As we sit and watch the Dow finish down 250 points, after being down as much as 550 intra-day, we have been engaged around the desk in a lively game of 'How low can you go?' While only time will tell definitively, it certainly appears markets have been forming the most obvious top for risk assets in recent memory over the past 9 months.  Real estate activity hints at a similar conclusion:  Frenetic activity at the high end of the residential market in 2015, endless supplies of condos, apartments and new office buildings coming on line, and real estate equity and debt fund raising hitting extremes.  It all looks eerily familiar.  At the same time, it certainly feels like we are hitting the exhaustion point for central banker monetary magic.  

Of course, the real art for professional investors when markets are transitioning from 'normal' - when borrowing and lending is largely functioning so asset prices are more or less 'rational' at least as measured using manipulated interest rates - to 'distressed' - a delevered state where assets must fall to (or below) prices where 'real money' wants to own them because borrowing and lending markets are not functioning well - is to know how many days to keep talking about it before actually doing anything!  History has been anywhere from three months to two-and-a-half years for peak to trough unwinds of past excesses.  Similarly, asset price declines have been as shallow as 20-25% and as deep as 80% plus.  Given the size of the imbalances created over the past 15 years and the level of asset inflation achieved, we suspect this unwind through the full distressed cycle to a largely delevered state may be longer and deeper than average....  The waiting, til the right moment, is the hardest part (with apologies to Tom Petty)!  

LPs and GPs at the second annual Private Debt Investor Forum in New York agreed that private debt is increasingly becoming a permanent part of institutional portfolios. Now it’s time to get to work on the details of how it works and where the risks lie.

By: Anastasia Donde of Private Debt Investor

Published: 01 October 2015

Speakers at the PDI Forum in New York this week agreed that private debt is becoming a permanent part of institutional portfolios, not just an opportunistic play. As such, limited partners (LPs) need to do the work on how the asset class, and its various underlying strategies, works; where the risks lie and how to look for managers.

As with any growing sector, LP views’ on strategy preferences, how they can access the asset class and what they look for in managers diverges. Several large Canadian institutions speaking on a panel yesterday (30 September) had contrasting opinions on how to tap into the asset class. Ontario Power Generation, for instance, recently began investing in private debt as an offshoot of its real assets portfolio and is building up its allocation to the sector. The Caisse de Depot et Placement de Quebec, on the other hand, has had a leveraged finance group in-house doing direct deals for 18 years. While others, like the Ontario Teachers Pension Plan and Ascension Investment Management, look for managers as part of their fixed-income or private equity portfolios.

Speaking on a panel about ‘The New Face of Middle-Market Lending’, Ted Koenig, chief executive of Monroe Capital, said investors are increasingly funding private debt allocations from their fixed-income buckets, and many are forming private debt allocations quickly. “Today private debt is its own asset class, not just a subset of a private equity portfolio, that’s a huge change,” Koenig said.

Unitranche has become such a popular instrument in the private debt landscape that it garnered its own panel at this year’s PDI Forum, with Bill Brady, a partner at law firm Proskaeur, moderating a panel on “Understanding Unitranche,” with speakers from Sankaty Advisors, GSO and the Goldman Sachs BDC. The managers discussed the many guises of a unitranche agreement, and the way they benefit lenders, borrowers and sponsors. “A lot of it is about: whose deal is it? Who is bringing whom into the room and who can kick whom out?” Brady said, explaining that not all unitranche partnerships are created equal, as PDI also noted in a feature on joint ventures in the October magazine issue.

While unitranche has been all the rage, mezzanine has fallen out of favor amongst many private debt practitioners. In a poll question that asked which sector in private debt looks the least attractive right now, mezzanine came in at 60 percent. However, there are still many managers handling the strategy that tell PDI they can find plenty of investment opportunities. Some of these managers are going to take the stage on a mezzanine panel today and try to banish the bad rap mezzanine has gotten of late.

