As banks repair their balance sheets and adjust lending activity to comply with new regulations, private debt funds are expected to take a larger role in deal financing moving forward, according to DLA Piper’s annual European Acquisition Finance Debt Report.
The law firm surveyed professionals from approximately 45 financial institutions for the report, which examines how the industry expects debt and deal financing markets to develop this year.
Although a strong majority of respondents said they expected banks to be the most active arrangers of debt in 2013, approximately 20 percent said private debt funds will be most active. DLA said that given the minimal profile of private debt providers last year, such growth in such a short space of time was “impressive”.
“When you consider that close to 80 percent of debt transactions are still expected to involve banks in 2013 and the profile of the specialist private debt fund sector was minimal this time last year, making such a rapid growth in short a space of time is impressive,” the report said.
DLA Piper attributed the growing popularity of private debt funds to a number of factors. Namely, Europe’s CLO market has been hamstrung by uncertainty and regulation, and a volatile high-yield market has created difficulties for private equity firms looking to finance deals.
The rise of private debt funds is also partially due to regulations set under Basel III, which have forced banks to maintain a larger amount of capital on their balance sheets. That will likely result in a €125 billion to €250 billion funding gap for European companies, according to research cited by the report.
The funds certainly won’t lack for opportunity. Respondents also expected senior debt leverage levels to increase over the course of this year. Approximately 16 percent said they expected average senior debt leverage to top 4x this year, compared to only 1 percent who made that prediction last year.
In terms of how non-bank lenders structure that debt, most respondents expected secured and unsecured high yield bonds, mezzanine and unitranche to be the most prevalent in 2013, the report said. The respondents also noted that debt funds can structure their products to whatever capital structure is required, as they can react more flexibly to market trends than traditional lenders.
The study also examined which markets were expected to be most active in the coming year. Within Europe, a plurality of respondents said the UK would present the most opportunity for debt providers. That being said, growth within the UK will likely be flatter as investors work harder for deals, according to the report.
Outside of the UK, Germany’s relatively solid economy is expected to drive more investment activity than in the past, which could result in that country challenging the UK’s position as the most attractive investment destination in Europe, according to the report.
The respondents were less enthusiastic about Southern Europe, where risk-averse investors and a lack of available debt are likely limit M&A activity.