Private Debt Market 2016

Transcription

1 Private Debt Market 2016

2 Foreword The European private debt market is in exceedingly good health. Deal flow is buoyant, fundraising is extremely healthy and investor appetite shows no signs of abating. As an asset class, private debt seems to have shot into the stratosphere almost overnight, and whilst it certainly has come of age since the economic downturn, private equity houses have in fact been offering alternative types of lending for some time. What is new is that private debt is now no longer seen as an off-shoot of private equity, but rather as a sector in its own right. The primary driver for such extraordinary growth is rather simple, if not clichéd the market abhors a vacuum. The gap left by traditional lenders, reluctant to lend and weighed down by new regulation, has meant there has been a dramatic increase in the demand for private debt, from both the sponsor-side and institutional investors. The latter in particular are attracted to its continued and impressive ability to deliver returns. This in turn has given rise to a proliferation of new private debt providers, offering a range of products of increasing complexity and diversity. It is a rapidly maturing industry, and one which, as the findings from recent research by Intertrust illustrate, shows no signs of slowing down. Given the current climate of economic insecurity, private debt is poised to make even greater strides into the mainstream in the years ahead. Tim Hames Director General British Private Equity & Venture Capital Association (BVCA)

3 Highlights 41% 70% 54% 41% Of investors intended on increasing their allocation to private debt over the next 12 months Direct lending considered the most favourable private debt fund strategy amongst institutional investors over the next months Over 70% of investors said their investments in private debt met or exceeded expectations in the last three years Commercial real estate expected to attract the highest levels of investment from private debt funds within the next two years, according to investors 54% Of investors think the private debt market will grow over the next 12 months Regulation is the biggest challenge facing the european direct lending market over the coming years, say 60% of investors Private Debt Market As mentioned by Tim Hames in the foreword to this report, private debt has rapidly grown in popularity as investors seek to capitalise on the attractive risk adjusted returns. While it is still in its infancy as an asset class, investor interest is growing fast. Intertrust conducted research amongst 136 alternative investment professionals in order to understand investor sentiment towards private debt, and the current appetite for the asset class; the results paint a positive picture. Before we explore the findings, by way of background, in the UK, investors in private debt currently have combined total assets under management of 3 trillion. There are 186 private debt investors currently active in the UK 102 of which are based in London and the average current allocation to private debt for UK-based investors is 6% of total assets, according to Preqin s September 2016 Spotlight. The recent EUR 625 million unitranche debt financing arranged by GSO Capital Partners for a significant international merger a record for the European market is a clear sign the times are changing. What s more, these very large deals may be on the increase. Competition is also on the rise which is inevitably driving down returns as additional funds are raised with capital to deploy. This gives borrowers more options, but also more room for negotiation. Globally, appetite for private debt allocation is on the rise in the UK, Continental Europe, North America and Asia. Indeed, in the latter, 116 of the 194 active private debt investors are considering new commitments in the year ahead. And this is not a standalone case. 3

4 Research Findings Investor allocation will increase How is your allocation to private debt likely to change in the next 12 months? Private debt has exceeded expectations How is your allocation to private debt likely to change in the next 12 months? Private debt will continue to expand In terms of growth, what do you expect to happen to the private debt market over the next 12 months? 14.6% 14.6% 7% 10.3% 29.4% 14.6% 15% 57.5% 22.1% 25% 26.8% 15% 10% 2.5% 35.2% 29.4% It will remain at about the same amount 26.8% It will increase slightly 14.6% It will increase significantly 14.6% It will decrease slightly 14.6% Don t know / Not applicable 0% It will decrease significantly Investors are set to increase their allocation to private debt, with 60% revealing they believe the private debt market will grow over the next 12 months. 41% of investors are likely to increase their allocation to private debt in the next 12 months. 15% said that they would increase their allocation signifi cantly, while 29% said it would remain the same. 57.5% Met them 15% Exceeded moderately 15% Don t know 10% Fallen short moderately 2.5% Fallen short dramatically A staggering 73% of investors said their investments had met or exceeded expectations, while only 13% reported investments as having fallen short of their expectations It will grow slightly 25.% It will grow significantly 22.1% It will increase significantly 10.3% Don t know 7% It will shrink slightly In comparison to only 7% of investors who believe the private debt market will shrink over the next 12 months, 60% are positive about the outlook for private debt. 4

