The last word: Fits and starts

Q. How has investor demand distressed changed over the last five years?

The appetite for investing in distressed has picked up, specifically in Europe.

People have been waiting – we have been waiting – for a long time. Starting in 2008-2009, we believed there was going to be an opportunity for investing in distressed [companies] in Europe, as everyone else did. But we really had a hard time finding an appropriate partner to raise capital for because they were so few and far between, or they were missing characteristics we like to see: feet on the ground, a big local presence in those markets.

We came back from the whole exercise with the view that this opportunity set might not be there at this time, or at least not in the shape we imagined. We shifted at that point, because when we were talking with people in the market we realised that there actually was an opportunity – in all our conversations with banks, borrowers, companies and issuers – for these direct lending funds, these private debt funds, in Europe.

Q. How has the market responded?

When it came to private debt, I think there was a learning curve that everyone had to get up to speed on at the same time. We approached the clients directly and we approached the consultants simultaneously. It was almost a parallel process, which I had never seen before. I’ve been in the business a long time and I’ve never seen this in any area.

Q. So has the development of the market come more in fits and starts?

I think that is fair. It’s important for the consultants to get in the game for sure. I can’t tell you how many meetings I’ve been going into directly with clients where the chief investment officer – for example – will look across the table and say, “This is exactly what I’ve been looking for”. You don’t hear that too often in my business. But in these situations, that is what we’re hearing.

Q. As that market demand picked up, how have LPs allocated to these types of strategies?

In the past, there were not a lot of ‘experts’ within the institutional limited partner marketplace.

Over time, that has changed now. We see – I’m thinking specifically of three instances in the last few weeks –portfolio managers within private equity at major institutions have moved one or two of their people from being a generalist buyout [investor] to focus on private debt, or distressed [debt]. That goes to show, at least to us, that there is an increased appetite for this sort of thing.

We’re seeing [allocations] come out of fixed income, we’re even seeing it come out of hedge fund allocations … and of course the typical private equity, but really it’s a hybrid because most of these funds are five year funds or less.

Q. How have firms built their teams to take advantage of that opportunity?

The talent is coming from the other side, too. It’s coming from fixed income, it’s coming from credit shops and hedge funds, it’s coming from all those places.

All the banks that had direct lending or private debt or special situations, or whatever you want to call it, in-house are no longer focusing on it because of all the rules. These are Level III asset lenders, and they’re no longer able to do it, so this proliferation of spinouts, whether spinning out and forming their own firm or joining an existing firm, has been something to see.

When you’re not within a bank, the opportunity set for the actual group changes, and changes positively.

Q. Do you have any predictions for how this space will evolve in the next year?

The asset class is definitely here to stay, and the quality of managers will continue to be a primary driver for success. We spent a significant amount of time picking a distressed manager, the special sits manager and the private debt manager in the space where we believe this was best in class. We did our job in Europe and then had a lot of demand for a similar type of thing in the US. We met with over 50 managers, and what I realized is that it was less about macro and more about micro.

For the private debt world, what I’m seeing is a significant emphasis on the actual manager. We want to partner with a manager who can source day-in, day-out, in any market, in any cycle.

Kelli Roiter is a managing director and head of Jefferies Strategic Capital Opportunities. She is based in New York.