“Growth and the general outlook have never been stronger,” asserted Blair Jacobson, partner and co-head of European credit at fund manager Ares Management, on the opening panel of this week’s PDI Capital Structure Forum in London.
Stephan Caron of BlackRock and Ben Harrild of BlueBay, who joined Jacobson on the panel, were equally bullish about European private debt prospects – with much of the talk revolving around larger fundraises giving the heavyweights of private debt the ability to write bigger tickets (in the €500 million-€1 billion range) and become a growing source of competition to the capital markets.
This may well be a positive development in the sense of broadening the private debt universe and providing arguably a more reliable and longer-term source of financing for larger companies than the public markets can offer. But it prompted talk around the fringes as to whether a kind of oligopoly had been created – and whether this was healthy. The conversations were framed by PDI data revealing that the top 10 private debt fundraisers now account for 38 percent of all capital currently being targeted.
Summing up the event, co-chairman James Newsome, founder of advisory firm Arbour Partners, questioned whether the asset class needs a “more diverse gene pool”. Many of the biggest managers are raising €3 billion-€5 billion funds and are mostly – though not exclusively – seeking to support deals sponsored by brand-name private equity firms. This is all well and good amid a thriving private equity market. But PE is subject to cycles – and what happens when things head south? Do the larger private debt firms all have a plan B?
Plan B used to be the non-sponsored market. A few years ago, one of the main conversational topics was how non-sponsored deals – given the huge opportunity set of smaller companies no longer able to easily raise finance from traditional banking sources – would grab an ever-increasing share of the European deal market. In Q1 2015, according to Deloitte, this market share stood at just over 22 percent. In Q1 2018, it was a little more than 17 percent. Unexpectedly, non-sponsored deals have become less, not more, significant.
It has always been recognised that building out the infrastructure for non-sponsored deals would be tough. You need to put many boots on the ground to stand a decent chance of success and that costs a lot of money and time. The cost of not having done so, however, is the risk that when your main source of deals disappears, you have nowhere else to turn. It’s interesting to ponder how many delegates left our event with the sense that the “next big thing” has not yet lived up to its billing – but may be worth reviving.
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