The beneficiaries of a bear market

With growing talk of bear markets and fear spreading of a global recession, it can be surprisingly refreshing to spend time in the company of a private debt fund manager. “Things are getting much worse on the public markets,” one told us this week. “But the borrowers who have always looked to the public markets are now looking to us. We have to be cautious, of course, but we appear to be a net beneficiary of all the volatility.”

As hinted at in the quote above, there is no room for complacency. Managers have a very close eye on the possible impacts of economic uncertainty on their portfolios and underwritings are being done on the assumption of continuing headwinds. Any type of business associated with discretionary consumer spend is being treated with a great deal of scepticism as household bills soar. This is concentrating investment activity on a shrinking number of sectors.

But with the public credit markets effectively closed as bank underwriting appetite shrivels, private debt is often the only game in town these days and borrowers are shedding their concerns about the price of private debt financing in recognition of its certainty and flexibility. Moreover, the absence of finance for larger deals is opening up a whole new market for private debt. With the first $1 billion unitranche having been swiftly followed by the first such deal worth $2 billion, sources tell us to expect several $3 billion-$4 billion unitranches over the coming months.

There are one or two limiting factors, which probably means the deal size record will hit a ceiling at some point. For one thing, the private debt market has little to gain by simply mimicking the broadly syndicated market – managers tend to either want sole lender status or at least be one of only two or three lenders in a deal. But in taking larger and larger tickets, they will eventually run up against concentration limits set in limited partner agreements.

One of the major trends noted in our PDI 100 ranking of the asset class’s most prolific fundraisers was the clustering of capital in the hands of a small number of trusted firms able to do large deals. Given the apparent blossoming of dealflow at the larger end of the market, this trend looks likely to accelerate further in the period ahead.

Write to the author at andy.t@peimedia.com