportunities where our long-standing private equity relationships are important for sourcing deals.
Q – Do you target primary or secondary transactions?
During 2012, 16 of the 22 senior debt transactions and each of the 12 mezzanine deals that we did globally were in the primary market. In the near term we see the euro-denominated secondary market experiencing a strong “technical bid” as CLO managers push to keep as much of their available capital invested just as their investment periods expire. Our focus on selecting stable credits means we do not buy whole portfolios with mixed quality loans, but instead select single assets we know to be of high quality. An example was the recent acquisition of an Australian senior loan from a European bank that was pulling out of that region.
Q – Can you give an example of a deal you recently declined, and explain why?
We recently declined a Holdco PIK investment opportunity in a business whose capital expenditure almost matched the EBITDA generation over the business plan period which led to insufficient cash flow to support de-leveraging. Furthermore, the company’s main assets were securitised ahead of the proposed debt investment which would be structurally subordinated and provide a PIK-only yield. Taking these considerations into account, we decided the downside protection was insufficient and declined the opportunity.
Q – What trends are you observing on the fundraising side for private debt?
In the current low interest rate environment, investors are seeking the attractive yield that private debt can offer, as well as some exposure to floating instruments in case interest rates rise in the future. At the same time, risk aversion means that investors are focussed on principal protection and perceived safe investments. We generally see strong demand from investors for exposure to private debt, particularly given the high contractual yields that can be generated from low risk investments at a time when GDP growth is low.
Q – In the US, CLOs are coming back. What’s the significance of this development generally, and what does it mean for your business?
There was approximately $54 billion in new CLO issuance in the US in 2012 as well as $9 billion in January 2013 which has provided a substantial supply of credit to that market. CLOs are typically under pressure to ramp up quickly, which can lead to managers being less selective with their investment decisions. This puts downward pressure on pricing – for example, the debt supporting Apax’ acquisition of Cole Haan, a branded shoe retailer, was 3.5x oversubscribed and loan margins were cut by 75bps. Instead of chasing broadly syndicated loans, we focus on the mid-market where CLO investors are less active and our established relationships make the difference in securing access to the most attractive opportunities.
Q – A look at your biannual ‘Relative Value Matrix’ suggests private debt is currently the most interesting activity for Partners. What is the main reason for this?
We believe private debt is a very interesting asset class for a variety of reasons. Investors are attracted by attractive yields with downside protection through financial covenants and security afforded by private loans and low default rates.
René Biner is head of private finance at Partners Group and is a member of the firm’s executive board. He is based in Zug.