The boat is being rocked. This was the message that rang loud and clear from an S&P Global Ratings report published at the end of last week which drew attention to a growing cluster of risk factors.
Top of the risk charts was the US’s new-found protectionism, with trade tariffs having the potential to batter investor confidence – especially if the US’s trading partners, rather than adopting a mollifying stance, choose instead to meet fire with fire by launching an all-out trade war.
Other worries highlighted by S&P included geopolitical tensions, asset price volatility, a Chinese debt overhang, cybersecurity threats, and increased populism and anti-globalisation sentiment around the world.
The report struck a brighter note for the US by pointing to strong economic performance, with real GDP growth of 2.9 percent forecast for this year on the back of the recent tax package and increased government spending. S&P assesses the risk of recession in the US in the year ahead at only 10-15 percent.
In Europe, however, the prognosis is more unsettling. The report says the European Central Bank-led recovery seen across the eurozone during most of the last decade is under threat – citing some of the same risks mentioned above. It says “it would not take much to trigger a more material correction in financial markets than we have already witnessed in February”.
That first iteration of stock market wobbles (assuming it’s not also the last) was certainly sufficient to give investors in general the jitters. But there are few if any signs of this nervousness translating into less appetite for private debt.
Our Q1 2018 fundraising figures, for example, showed almost $36 billion raised globally. While it’s early to draw conclusions, this level of fundraising projected across the year as a whole would put 2018 on course to be the second-best year ever (behind only last year’s new historic peak).
Meanwhile, a survey from NN Investment Partners published this week revealed that 14 percent of investors canvassed were planning to make their first allocations to private debt this year, while 45 percent of existing investors in the asset class said they intend to increase their exposure over the coming 12 months.
Asset managers that PDI has spoken to recently contend that this makes sense. In an uncertain world, committing long-term capital in exchange for an illiquidity premium and a predictable return that – while not shooting out the lights – should at least be highly respectable, has a lot to be said for it.
One source said it can be tough work to make what he described as a “boring pitch” to investors for a direct lending strategy that, while prosaic, would more precisely match a given investor’s requirements than any other investment option on the menu. Perhaps private debt’s dullness is a small price to pay for possessing the characteristics that will enable it to endure whatever storms lie in wait.
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