The talking points in 2020

PDI’s private debt prognosticators take a crack at predicting several of the big themes that will be front of mind next year.

Ah, the holidays are upon us once again. That, of course, means more ham and turkey (or Tofurkey for all the vegetarians and vegans in the house), stockings hung, menorahs lit with care and … crystal ball gazing, of course. Here are three of the things we think will be occupying people’s thoughts next year.

A growing number of LPs are anticipating lower returns

Two surveys, our own PDI Perspectives 2020 and Coller Capital’s Global Private Equity Barometer, show that LPs that are expecting lower returns.

When we asked investors whether their private debt benchmarks would exceed, meet or fall below expectations, 22 percent said they expected the asset class to underperform. The figure last year was 13 percent. In addition, the number of respondents expecting outperformance in 2020 fell from 26 percent to 18 percent.

Nearly 60 percent of LPs anticipate that the asset class will meet benchmarks. But a 9 percentage-point uptick in those expecting underperformance and a 6 percentage-point decrease in expected outperformance give us pause.

In Coller’s poll, 75 percent of LPs said an increase in the number of credit managers would lead to lower returns. In addition, 73 percent of investors were anticipating lower recoveries as a result of covenant-lite deal sources, which is something lenders of all stripes seem to agree on.

“I think that’s the assumption, and we work on that assumption as well,” a senior executive at a large credit manager said. “In our view, there’s going to be a pretty significant dispersion in outcomes in the cycle; with fewer covenants, you’re going to see more restructurings as a result of liquidity concerns.”

PE will continue to be in politicians’ crosshairs, but LPs will back the industry

US Democratic presidential candidates Bernie Sanders and Elizabeth Warren all but declared war on the “billionaire class”, private equity and, by extension, private credit.

In the Coller survey, 69 percent of North American and 57 percent of Asia-Pacific-based LPs said political and media criticism of private equity had increased. Some 76 percent agreed with the sentiment that more needs to be done by private equity and venture capital trade associations to defend the asset classes.

When asked about the individual provisions of Warren’s bill, provocatively titled the Stop Wall Street Looting Act, LPs in the Perspectives survey tended either to toe the industry line or did not have a strong stance on the issues. More than half (55 percent) were against forcing managers to publicly identify their LPs. In a verdict that will make credit managers happy, 62 percent opposed stopping the tax deductibility of interest payments.

Investor sentiment will become clear on GPs selling minority stakes

Dyal Capital Partners pulled in an eye-popping $9 billion this year for its fourth flagship fund. Numerous high-profile credit managers have sold pieces of their firms to Dyal, to Blackstone and to Goldman Sachs’ Petershill programme, three of the biggest players in the GP minority-stakes world. That’s not even including the dozens of others that have sold portions of their investment shops to upstart minority-stake investment firms.

However, 43 percent of LPs said they were unsure how they would feel about a GP doing so. Only 12 percent said it would make a GP more attractive, while 45 percent said it would make a GP less attractive.

The success of Dyal’s fourth fund means LPs will encounter alternative asset firms with minority stakeholders more often. As the vehicle is more than 60 percent deployed, Dyal is likely to come back to the market shortly.

One question LPs will be likely to pose in 2020 is how much is too much? There are only a finite number of GPs – and even fewer top-flight managers – and the chances are there are far fewer than the number of viable mid-market businesses.

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