Seeking order amid chaos

A number of recent reports have attempted to shed light on what Brexit might mean for the private debt industry. They appear to offer encouragement, but caution needs to be exercised.

The lawyer David Allen Green, who has emerged as a leading commentator on Brexit, likened the current scenario to Samuel Beckett’s Waiting for Godot, specifically when Estragon asks Vladimir whether they should leave and the latter says yes, but both remain still. The scene perhaps exemplifies UK Prime Minister Theresa May’s statement that “Brexit means Brexit” – a sentence that risks sounding hollow until a solid plan is drawn up.

A revival of Beckett’s play about the feeling of paralysis may be apt in post-Brexit Britain. But the confusing situation has not stopped many consultancies and advisory firms from assessing the long-term impact of the UK’s vote to leave the European Union and finding order in the chaos.

Among their conclusions is that private debt is set to benefit from Brexit. Earlier this month, the advisory firm Elian published a survey that found a number of institutional investors are preparing to increase their allocations to private debt with almost three quarters saying their investments in the asset class exceeded expectations. Moreover, a PDI survey conducted shortly after the vote found that more half of respondents believed the vote would have no impact on allocations to alternative asset classes.

Furthermore, a Partners Group report suggested that while Brexit has caused short-term volatility, a big opportunity exists for private lenders who can offer certainty of execution. The same report highlighted that, in private equity, mid-teens IRR is the “new normal” – meaning that debt funds offering a similar return should benefit from being the inherently less risky option.

For those in the private debt industry, it’s important to maintain a healthy scepticism. Such conclusions provide snapshots of opinion that may in time be retracted. We’ve already seen a pivot from the dominant opinion prior to the vote that Brexit would have a negative impact on the asset class – who’s to say the dominant view won’t change again?

But these post-Brexit reports do offer an insight into the minds of investors – and on the whole, they are clearly thinking positive thoughts. The conclusions of the Elian report chime with the views of Mark Hedges, chief investment officer at Nationwide Pension Fund, who told PDI in this month’s issue that “Brexit will not have a significant impact on the growth of private debt funds and pension fund investment in them”.

The reaction of the banks is key. The development of the asset class followed the global financial crisis, as banks withdrew from lending following the introduction of a number of restrictions on their activity. It’s possible that Brexit may eventually mark another milestone in the history of private debt.

As Faisal Ramzan, partner at law firm Proskauer, said earlier this month: “Brexit has generated a number of regulatory uncertainties, which means banks are still showing a caginess to lend. Unlike banks, private debt funds have the capital to invest and are able to move quickly to execute deals.”

Surveys are the first attempt to translate the chaos into something substantial that illustrates what Brexit might mean. It is understandable that such narratives attract attention. But since the vote, we at PDI have been on the phones frequently asking how the decision may affect various businesses in the private debt space and the main response so far is “it’s too soon to tell”. As we move into a new season, it is wise to proceed with a sense of caution – and like Estragon and Vladimir – be patient amid the uncertainty.