Short-term volatility provides opps for debt funds – study

The accountancy firm’s latest Alternative Lender Deal Tracker notes that debt funds operating with flexible mandates can seize on complex deal structures that banks retreat from as a result of uncertainty created by Brexit.

The political shock of the EU referendum vote may prove to provide a number of opportunities for alternative lending firms with flexible mandates, Deloitte’s latest Alternative Lender Deal Tracker report has concluded.

While Brexit will lead to short-term volatility in the global markets, the report noted that its effects on the private debt industry are so far unclear. Deloitte noted that there will be a drop in M&A activity as banks become more risk averse. 

The report covered deal flow until the end of the first quarter 2016, where it recorded 63 deals for the period. It is a slight drop on the previous two quarters, but is up compared with the same period last year (55). 

Over the last 12 months, the majority of the deals completed were in the UK (96) compared with the whole of Europe which recorded 147. Of the deals completed in the UK, the favoured structure was unitranche (47 percent), followed by senior debt (32 percent). Across Europe, senior was the preferred structure at 39 percent, while 36 percent of deals were unitranche.

On the fundraising front, volatility in the global markets coupled with the threat of Brexit are cited as two factors in a drop in the capital raised in the first half of this year by direct lending funds in both the US and Europe. However, the report noted that there remains a strong demand from investors in private debt.

The accountancy firm predicts that post-Brexit “a flight from riskier assets, such as sterling and equities, to safer assets such as gold, government bonds, the yen and the dollar”.

It continued: “If sustained, declining financial market risk appetite tends to feed through to weaker risk appetite in the corporate sector, companies react by battening down hatches, paring investments and sharpening their focus on cost control.”

Focusing on the mid-market, the report noted that “more interesting opportunities exist for more risk tolerant funds who can fill the current gap between direct lenders and special situations funds and are looking for unlevered IRR’s of 10-12 percent for more complex pictures in Europe which do not fit the investment criteria of banks nor mainstream direct lenders.”