The message from the alternative asset world was loud and clear: many businesses will suffer as a result of the UK’s vote to exit the European Union, and the effect on UK funds will be especially marked.
This was the clear conclusion from a recent PEI survey which found that 42 percent of professionals canvassed believed that the effect of Brexit on their business would be negative, with 22 percent viewing it as positive and 24 percent neutral.
A similar figure – 41 percent – said that commitments to UK-focused funds would decline in the aftermath of the vote, with only 15 percent predicting that allocations to such funds would continue as normal.
But while the survey was far from all doom and gloom – for example, 54 percent thought there would be no impact on alternatives allocations generally – there are reasons to believe that at least some firms in the private debt market may actually be favoured by the vote’s outcome.
As the dust begins to settle, those private debt funds focused on senior debt may be among those feeling confident of investor support. After all, with economic prospects (particularly in the UK) looking wobbly, there is a natural tendency to shy away from the riskier parts of the capital structure and towards the safer parts.
From recent conversations with the market, there is a sense that senior debt is certainly viewed favourably relative to equity. Moreover, as economic prospects begin to head south, some are seeing a buying opportunity as things become more challenging for sellers.
Real estate may not exactly be flavour of the month, but alternative lenders are seeing a specific opportunity in the 50 to 70 percent loan-to-value (LTV) space from which banks have retreated – or at least are in the process of retreating from – but which is still seen as both relatively safe and capable of delivering decent returns.
Another area of growing interest is the non-sponsored market, with the banks’ aversion to sub-investment grade product reducing the ability of mid-market corporates in particular to access the financing they require from traditional sources.
With a number of troubled French and other continental European banks inclined to step away from the UK – as a result of their own troubles as well as fears over the country’s economic prospects – the opportunity for debt funds is clear, aided by their long-term structures and ability to ride out downturns.
Indeed, fears over the UK economy – with economists slashing growth forecasts and contributors to a recent Bloomberg survey increasing the likelihood of recession from 18 percent in June to 40 percent in July – have led to increasing interest in distressed strategies. One UK pension recently confided to PDI that it was setting a pool of money aside in anticipation of the distressed opportunity to come.
While the individual strategies mentioned above all have their merits, market sources have also made the point to us that a flexible, multi-strategy approach also looks favourable in such a volatile – and some would say – unpredictable environment.
There appears to be little reason for well-positioned private debt managers and investors to be feeling downhearted in the world of Brexit.