To a large extent that rise in popularity has been fuelled by banks easing back on lending as a result of increasing regulations and consolidation within the industry – at a time when demand for financing, particularly among mid-caps and SMEs, has grown and showing little sign of waning. There is also the added backdrop of prevailing low interest rates and subdued default rates, making private debt an attractive alternative to the public markets.
That opportunity for private creditors to plug some of that funding gap left by banks however, has not been without its challenges, particularly over the past 18 months. The fundraising process became more protracted, with more time spent in market before reaching the finishing line, and the Covid pandemic has also seen many LPs take a more cautious approach by turning to more experienced managers, rather than smaller or newer players, resulting in larger AUM volumes being concentrated among fewer players.
What can managers learn from the past to better plan for the future?
We asked a panel of industry experts with different perspectives to take a reflective look at some of those challenges. In our latest whitepaper, The Factors Shaping the Private Debt Market, they discuss some of the strategies that proved most resilient during the recent past, as well as share opinions on what they see as the next wave of opportunities going forward.
Four key themes came out of those discussions in the report:
- As interest in the private debt market grows, so does the need for managers to make themselves stand out from the crowd, particularly newcomers looking to break into the market. Many are broadening and diversifying propositions, with geographical diversification seen as an important strategic consideration. There is no doubt that North America and Europe still dominate – accounting for over 90% of the market – but Asia is seen as a promising market. A recent McKinsey report supports that, stating that while the US still attracts the most interest and was the fastest growing market last year (7.9%), long-term growth has been highest in Asia (17.4% CAGR since 2015).
- Managing funds comes with a host of operational and regulatory complexities, and those get more complex if your ambitions are to explore new geographical horizons. Using a trusted partner that has a global presence, rather than trying to do that in-house with often limited resources, can reduce costs, streamline processes, provide the flexibility to scale and ensure you are compliant both on a global market level, and on a local one.
- The change in business practices and market expectations over the past 18 months has added further weight for technology to be a central part of operational models. LP demands for increased transparency in reporting at borrower, asset and fund level, with more sophisticated KPIs, require not only robust systems and automation, but more importantly, a partnership-style approach where managers can leverage the creativity of the service providers and focus on fundraising and investment sourcing.
- While most managers agree there is a need to incorporate ESG principles into their investment strategies, not least because regulations are increasingly demanding that is the case, there is still a long way to go. In response to the question where they stand in the ESG-implementation lifecycle, only 11% of fund managers replied “already mature”, 53% “in progress” and 26% still “in awareness raising mode”. One of the key factors seen by the panel to moving this forward and driving positive change in the market, is the availability of accurate and meaningful data to monitor and track ESG practices and performances.
To find out how Apex Group can help you set up or manage your private debt fund, please contact us.
