State Street: Debt rallies in Q3 2016

The performance of distressed debt funds helped private debt performance improve in Q3 2016 after a ‘rough’ 2015.

Private debt returned 3.59 percent during Q3 2016 as it rallied from a disappointing 2015, according to State Street’s GX Private Equity Index.

The asset class returned 6.13 percent between Q3 2015 and Q3 2016.

Chirag Patel, head of innovation and advisory EMEA at State Street, told PDI that the Q3 performance represented something of a rally for private debt, which had returned 0.84 percent between Q1 2015 and Q1 2016 and 1.87 percent between Q2 2015 and Q2 2016.

“Certainly private debt had a pretty poor 2015,” Patel said. This was, in part, due to the poor performance of special lending as a subset of the asset class, he added. 

Special lending, which Patel said is defined largely as venture lending, returned 2.03 percent for Q3 2016, behind the asset class as a whole. State Street also includes mezzanine debt and distressed lending as the other components of private debt within its index. 

The sluggish performance prior to Q3 2016 was due to a lack of attractive deals resulting in cash not being drawn-down and invested, Patel said. “Activity levels have slowed,” he added. “We attribute the pullback in returns to fewer deals being sourced.” 

Patel said he had seen more deals at the end of 2016 and beginning of this year. While more capital being deployed is not necessarily a prerequisite of better performance, it is logical to assume returns may pick up in such an environment. 

“The intuition would be managers sourcing opportunities when valuations are attractive would mean they are likely to exit at decent returns,” he said.