Regulatory Framework and its Effects on the Global Private Debt Market – June 2015

by Ron Wexler

  • 11 Jun 2015
  • PD

Private debt has continued to shape into an established asset class, offering investments that are potentially lucrative alternatives to traditional high-yield and general fixed income investments. As the market continues to cope with interest rate uncertainties, investors are seeking alternatives to diversify portfolios in preparation to hedge against the inevitable volatility ahead. As institutional investors search for creative yield alternatives to match obligations, many are now investigating the most promising regions for expansion within the private debt space, and whether recent regulations are shifting the fixed income landscape. The increase in both dry powder and funds in market are indicators of how investors and fund managers perceive opportunities within regions.

When seeking opportunities, a key factor for investors in the global private debt asset class is the governance and legal structures within the given region targeted by a fund. Regulation in the US and most European countries has developed significantly over the past seven years, a seemingly positive transition for non-bank lenders. As regulations such as Dodd-Frank and the AIFMD generally revolve around transparency and accountability, investors tend to be more attracted to these funds, rather than others targeting the presumably less regulated emerging markets. Governments in less established regions such as Asia and other emerging markets are still lagging behind North America and Europe when analyzed through the scope of institutional portfolios. The appeal of increased transparency in any investment vehicle is apparent, especially when looking at the current funds in market. According to Preqin’s Private Debt Online, private debt funds that target either North America or European markets account for 82% of all funds active in the private debt space as of May 2015.

The more transparent framework of the directives put in place by regulatory bodies in the US and European Union are meant to outline a clearer platform to protect covenants, consequently forcing loan providers to reserve larger amounts of capital in case of default.

As the private debt market continues to develop to its potential, fund managers are finding greater demand for distressed debt, mezzanine and direct lending vehicles in more mature markets. As of May 2015, aggregate private debt dry powder in North America and Europe stood at $110bn and $54bn respectively, still dominating the field, while Asia and Rest of World regions represented just $5.8bn and $4.3bn respectively.  In terms of regional growth in dry powder from December 2014 to May 2015, Europe has experienced an increase of $17bn, and Asia and Rest of World regions have seen slight increases of $0.9bn and $2.1bn respectively.

As tangible increases in private debt fund capital activity has occurred globally, North America and Europe remain the dominant regions. These developments show that while less developed economies still have room to expand exponentially, the supremacy of North America and Europe in this space provides investors with more secure markets to invest in, as many investors perceive relative safety in mature, developed markets. 

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