With private debt fundraising having gently tapped the brakes in 2016, what are the chances of a quick acceleration in the year ahead?
Fairly long odds, according to numerous market sources. They say that most of the mega-fundraisers of the asset class, having amassed bulging treasure troves of support in the last few years, now have no need to tap anyone for capital in the near future.
However, this does not mean the future of private debt fundraising is looking gloomy – far from it, in fact. What it does mean is that investor appetite, which continues to be strong, will be met instead by mid-sized funds that may evolve into the next generation of mega-funds as they raise significantly larger successor vehicles.
This begs the question as to whether such managers will be moving out of their comfort zones. Justin Mallis, a principal at London-based placement agent First Avenue, does not think this will be the case. In his view, such funds will retain their current strategies while being able to account for larger slices of deals.
“If you want to lend to the mid-market and you have a €500 million fund, you will have to syndicate to co-investors, whereas if you have a €1 billion fund you may not have to do that – and with a €1.5 billion fund, you definitely won’t,” says Mallis. “I think we’ll see €500 million funds doubling in size to €1 billion and then doubling again to €2 billion.”
Mallis expects to see more separately managed accounts as investors demonstrate a preference for tailored, low-fee products rather than commingled arrangements. He also thinks there will be demand for higher returning strategies, such as consumer, healthcare and non-sponsored as well as discounted secondary debt.
Real estate has been another popular strategy recently, and Alex Tilson, vice-president at Threadmark, a London-based placement agent, believes debt strategies will benefit in this area at the expense of equity. “Investors are seeing headwinds such as Brexit and general market conditions in relation to valuation and pricing,” says Tilson. “It may now be harder to achieve what you want from real estate equity, but debt is continuing in the same vein as before.”
Bruce Chapman, co-founder of Threadmark, says he is aware of some continental European investors becoming more reticent about UK exposure, amid fears of a further slide in the pound and issues of regulation and taxation. The post-Brexit tax situation remains unclear, he says, but it could get complicated. “With core strategies in particular, the loss of several hundred basis points through tax leakage would have a very meaningful effect on returns.”
Chapman detects a divergence in the investor ranks, as some see an opportunity going forward to invest in distressed strategies, with a number of fund managers in the space gearing up for launches. Others, by contrast, perceive significantly increased risk and so are retreating toward strategies that are a bit more vanilla.
Chapman sees some interesting niche areas opening up for managers, such as trade finance and the insurance sector. He also cites opportunity in the non-sponsored direct lending market, but cautions that some mezzanine funds doing sponsorless deals have come undone in the past. It requires a particular skillset and therefore comes with a health warning, he says.