Q – Can private debt funds bridge the funding gap created by European banks’ reduced lending?
The Institutional market will continue to develop in Europe. Funds, managed accounts, permanent capital and structured credit vehicles will coexist alongside an active bank market. Private debt managers will work alongside the European corporate banks, providing capacity in the lower rated capital (BB and below) segments that banks find more difficult
Q – What have private debt managers learned from the market volatility of recent times?
They have learned the importance of having in-house expertise across the spectrum of all credit instruments, of being able to arrange, underwrite, invest, trade and manage portfolios through a cycle, and of the need to manage both performing and non-performing credits.
It has also shown the importance of a robust and disciplined investment process, the benefits of limiting mandate constraints to provide flexibility, and the ability to access both primary and secondary channels. It has also shown CLOs can survive significant stress, and lastly, it’s shown that relationships do still matter.
Q – Where are the opportunities at present – in more stable income-focused loans, event-driven opportunities, or distressed debt?
All of the above depending upon an investor’s appetite for return, risk, liquidity, yield and lock-up. New LBOs are generally well structured compared to historical ones, with a high equity component, lower leverage, and higher margins. Event-driven investing remains an important strategy given European market dynamics and we are seeing an increase in fallen angel corporate credits accessing the sub investment grade debt markets. Distressed debt opportunities in Europe will remain patchy and often consensually-focused given the unpredictable and untested jurisdictional insolvency regimes.
Q – What can Europe learn from the US institutional market?
The US market is liquid, rated, transparent and has a visible long-term asset class track record- stretching back into the 90s. Most consultants, regulators and chief investment officers and portfolio managers in Europe do now acknowledge that European sub-investment grade debt has a place within their global fixed income allocations on a risk adjusted basis.
Settlement systems are a big issue – some investors want weekly or monthly liquidity but in Europe quarterly is more realistic, and even then, only for the more liquid tranches. Lastly, the US business development companies (BDC), retail and mutual fund markets are significant and similar forms should exist in Europe.
Q -What issues do your LPs raise most frequently with you, and have attitudes changed since CVC Credit Partners was launched?
Investors most commonly ask about liquidity, and also like to discuss the opportunity in Europe versus that in the US. Lastly, they are keen to talk about future market opportunities as investors turn toward floating rate exposure. Investors have grown more comfortable with European tail risk. They can see the performance of sub-investment grade debt between 2009 and 2012 has been strong, and there has been more liquidity, particularly in the larger credits. That’s been helped by the growth of the senior secured bond market and it is not a big leap to move from investing in senior secured loans after senior secured bonds.
Q – What’s your prognosis for the private debt industry in 2013?
The US CLO market will continue to grow, while the European CLO market will re-open with possible help from the regulators. Institutional investors will continue to allocate for yield and floating rate credit (in effect a shift from high yield bonds to loans), particularly in managed account format. Refinancing will be a big theme as the maturity wall nears. European primary M&A will increase and risk will be re-priced once there is true underwriting and US bond fund outflow. Finally, the industry will hopefully be able to judge more accurately whether a true direct lending opportunity exists and at what price.
Marc Boughton is chief executive and founder of CVC Credit Partners. He is based in London.