European special intro

The headline above is deliberately ambiguous. Is that growing demand for private debt? Potentially. Or does it refer to discontented investors seeking more from their general partners – more deals, higher yields, lower risk, greater diversification, flexibility, a clear strategy, track record in a still relatively nascent, developing market?

It’s both of course.

This year’s bumper European special showcases the ambiguity that appears to have crept into the market. BlueBay Asset Management raised more than €2 billion for its second direct lending fund in five months.That and the PDI Research & Analytics data which show fundraising for European debt strategies outstripped that of US-focused funds in the third quarter, clearly demonstrate a thirst for alternative credit investment in the continent. And in response, funds are getting larger. Average fund size has jumped to just shy of $1 billion this year, PDI R&A data show.

And if you pick up this month’s Perspectives supplement, you will see there too that investors are keen on European private debt as we move into 2016. 

Our in-depth profile of performing and non-performing loan portfolio investor LCM Partners also supports the theory. LCM Partners has raised €650 million from two cornerstone investors. It is targeting €1.5 billion overall.
But of course LCM Partners has some- thing else that investors demand – a track record. The firm, originally Link Financial, was established 16 years ago. It was a balance sheet investor until 2010 when it set up a joint venture and began investing third party capital.The new LCM Partners Credit Opportunities Fund is the firm’s first independent, branded, third party capital investment vehicle.

Both the PDI Capital Structure Forum in London in October and our annual European Roundtable emphasise the weight of investor expectation.

The market is maturing and yields are naturally compressing in response, delegates at the conference heard.

“Quite a lot of capital is coming from the US and if not handled properly, it could have consequences … and at a time when Europe is not ready for it,” said Portfolio Advisors’ Peter Schwanitz.

The event was upbeat but realistic about the risks in what is still a devel- oping asset class. The large number of investors present – roughly 30 percent of the audience – said that they like the potential of credit strategies but in sideline conversations with Private Debt Investor several noted that they need more and better information from managers. Discussions often also turned to what stage of the credit cycle the European market is at. Central bank monetary stimulus seems to promise to continue to push investor capital toward higher yielding, illiquid strategies but many man- agers are also looking towards the next turn in the credit cycle. It is a risk that investors and managers must equally keep on their horizon.

So far, though, investors are pleased with what private debt offers. Our five Roundtable participants made it clear that an unrelenting focus on meeting the needs of investors is key to continued success.

For the sake of the wider market, hopefully everyone else is just as focused on meeting investors’ expectations and going above and beyond to outperform other demands.