Tokyo offers glimpses of the future

Participants at our latest event discussed the broad outlook for the asset class, the allure of Asia-Pacific, changing terms and conditions, and caution over distressed debt.

The future’s looking bright. That was the obvious conclusion from a poll of the audience at this week’s PDI Tokyo Forum, which found two-thirds of respondents predicting an increase in allocations to private debt post-pandemic, one-third predicting no change and none at all envisaging a decrease. The virtual Forum saw attendees come together from all over the world to ruminate on the current state of play in the asset class. Here are some of the talking points.

Confidence amid uncertainty. Opinions were divided over the short-term prospects for private debt. Some said the next year would be one of uncertainty for lenders and borrowers, with companies in the “wrong” industries struggling to obtain financing. But others claimed the asset class was coming through its covid-19 test well, with capital raising proving resilient and managers developing a better understanding of how to conduct diligence and underwriting effectively in the “new normal”. One attendee said private debt would be challenged until the middle of next year, when things would pick up; another said they saw “no huge challenge to private debt in 2021”.

The shift to Asia-Pacific. Asian economies have generally held up better than those in North America and Europe during the health crisis, giving investors confidence. In addition, private debt growth is being driven by a shortage of corporate credit due to inefficiencies in the banking market. More and more established corporates are demanding the kind of customised debt solution that only private managers can offer. However, there was also a view that the golden age for Asia-Pacific (and, for that matter, other emerging regions such as central and eastern Europe) may still be at least five years away.

Still a question mark over discipline. Hopes that terms and conditions would move back in lenders’ favour following the crisis were initially given a boost by signs that borrowers were indeed rowing back from some of their more egregious requests. However, a view expressed at the Forum was that there has been a slight reversion back to pre-covid ill-discipline and an intensifying of competition on deal terms rather than yield. Borrowers have been making the argument that we are in a ‘survival of the fittest’ period where companies in certain covid-hit industries will stumble, while the best credits deserve the most flexibility on terms.

Distressed investing requires patience. The belief that distressed debt represents a great opportunity over the next 12 months is a misreading of the crisis, according to one attendee. He pointed out that this is a health crisis rather than a financial crisis and there is little pressure on either banks or direct lenders to sell underperforming assets. He also suggested that the looseness of documentation would make it difficult for distressed investors to access and meaningfully restructure assets. Others said the residual impact of the crisis on economies would present promising distressed opportunities in North America and Europe over a longer-term timeframe of perhaps three to five years.

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