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Plus ça change, plus c'est la même chose
Delegates at the Euromoney Institutional and Alternative Lending conference in New York found that when it comes to debt crises: the more they change, the more they’re the same thing...
It all sounds achingly familiar. Investors searching for yield find a prosperity-laden new market. It gives healthy returns at reasonable risk and investors are happy. Word gets about. New players enter the market. Pricing gets tight and yields start to dwindle. In the hunt for better returns covenants start to loosen, deal structures become byzantine, debt multiples tick up and people start to lose sight of the risks that are taking. The word ‘securitisation’ begins to get muttered in dark corners.
This is how many now view the market for alternative lending, and it was one of the central themes at Euromoney’s conference on Institutional and Alternative Lending held in New York this June.
The market for alternative lending is overheating and due a correction – that much is certain. But what form will this correction take and how will the industry cope? Borrowers, lenders and investors met in New York to discuss the prospects for a market that boomed in the wake of the credit crisis – as traditional banks stopped lending to SMEs - but is now looking dangerously toppy.
The sector was worth a heady $600bn by the end of 2016, according to conference sponsor Prequin, with a further $220bn sitting on the side lines looking for fewer and fewer homes. What will happen to this wall of money?
Step up David Golub, president of Golub Capital – one of the biggest US mid-market lenders and manager of $20bn worth of funds. In the opening key-note interview Mr Golub was asked: have we reached that point in any boom when things start to go awry?
His conclusion was that, to a certain extent, we had. But he was sanguine. His view was that it was about time the industry had a shake-out. A shake-out, he said, would clear the market of some of the short-term players who were only in the business to chase yield. The more established players would survive the correction and thrive in the aftermath.
Over the two days in New York, senior figures from all sides of the industry discussed topics that ranged from: How to stay competitive in a busy marketplace? Answer: focus on quality, build lasting relationships and don’t chase returns. What returns can investors expect? Answer: between 6% and 8% is realistic in this market. Is investing in Europe a good idea? Answer: It’s a diversity play – you will get better yields in the US. Are new deal structures sustainable? Answer: Some are, some aren’t. Avoid complexity and keep it simple. What is the institutional appetite for private debt? Answer: some hunger with an average of 5% of institutional investor funds allocated to the sector.
The event wrapped up with a private investor workshop for LPs and institutional investors. Over 30 senior figures from the industry discussed how to diversify their private credit portfolios and achieve expected returns – with a focus on allocations and manager selections.
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