During Q4 2014,¬† Simon Hirtzel, Kreos General Partner and COO, spoke at two of the Private Debt conferences which are becoming an established fixture in the European private debt market space. Both events reflected a positive outlook on the prospects for growth of the private debt/illiquid credit asset class:
¬®¬†PDI‚Äôs Capital Structure conference in London‚Äîwith over 200 attendees
¬®¬†PDI‚Äôs Private Debt Investor Council in Versailles‚Äîan exclusive gathering of 30 leading private debt LPs, GPs and advisors.
Here are a few observations from the conferences which we thought would be of specific interest to our Kreos Quarterly readers:
Private Debt asset class growth across both private debt and private equity allocations:
While the private debt asset class has already grown significantly over the past several years, one of the themes of the discussion at the Capital Structure conference was that many LPs who had not yet allocated to the private debt asset class were about to implement private debt allocation programmes over the next year ‚Äì suggesting that additional LP capital will be entering the market. Speakers at both conferences indicated that currently LP commitments to private debt funds are coming from both dedicated private debt allocations as well as opportunistic/special situation private equity allocations, and that the size of these allocations will continue to increase.¬† Additionally, over the next several years an increasing percentage of allocations to private debt funds will be coming from LPs‚Äô fixed income allocations which had previously been invested in government bonds and are now being shifted to private debt and illiquid credit allocations in search of increased yield. A dramatic example of this phenomenon was shared by a pension fund manager whose fund had recently shifted its entire 30% fixed income allocation to be split 7.5% each between four private debt strategies.
Private Debt allocations are increasing across multiple LP sectors:
Speakers at both conferences indicated that private debt allocations are coming from a broad set of LPs. When allocations to private debt started to increase substantially approximately 3 years ago, pension funds and insurance companies served as the main drivers. ¬†While they continue to be the largest allocators to the space and will continue to provide the bulk of future growth (especially from the shift of fixed income allocations as noted), an increasing number of endowments, foundations, funds of funds, family offices and private wealth asset managers are increasingly allocating to private debt managers as well. This was also indicated by the high proportion of LPs speaking at and attending the conferences from these LP sectors.
LPs are increasing the breadth of private debt strategies they are committing to:
A number of LP speakers at both conferences indicated that they were increasing the different types of private debt strategies they were committing to. Many private debt LPs have been working on deploying their core commitments over the past several years and are now actively seeking niche strategies with compelling risk-return profiles which complement their core private debt portfolio.¬†¬† Interestingly, several LPs that were just entering the private debt asset class indicated they were building their programmes from the ground up with niche private debt strategies as part of the core initial commitments.
US LPs interest in the European private debt asset class is continuing to build momentum:
The number of US LPs who traveled to Europe to speak at and attend both conferences was strikingly high.¬† A number of US LPs indicated their preference for Europe as their preferred geography for private debt allocations, as well as private debt as their preferred asset class for their European geographic exposure.¬† The key reasons cited were that European private debt offers LPs:
¬®¬†a sustainable and growing market opportunity due to the major structural factors of the banks withdrawing from the lower mid market and lower current penetration of the European market by private debt funds, which has led to‚Ä¶
¬®¬†higher yields combined with similar net loss and recovery rates when compared to the US, enabling a compelling risk-return profile.