5 All investor segments attracted Investors believe private debt funds will be considered attractive to the large majority of investor groups over the next 12 months, with particular note to endowment plans, private sector and public pension funds and family offices. We asked respondents to name all of those private debt fund strategies they believe will be most favoured among institutional investors over the next months. Direct lending Mezzanine 55,2% 47,8% Commercial real estate will attract most capital We asked respondents to name all of those sectors they believe will attract the highest levels of investment from private debt funds within the next two years Commercial real estate Infrastructure Technology Healthcare 36,4% 33,3% 31,8% 40,9% Private debt is a diversification play and considered to have superior protections versus traditional bonds and equity-like returns. Paul Lawrence, Group Head of Funds Distressed debt 41,8% Residential real estate 30,3% Credit-focused special situations 29,4% Manufact 27,3% Real estate debt 28,4% SME finance 25,8% Venture debt 25,4% Shipping, transport and distribution 15,2% Infrastructure debt 22,4% Collateralised Loan Obligation 7,5% Direct lending fund of funds 6% Leisure, retail and consumer 13,6% Aviation 4,5% Other 4,5% The survey found that direct lending will be the most favoured private debt fund strategy amongst institutional investors over the next months (55%), closely followed by mezzanine (48%) and distressed debt (42%). Investors believe commercial real estate will be the sector that attracts the highest level of investment from private debt funds within the next two years (41%). 36% of investors believe infrastructure will attract the highest levels of investment from private debt funds, while only 26% believe it will be SME finance. 5

6 Spotlight: brexit The EU Referendum was the most significant macro event to take place in the UK / Europe this year. With a positive outlook for private debt running through markets at the start of the year, understandably, investors had an eager eye on what the outcome would be. The decision whether to leave the European Union triggered higher levels of uncertainty across markets before the vote, and some head-scratching after as investors reacted to the Leave decision. While the outcome was a shock, it by no means caused the doomsday reaction that was prophesised before the 24th June whether a DIY recession and the necessity for a Brexit budget (George Osborne) or the inevitable rise of economic nationalism (Christine Lagarde). In light of this, Intertrust decided to run a brief survey after the Brexit result, to see how investor allocation to private debt may have changed. The results show a continued confidence in the asset class. Post-brexit Pre-brexit 41% 70% 54% Of investors said that their allocation to private debt will not decrease Of investors said the private debt market would grow over the next 12 months. This figure only dropped marginally, with 54% remaining upbeat In light of this, Intertrust decided to run a brief survey after the Brexit result, to see how investor allocation to private debt may have changed. The results show a continued confidence in the asset class. Complex strategies Seen from traditional institutional lenders following the financial crisis have continued to weigh heavily on business growth. As a result, there has been a significant increase in demand for forms of alternative lending, specifically as institutional investors come up against continuing low yields from mainstream fixed interest vehicles. Paul Lawrence, Group Head of Funds 6

7 Looking ahead There is little doubt that the mainstream lenders will Continue to be restricted under increasing regulation, something which has caused in many a reluctance To lend. In fact, 60% of those surveyed believe Regulation will be the biggest challenge facing the European direct lending market over the coming years. Subsequently, this has created just one of the major Drivers currently for increased demand in private debt, From both the sponsor-side and institutional investors. With a view to a post-brexit landscape, the market Consensus in the uk and europe is that any Normalisation following the government enacting Article 50 is likely to take at least two years. As a result, the market should expect there to Remain an understandable level of uncertainty For a prolonged period in terms of the uk s Position, across asset classes generally. In low interest rate environments we have seen lps increase their allocation to private debt as it can provide steady income streams when compared to other asset classes. While it is likely that returns may not reach the heights that we have seen in recent periods, with interest rates set to remain low for The foreseeable future this trend should continue and with it the positive outlook for private debt. Businesses will still need credit, and as such direct lending will still have a role to play, but private debt is continuing to challenge traditional lending and increasingly assert itself as a standalone asset class. While private debt is still in Its infancy as an asset class, This research clearly shows That investors are responding positively in their allocation levels. This is being driven by the robust performance private debt investments have demonstrated, and indeed continue to deliver. Paul Lawrence, Group Head of Funds Methodology Research was carried out in May 2016 and September 2016 by Citigate Dewe Rogerson on behalf of Intertrust. 136 responses were gathered from alternative investors from the UK, Continental Europe, North America, Africa, Asia and the Middle East. Whether you are a multinational, alternative investment fund, financial institution or business entrepreneur, you need to know that the administration of your company is in safe hands. Intertrust is a publiclylisted company with more than 60 years experience in providing world class trust and corporate services to clients like you across the world. We ensure the smooth and efficient administration of your company through specialist financial and administrative services. Where necessary we also work together with the best lawyers and advisors to put in place the optimal solution to meet your company s unique requirements. We have over 2,400 professionals, operating out of 30 countries worldwide, working together to offer the genuine global reach, deep local knowledge and extensive international network you need to help you achieve your strategic goals. At Intertrust we combine expertise, professionalism and integrity with a commitment to deliver the quality of personal service we believe every client is entitled to expect. 7

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