Review: LPGP’s 9th Annual Private Debt and 5th Annual Women in Private Debt conferences.
Last week the Altum team had the pleasure of attending LPGP’s 9th Annual Private Debt and 5th Annual Women in Private Debt conferences. Below are some of the key takeaways and thoughts from the conferences.
Alternatives and the denominator effect
With the public markets in crisis, Private Debt continues to offer a great opportunity for investors to find solid risk adjusted returns.
In search for increased yield and diversification, investors have been increasingly drawn to alternative strategies within the private debt market, including distressed debt, direct lending, real estate debt, and infrastructure debt, among others. However, the denominator affect could provide a limiting factor as investors look to rebalance their accounts.
Distressed debt and special situations
The phasing out of government support, rising interest rates and pressure on the banks could potentially provide for substantial distressed debt, NPL and special situation opportunities.
Venture Debt
Providing a compelling risk-return profile there is an increased opportunity for venture debt in the private debt market. With increasing liquidity issues in the venture capital and private equity markets, venture debt offers equity owners the ability to increase liquidity without diluting their equity share.
With debt falling above equity in priority of payments, in a volatile market its highly likely that the venture debt lender will minimise its risk. Returns are healthy and can often provide investors with good yield which often outweighs the competitive direct lending markets.
Fund Financing
Up until recently there were limited providers of fund finance outside of the banks. However, this is an area that appears to be evolving quickly and new players and opportunities continue to develop the area.
One particular area is NAV based finance. These lenders can provided instant liquidity and enable accelerated distributions to LPs.
Providers of NAV based financing can make loan facilities bespoke for each borrower, and can even draw the cash to repay LPs, which allows alignment of the GP and LPs interests from both a fund performance perspective but also allowing for an increased investment.
The Role of Private Debt in Economic Recovery
The recent issues in the banking industry, with the bailout of SVB and Credit Suisse, is likely to cause further bank retrenchment, leaving a gap in the market for provision of liquidity in the investment markets.
The increased deal flow leaves a bigger part to play for providers of Private Debt and an impending power shift to the lenders, facilitating a tightening of lender covenants.
Investors are taking in an interest in their managers lending terms.
With most private debt loans utilising a floating rate, the increasing central bank rates will not play a major impact on net investor returns but will affect borrowers cost of capital and it is of increasing importance that investments are monitored on a regular basis.
This increased monitoring may lead to an increased emphasis on in-depth covenant analysis to better understand and manage the risks associated with specific investments.
Growing Demand for ESG and Impact Investing
Environmental, Social, and Governance (ESG) considerations and impact investing are becoming increasingly important in the private debt market. Investors are looking to align their investment strategies with sustainable principles and positive social and environmental outcomes.
This trend has led to the growth of green bonds, social bonds, and sustainability-linked loans, as well as increased demand for investments in renewable energy, affordable housing, and other ESG-focused projects. Private debt managers are now offering dedicated ESG and impact-focused funds to cater to this growing investor appetite.
Streamlining the lending process
Technological innovation is another key driver shaping the private debt market. Advances in data analytics, artificial intelligence, and machine learning have enabled lenders to better assess credit risk, optimize portfolio management, and streamline the lending process. In addition, financial technology (fintech) platforms are playing an increasingly important role in connecting borrowers with non-bank lenders and democratizing access to private debt financing.
Conclusion
The overall consensus from the conference was that 2023/2024 will be bumper vintages for those deploying capital now.
The private debt market has evolved significantly in recent years, offering attractive opportunities for both borrowers and investors.
With increasing demand for ESG and impact investing, technological advancements, and the growing importance of alternative credit strategies, the private debt market is poised for continued growth and development.