Private credit strategies attract investor attention

Outperforming private credit strategies are attracting the attention of Limited Partners in the private equity industry and more broadly among other investors, according to Elvire Perrin, Partner at Altius Associates.

Investors are looking at ways to enhance returns on traditional credit and fixed income portfolios which have displayed meagre returns over the last couple of years due to a very low interest rate environment in most of the Western World.

“The market dislocation created by the increasing regulatory pressure on banks has created a space for non-traditional debt providers as well as opportunities on the distressed credit sales,” said Perrin.

“Indeed, the conditions attached to bank rescue packages by the European Competition Entity and the new regulations being implemented are forcing banks to exit or decrease their level of activity in private equity and leveraged lending.”

He noted that given the very uncertain and challenging macro environment, the premium for investing in private credit strategies above public credit strategies is “one of the highest in history”.

“On a segment level, we are seeing the best opportunities in the small and lower-mid market where the issue of refinancing will be the most acute. The market has been quick to spot this opportunity and a plethora of funds focusing on distressed or primary issuance of debt for the private equity industry has emerged.”

Many of the funds focused on distressed or primary issuance of debt have been set up for the first time by ex-investment bankers or hedge fund managers diversifying into private equity type investing, or even mezzanine focused funds where risk/return profiles are more attractive than in the traditional mezzanine space.

“Many will not be able to raise the capital they are looking for and therefore will take longer to become viable firms or will just disappear,” Perrin commented. “When looking into the very specific segment of the market, investors should keep in mind the major risks related to first time funds and adequate experience.
Earlier this year, Paris-based asset manager Tikehau launched a credit fund, Tikehau Financement Privé, offering retail investors access to private debt of European mid-sized corporations. The fund invests in mezzanine equity linked loans for companies struggling to access the bond market.

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