Road to nowhere – or a once in a lifetime opportunity

Attendees at ACG Eurogrowth in Barcelona were still dismayed at the UK’s decision to leave the EU, but for many in the private debt industry the future offers good opportunities.

It seemed apt that delegates at the ACG Eurogrowth conference in Barcelona were greeted with the faint background music of Talking Heads’ ‘Road to Nowhere’. Kicking off proceedings was Jamie Murray, EMEA chief economist at Bloomberg, who outlined a number of largely negative consequences of Brexit. Unable to see the positive side, many in the international audience were more sceptical at what they saw as the UK government’s journey into oblivion.

Since the vote, a ‘hard Brexit’ has appeared more likely as UK Prime Minister Theresa May confirmed that she will prioritise restricting freedom of movement over membership of the single market. There was considerable unhappiness about this at the conference, with one private equity investor announcing he will not put his money in the UK while it pursues Brexit.

But for those able to accept the UK’s destination, pragmatism is key. Murray’s prediction of low growth and the likelihood of the Bank of England cutting interest rates further early next year may create more fertile ground for the private debt industry.

Indeed, Chis Smith, a partner in the debt advisory team at Clearwater International, an advisory firm to mid-market borrowers, said August had been the busiest month for his firm. “The people who will put this right are those who voted ‘remain’. It will be the entrepreneurial parts of the UK that will make a success of Brexit,” he said.

Private equity firms’ appreciation of debt funds’ flexibility and speed in decision-making gives them a strong position. One banker said it’s imperative that they work with funds on transactions or risk losing market share. With firms raising larger funds and awareness of the asset class growing, the future for private debt funds appears bright.

With an acceptance that the last couple of years have been a borrowers’ market, questions were aired regarding funds’ ability to operate in a less benign credit environment. Furthermore, the age-old complaint of intense competition among funds pushing up valuations often popped up in conversation.

One development noted by a panel focused on the role of debt in the push towards the lender education process, also known as the soft staple, whereby both the buy and sell sides in an M&A transaction are made aware of the debt options available from potential lenders.

“Lender education results in value-add because if buyers know higher quantums of debt are available then they can consider making higher bids,” says Ken Goldsbrough, managing director at Duff & Phelps. “So-called ‘hard staple’ processes, where lenders produce a legally binding document, have fallen somewhat out of fashion because they were costly, time-consuming and weren’t necessarily used, as bidders opted for other debt packages.”

It was clear in Barcelona that there were a number of views on the role of funds in M&A transactions. Some approach with caution, while others embrace them. The last couple of years has seen the asset class in the ascendancy, with 2016 showing record deals underwritten by funds on both sides of the Atlantic. While the prospect of Brexit is a source of confusion in the private equity industry at the moment, the antidote to short-term confusion is arguably a dose of pragmatism.

To paraphrase David Byrne, the lead singer of Talking Heads, the future of Brexit is certain – we just need time to work it out.