Private debt: remaining competitive in a crowded market

Our panels and speakers at the Private Debt Summit discuss the key topics: differentiation in a crowded market, capturing deal flow and new areas of credit.

Since the financial crisis, there has been rapid growth in alternative forms of lending. Whilst private debt is a mature market in the US, in Europe it was the increased regulation of banks which forced borrowers to look elsewhere. How easy is it to remain competitive, and to keep originating deals, in an increasingly crowded market?

With a whole day at SuperInvestor 2017 in Amsterdam dedicated to a Private Debt Summit, there were plenty of experts on hand to offer answers.

David Hirschmann, Partner and Head of Private Credit at Permira Debt Managers said that, whilst price was always going to be a competitive factor, there were other things at play. For instance, the ability – and willingness – to provide additional capital. “It’s having that capacity on an uncommitted or committed basis to continue to support these companies,” he explained.

The key is to have a model in which you can act very quickly.

For Tara Moore, Managing Director at Guggenheim Partners, the ability to provide more than one option to the sponsor, by doing plenty of homework in advance, was what maximised their chances of winning a loan.

Others chose to stick to a formula that they knew worked: “It’s vital to deliver a well-structured, well-tested process for reaching a decision – including getting an early view,” stated Simon Hirtzel, General Partner and COO at Kreos Capital.

In addition, speed of execution was a key differentiating factor for non-banks.

“The key is to have a model in which you can act very quickly. We can come back within one or two days with an indication of appetite, high level terms and list of key due diligence items,” explained David.

“We make sure we do all the due diligence,” he added, “but we do it in a short period of time and that’s clearly the defining factor.”

Having a 60-strong analyst pool, such as that at Guggenheim Partners, also helped push things along. “Whatever sector we are looking at, it’s not a standing start for us,” explained Tara.

But how do firms capture deal flow in the first place?

Capturing deal flow was a challenge, but there was no substitute to keeping an ear to the ground: “So you are familiar with the deals as they come along,” argued Simon.

Mark Brenke, Managing Director, Co-Head of Private Debt at ARDIAN, added that, while on the one hand the European market was following a similar trend as the US towards institutionalisation, that was where the similarity ended. Europe, because it’s not one homogenous mass and has a plethora of legal jurisdictions, necessitated a different approach: “If you are focusing on mid-market you need to be local, and you need local sourcing networks in order to proactively originate deal flow,” he explained. That said, most agreed that the majority of their business was repeat – from existing relationships.

Douglas Goodwille, Managing Partner at Kayne Anderson succinctly summarised the secret to origination: “It’s shoe leather and hustle. You must be in front of them.”

Using technology to enable credit investors

Aegon Asset Management outlined a relatively new foray they had made into the private debt market – lending directly to SMEs through online lending platforms.

Investing in illiquid assets was not new to Aegon, explained FrankMeijer, Co-Head of Fixed Income at Aegon Asset Management, because of the search for yield and decent return on capital. But theirs was interesting case study, and potentially an inflection point in the way in which the private debt market works. Aegon backs data-led platforms which originate thousands of smaller credits.

“We do like illiquid assets. So as opposed to buying a CLO or bonds backed by these SME loans or consumer loans, we rather take the assets themselves,” Frank explained. The latest investment is into Funding Circle, a UK-based lending platform through which Aegon sources SME loans.

However, with loans on through the platform agreed in as little as two days, it was tough to see institutional investors getting comfortable with that kind of speed.

“It took us roughly one year to go from looking at the deal to signing the contract,” explained Frank. “I think you need to get a good feeling for the risk you are taking on your books. Basically, you’re outsourcing portfolio management, so you need to have an extremely good feeling for the underwriting mechanisms, it is a lot of number crunching. Institutional the governance is also important,” he said.

While it remains to be see whether others will follow their lead, for Aegon, this is a long-term thing. “We have been setting up strategic partnerships; we have also taken equity stakes in some marketplace lenders. Also, we believe that the illiquidity premium that you would expect is there. If interest rates were to rise, I would also expect illiquid assets to continue to have a premium, as long as that is the case, I don’t see us moving out, I think it’s more likely that we will scale up.”