Other speakers and managers that talked to PDI on the sidelines are concerned about how late we are in the credit cycle, and how to accurately pivot their portfolios for when it turns.

Several panelists and attendees also brought up concerns about the continuing of falling valuations in BDC stocks and what this means for the sector. Several big-name firms, including representatives from Ares, TPG, KKR and Goldman Sachs are going to take the stage today to address the issues in the BDC space, in a panel moderated by Wells Fargo’s Jonathan Bock.

And for a US event, the questions and topics turned to Europe so many times to make it clear that it’s not a bifurcated world or asset class. Many US managers are also handling European strategies, or looking for investors there, and vice versa. Later this month, the European experts will take the stage at the Capital Structure Forum in London to discuss the private debt investment landscape. Stay tuned for more coverage of these and other events.

Press Release - Prequin

7^th August 2015

Private Debt Fund Managers Face Intense Competition to Deploy Record Levels of Dry Powder

51% of fund managers recently surveyed by Preqin reported increased competition for investment opportunities, but two-thirds intend to deploy more capital over the next 12 months

Private debt fund managers are currently sitting on a record $185bn in dry powder, capital commitments from investors that are yet to be invested. Fund managers are keen to invest this capital in attractive investment opportunities, as 66% of respondents to a recent Preqin survey of over 100 private debt fund managers indicated they plan to deploy more capital over the next 12 months. Yet managers face intense competition from their peers – over half of survey respondents (51%) noted that they felt competition for investments had increased over the past 12 months, and a third claimed it was harder to find attractive opportunities in the current market.

Other Key Private Debt Industry Facts:

· Investor Appetite:

73% of fund managers think that investor appetite has increased over the past 12 months. The largest proportion of respondents (39%) stated that public pension funds currently have the most appetite for the asset class, followed by family offices (21%).

· Biggest Challenges:

Deal flow is the primary concern of fund managers in the next 12 months, with 43% citing it as the biggest challenge. This is followed by performance, which was cited by 40% of fund managers.

· Attracting Investors:

37% of fund managers named transparency as the most important way of differentiating themselves from peers when looking to attract investors. This is followed by 10% of respondents that named both larger GP commitments and providing greater liquidity to LPs.

· Additional Structures for Investors: Over the next 12 months, 39% of fund managers intend to offer more co-investment opportunities to investors. Furthermore, 34% plan to offer more opportunities for separate account investments.

· Long-Term Outlook: By 2020, 64% of fund managers expect the private debt industry to have increased its assets under management by at least 50%.  In addition, 49% of managers expect there to be more firms in the industry.

To view further analysis and commentary, please see the following link:

https://www.preqin.com/docs/reports/Preqin-Special-Report-Private-Debt-Fund-Manager-Outlook-August-2015.pdf

Comment:

“The private debt industry has witnessed tremendous growth in recent years, and fund managers are now sitting on a record level of dry powder. Preqin has recently surveyed over 100 private debt fund managers to gauge their outlook for the coming year. This has shown that fund managers in tend to deploy a lot more capital over the next 12 months, but over half feel that competition for investment opportunities is higher than a year ago. Furthermore, a third of respondents stated that they were finding it harder to identify attractive investment opportunities in the current market. Although fundraising levels are buoyant for the private debt industry, fund managers will be keen to demonstrate they can put capital to work to ensure they can continue to attract future commitments from investors.”

Ryan Flanders – Head of Private Debt Products, Preqin

Generic commercial mortgage loans priced at par, with a 4% yield, and purportedly having 58% LTV and 1.44 debt service coverage....Great if you are a policymaker but completely uncompelling for investors!

DEBTX: CMBS Loan Prices Hold Firm in May

Boston, MA, July 08, 2015

Median adjusted loan-to-value increased to 58% in April and median debt service coverage ratio remained at 1.44. Median estimated loan yield remained at 4.1%.