2017 saw the highest level of fundraising activity for private debt funds to date: globally, aggregate capital raised rose 13% from the high of 2016, a strong indication of LPs’ increasing appetite for the asset class. However, the biggest challenge now facing fund managers is how to put this capital to work. In a recent Preqin survey, 94 private debt managers were asked to identify key issues in the market; most of these managers viewed high valuations and growing competition for high-quality deals in a congested market as the top concerns. This blog will use Preqin’s data to take a closer look at deal flow across the two major private credit hubs, North America and Europe.
Despite concerns regarding competition and access to high-quality deals, the number of private debt-backed deals across North America has increased since 2010, reaching its highest point to date in 2017. The increasing capital concentration within the market is likely responsible for this, with the number of North America-focused funds that closed in 2017 decreasing, while the amount of capital entering the market remained high. This results in fewer funds in market vying for the best deals, and large amounts of capital available to compete for the best credits.
In Europe the opposite is true: in 2017, the number of Europe-focused private debt funds closed rose for the third consecutive year, and both aggregate capital raised and dry powder (€78bn) targeting the regions reached new peaks. However, despite an increase during 2014-2016, the number of deals has since fallen, suggesting a struggle to put LP capital to work. For larger firms that have strong origination teams and boots on the ground in Europe, deal sourcing may not be too complicated; however, smaller firms may be pushed into the junior tranches and offer more covenant-lite features on their loans as a result. The ability to source new opportunities may continue to challenge fund managers focused on Europe. However, new markets opening up in the region may present more opportunities; Italy stands out as a potential destination, following its decree in February 2016 that enabled international debt funds to originate loans in the country.
Deal origination is likely to remain a key concern for fund managers for some time, given the high levels of dry powder in Europe and smaller firms at risk of being pushed out by larger debt providers in North America. However, the amount of capital entering the market is a positive sign for the asset class, and should encourage managers to think of innovative ways to put investor capital to work.
For more information, or to submit deals data, please email Thomas Mulready.