Resilience was a word that was heard repeatedly in a private debt context as the asset class won plaudits for its ability to help borrowers emerge from the pandemic in decent shape. Now, with the war in Ukraine entering its second month, that ability to defy challenging circumstances is once again being put to the test (or, if not yet, it soon will be).
Perhaps the biggest problem for companies supported by private equity and private debt firms is that, when they were bought, many of those deals were characterised by high valuations and leverage multiples that could only be justified by a certain level of growth. But the hit to global GDP likely to be suffered as a result of the situation in Ukraine means that growth is likely to slow. Indeed, history shows that energy shocks are often the prelude to recessions. On a webinar hosted by Paris-based fund manager Tikehau Capital this week, the argument was made that earnings expectations have probably not yet caught up with reality.
But amid increasing inflation, rising interest rates and recessionary pressures, it’s not all bad news for fund managers. On the Tikehau webinar, and from other firms in the market, we are hearing the view that the current crisis serves to accelerate certain themes which could be favourable. Some sectors, such as energy transition and cybersecurity, stand to be obvious beneficiaries of the stand-off between East and West.
Certain strategies are also likely to see opportunities emerging. Direct lenders mainly offer floating-rate notes that offer immunity to rate risk. Moreover, downturns tend to see banks retreat to core activities, leaving direct lending well poised to gain further market share and cement its position as a strategically important segment with the financing ecosystem of the real economy.
Then there are the wide range of strategies dedicated to value investing, such as special situations and capital solutions, which are well equipped to help guide companies through economic shock and volatility. Turbulent times may also give a further boost to the growing private debt secondaries market as willing – or even forced – sellers emerge and require liquidity solutions. For some, the trends may be their friend, even in times of trouble.
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