With over 250 people in the room, including more than 70 representing limited partner organisations, the PDI New York Forum 2016 was the place to be this week. The November issue of PDI will include a comprehensive summary of the event but, for now, here are a few takeaways:
It’s not what it’s called, it’s what it does:
Should I choose unitranche over a traditional two-tiered structure? That question leads to all sorts of interesting debates. There are many other questions of this ilk that pit one kind of approach against another in a battle of relative merits. At the forum, however, the argument was put forward that looking at things in this binary way risks jumping beyond the sensible starting point of what you want the financing to achieve. As one panellist put it: “Every deal is its own special story.”
Start off with an open mind, develop a plan based on what risk and return is acceptable, focus on the documentation and make sure you have the right protections, and understand what happens in different scenarios. Once you’ve got to that point, does it really matter what the thing is called that got you there?
Watch out for the secular shifts (and value young people):
There was a lot of talk about how investors can be challenged by secular shifts within industries, such as online migration in the retail sector. “In every deal you do, be aware that someone may well be trying to disrupt the industry that the business you are financing is operating in,” came the warning from the stage. The advice? Pay due heed to what’s happening with the economy, familiarise yourself with all the possible downside risks and be prepared for change – especially in dynamic industries such as retail and IT. One panellist said his firm likes to have young people provide advice, as they are more in tune with emerging trends (though no poll was taken to assess how those in the audience viewed the wisdom of this).
Don’t write off BDCs… or mezzanine:
With many wallowing in discounts to net asset value and nursing exposures to the energy sector, recent times have been tough for BDCs. But panellists cautioned against attaching too much importance to NAVs and drew attention to the tax advantages of BDCs, as well as good governance and transparency (with all exposures itemised rather than the aggregated data you may have to settle for in other asset classes).
On another panel, talk of the ‘death of mezzanine’ was rejected, with mezz fundraising having been in good shape lately and opportunities apparently opening up in Europe. The emergence of independent managers in Germany is expected as a result of recent legislation in the country. Indeed, one panellist was so buoyed by prospects that he declared: “Mezzanine is cool – a lot of us have beards now and we’ve switched from Blackberries to iPhones.” Food for thought.