‘Sometimes unlikely things do happen.’ Little did Jamie Murray know how prescient he would be when he placed an image of Donald Trump above this tagline in late October.
Bloomberg’s chief economist for Europe, Middle East and Africa was wrapping up his remarks at ACG Eurogrowth in Barcelona and his audience had Brexit on their mind. Little did delegates know what was to come.
The surprise of the reality TV star’s election is on a par with Britain’s decision to leave the EU, so, as with Brexit, will shock quickly turn to thoughts of how seize the opportunity? The consensus in Barcelona was that the UK is committing a form of economic suicide. Murray’s presentation predicted soaring inflation and deterioration in the value of sterling. One European-based investor even declared that he would not invest in the UK while it pursued this journey.
However, Chis Smith, partner at Clearwater International, a consultancy firm advising corporate borrowers, is seeing evidence of the contrary. August had been the firm’s busiest month, securing a record number of mandates. For Smith, it is time to be pragmatic. “The fundamentals of the UK remain the same and the people who will put this right are those who voted Remain. It will be the entrepreneurial parts of the UK that will make a success of Brexit.”
Low interest rates and stricter capital requirements for traditional banks have provided fertile ground for the growth of the asset class. With a potential recession on the horizon and the Bank of England reducing rates by 25bps, the space could further open up as banks become cagier with their lending.
The sense of opportunity was reflected in a panel discussing the role of debt in mid-market private equity transactions. Rolf Kobabe, a partner at German law firm Luther, said “private equity firms like the idea of working with debt funds because they can be more flexible on the terms”.
Joshua Shipley, senior vice-president at Pricoa, added that there is more willingness from borrowers to look to funds: “We’re seeing them evolve to compete with banks as firms look to alternative sources of capital.”
It seems there has never been a better time to be a borrower. PDI research shows 2015 to have been a record year for fundraising, resulting in a huge amount of dry powder chasing deals.
Nevertheless, private debt funds are putting capital to work and while 2016 is a year of both political and macroeconomic shock it may also be when the asset class found its feet. Ken Goldsbrough, managing director at Duff & Phelps, pointed to the record amount of loans financed by Ares and GSO Capital Partners as an example of private debt funds tapping into the lower part of the high end of the market. Ares’ backing for the takeover of Qlik with a $1 billion unitranche facility was completed around the same time that GSO backed the merger of Polynt and Reichhold with a €625 million loan.
The grey skies that accompanied the two-day event were an apt metaphor for the uncertainty on both sides of the Atlantic. Amid difficult circumstances, however, it is a time to be pragmatic.