Managers See Market Crowded As Loan Race Heats Up

The renewed interest of investment banks in direct lending is not the only competitive threat that fund managers need to be concerned about. They also face formidable competition from their peers.

Data from Preqin Ltd. show that at the start of April, there were 348 private debt strategies in the global market seeking to raise $ 168 billion from investors. Direct lending strategies account for 170 of this total, targeting $ 74 billion in assets.

“I think there’s probably a little too much craziness in space – there’s been a ton of capital raised, generally speaking,” said Jim Neumann, partner at Sussex Partners UK Ltd. At New York.

The intensity of competition varies across the credit market, with large caps and unitranche units being the places where competition is most intense, said Patrick Marshall, head of private debt and secured loan bonds at Hermes Investment. Management in London.

“This competition manifested itself in both lower yields and weaker lender protections, such as debt relief features, which made risk-adjusted returns less attractive,” added Mr. Marshall.

In contrast, he said that the top-tier secure middle market has been less affected by these factors because banks continue to dominate the space “and there are strong barriers to entry due to the challenges of effectively creating these smaller, high volume lending opportunities. So as competition has increased, yields have remained relatively resilient and all of these loans continue to benefit from the inclusion of maintenance clauses, ”said Mr. Marshall.

As direct lenders continue to put the money to work, assets under management increase and the market could become even more crowded, because “there is a risk that the banks will not back down much more than they have. , as the balance sheets are on the way to being repaired now, ”said Gregg Disdale, alternative credit manager at Willis Towers Watson PLC in London. “At the same time, there is a danger that too much money has been raised in Europe (by direct loan funds), especially if refinancing slows down from its current rapid pace,” he said.

As the market and competition developed, some managers found themselves looking for opportunities in different areas.

Kirsten Bode, co-head of Zurich-based Muzinich & Co.’s pan-European private debt fund, said the company, which focuses on € 5million ($ 6.2million) notes at 15 million euros, sees a number of opportunities in Spain since the bank consolidation in this market. “There are only three or four banks that are considering leveraged loans. This automatically gives the opportunity to direct the loan funds. It’s similar in the UK, and also in Ireland ”, while Germany has a“ good pipeline, but as the bank consolidation hasn’t happened there to the same extent, we see a Slightly lower success rate to close deals, ”she said.

And North Wall Capital LLP is launching its first opportunistic credit strategy to invest in the space “small and medium European market without a sponsor”, said Fabian Chrobog, managing partner based in London. The team is looking for opportunities that, largely because of their complexity and size, “do not fit into direct lending funds and banks,” he said.

M&G Investments executives also found themselves looking for opportunities in different areas. “We found ourselves trying to get expertise in new areas, developing expertise in other areas and (making deals in areas where there is not a lot of competition),” said James Pearce, London-based Head of Direct Lending. “It’s more complex and requires more work, more resources and more expertise.”

He said the frameworks are broader in terms of reach, while “the things we are looking at are more opportunistic as a way to find value for our clients. But if we wanted to raise more money, we could – we choose not to do it because we want to deploy safely, ”he said.

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