‘We’re seeing an inversion of the capital structure’ – ACC head

What’s the state of the private debt asset class today?

The asset class is still very much in growth mode, though we’ve seen a slight shift away from core strategies towards some newer types of credit on the periphery. The non-traditional strategies are experiencing rapid growth, but the more conventional strategies are growing as well.

We think this is going to continue for the foreseeable future. A lot of investors are still not allocated to private debt and they’re the ones coming to market looking at the more traditional mid-market funds, while the more experienced investors in private debt are now looking for more niche strategies.

Has the number of new managers entering private debt slowed and will the industry consolidate?

We actually see managers are adding more private debt to their portfolios. In particular, we see firms that have been active in hedge funds or real estate are now adding private debt, and so are many of the traditional asset managers. However, the growth in new managers is not as perceptible or loud as it was a few years ago.

As for consolidation, I think we won’t see that happening until the cycle turns. We may then see some portfolios change hands, and the most experienced and skilled managers may take on problem portfolios and clean them up. The industry is already preparing for the next turn in the credit cycle.

There’s a lot of concern about terms and conditions and risk levels in the market right now. What is the ACC doing to help with this?

Whether risk levels are getting too high really depends on the market and the manager. However, we have seen that financial sponsors are driving a very hard bargain on deals and we’re seeing an inversion of the capital structure where the debt is riskier than the equity.

It’s important that managers understand what these risks are, and we want to ensure we promote the use of sound due diligence on all deals. We’ve just published a paper on regulatory obligations to remind people of their regulatory requirements. But we also want to remind firms to ensure they are transparent to the market, and that they have a good understanding of EBITDA ratios and their covenants. We’re studying the trends in the market so that we have more information about the context in which these decisions are made.

Later this year we will also be releasing practical guides on underwriting and risk management. These will form part of the wider AIMA library and will be its first credit-focused guide of this type.

Earlier this year the ACC released its views on European regulation. What’s happened in the EU since then?

Next week I’ll be travelling to Brussels to take part in a roundtable about how we can remove some of the internal regulatory barriers in the EU. We’re about to see a new parliament begin sitting and a new commission, and we believe non-bank lending is going to be a focus for the next commission.

However, given the political changes going on in Europe we may actually entrench national approaches to regulation and cause more divergence rather than harmonisation of rules. We already have a lot of calls to restrict sellers and buyers of NPLs, for example.

There’s also a risk that politicians will focus on the wrong areas. There is a perception among some that non-bank lenders are somehow worse for borrowers than banks. This comes from a cultural milieu where banks have been seen as part of the political process and politicians would put pressure on banks to be more lenient on borrowers in forbearance. They think they’ll have less influence on alternative lenders and so they want this stuff written into legislation.

The ACC will need to continue its work to dispel myths and persuade regulators and legislators to focus on the right issues to help grow Europe’s economy, instead of trying to come up with remedies for problems that aren’t really problems.