What have been the implications of the Bank of England’s post-referendum 0.25 percent cut in interest rates for direct lenders and the private debt asset class?
The rate cut has given UK corporates access to historically cheap credit and, in the immediate term at least, will reduce returns to direct lenders with LIBOR-based assets. However, I suspect the effect will be somewhat muted. Direct lending funds invest capital and are incentivised over the medium term and it will be medium-term rates that determine returns.
Banks after all are struggling to pass these rate reductions on with the risk of margins being squeezed. From the perspective of LP investors, low interest rates have been one of the driving forces for their interest in private credit, and the lower rates may well spark greater demand for higher-yielding alternatives.
Private debt appears to be in fashion at the moment, especially in the senior debt space. Is this a concern for Hayfin?
There’s certainly been an increase in the number of European-focused direct lending funds since we established Hayfin in 2009. The new fund entrants are concentrated in London, typically with limited scale and an inevitable focus on private equity-owned companies raising vanilla debt.
At Hayfin, we believe we have the scale and capabilities to bypass the more competitive areas of the European private debt market. Our offices in Amsterdam, Frankfurt, Madrid and Paris give us the local presence to source opportunities from a far wider geographical range.
We also operate specialist shipping, healthcare and structured credit teams, giving us access to these more complex sectors which tend to go under-served by the more generalist private debt firms.
Have you changed your investment approach following Brexit?
Our approach hasn’t changed, for two principal reasons. Firstly, Hayfin’s strategy has always been pan-European. Our colleagues in Europe continue to originate as many opportunities as they can, and continental Europe continues to account for most of our dealflow. For those firms that do operate primarily in London the impulse to diversify is understandable, but it can’t just be done at the flick of a switch.
Secondly, we judge each prospective credit on its individual merits. The referendum result is an important macroeconomic consideration which factors into our assessment of every potential UK investment.
This year has delivered two major political surprises. Are you fearful of similar shocks in the future affecting dealflow?
To date, the impact of the Brexit vote has been subdued: we’ve not seen any conspicuous weakening of supply or demand for credit, and the appetite of borrowers and lenders in the UK has remained relatively consistent with pre-referendum levels. These are very early days, however, and over the next two or three years it’s possible we’ll see UK companies hit by an inflationary pulse or by a fall in consumer confidence that curbs growth and affects the quality of dealflow.
What will be the biggest challenge for debt fund managers in 2017?
We’re progressing steadily through the credit cycle, and it’s possible that we’ll start to see a greater proportion of defaults cropping up in fund managers’ portfolios. That in itself is an inevitable part of credit investment, but it will test managers’ workout capabilities.