What do you see as the main implications of Brexit?
There’s a lot of talk about Brexit and other national agendas, but there is so much money chasing yield, it drowns the noise of local and national changes. Whether it’s sensible or not, that’s what’s happening. Therefore, Brexit has not had much impact really, though we have seen a little bit more caution about deals in the UK.
In continental Europe, the amount of dealflow since the summer has been higher than for a long time. Have funds re-focused on the continent because of Brexit? I’m not sure, but dealflow in France, Spain, Germany, Scandinavia and Benelux is at a peak. It’s too early to say it’s a trend, though.
Questions around valuation are less important to us as we are debt specialists and it’s more a question of what is the risk level. On that front, the market has remained quite conservative and has learned lessons from the past.
How do you see current market conditions overall?
For us, there are two different stories. In subordinated debt we have operated largely off-market with a preference for non-sponsored deals, so we’re less exposed to market movements – but you need a significant infrastructure and strong origination capability.
The bulk of what we do is in support of private equity sponsors and here there is a clear size advantage, which is not true of subordinated debt. Both of our funds are a similar size but the subordinated strategy is not very scalable and the senior strategy is very scalable. Size makes a lot of difference as it gives you diversification. In order to address the mid to upper end of the market, you need a very scalable fund.
The market will bifurcate with a handful of very big funds and then the smaller players with a specific focus, for example by geography or sector. The first-mover advantage there is significant.
It’s a reasonably favourable environment and it shows in the pace of deployment, which is very high. Our mezzanine fund was 30 percent invested one year after closing and the senior debt fund was more than 50 percent invested after 18 months. The impression I get is that the large players are deploying capital rather well.
Is your approach to target Europe uniformly, or specific markets only?
In subordinated, it’s quite uniform. We can decide to put one market ahead of another at any time as we’re pan-European. We may put more emphasis on Germany and Scandinavia as there is more visibility than in the UK at the moment. But in any circumstances, there are good opportunities in any market – we have just done a deal in the UK, for example. Our geographic pie chart would be quite diverse.
Subordinated debt is self-originated, whereas senior debt is more of a market product so it’s dependent on market volume and therefore more dependent on the UK and France where we’ve seen the greatest shift from the banks. It’s happening in Germany, but it’s taking longer, and it’s also only happening slowly in Italy and Scandinavia.
How do you view economic prospects?
We’re not terribly optimistic about the UK economy, where we’re expecting low or anaemic growth. But we’re debt guys, so this was always our underwriting assumption from the get-go. We have an assumption of zero growth. It’s the equity investors that are more worried about the upside. As a debt provider, we want reasonable stability.
Things would only be negative for us if the economy were falling off a cliff as then there would be more defaults. But we tend to be floating rate and use hedging, so there’s no impact from interest rates going up. Long periods of low growth are favourable for us as investors like high-yielding debt in that environment.