Investing in credit is regularly cropping up in my conversations with private equity insiders. It seems that the place to be these days is in all manner of credit strategies – direct lending, specialty finance, real estate debt, asset backed lending, distressed – to name but a few. People are either already investing in it, or looking closely at whether (and how) to invest.
"Legal and regulatory nuances related to debt investing are not so easily transferable"
Driving this trend is a multitude of factors, the main ones being the gap in the market left by banks withdrawing from lending (creating an opportunity for other investors), investment diversification (both for LPs and GPs) and the additional security of returns of investing in debt or quasi-debt instruments (rather than in pure equity). However, unlike equity investments that seem to translate relatively easily across borders, investing in debt seems to be more geographically carved out into North America, Europe and the rest of the world. While I was in Boston in June for SuperReturn US East, I asked why this was the case, and it seems (in some instances at least) that legal and regulatory nuances related to debt investing are not so easily transferable across the pond, and therefore investors tend to raise region-specific funds. It also means that LPs looking to invest in credit strategies in both North America and Europe need to get to grips with sometimes quite different propositions.
Almost on cue, Private Equity International reported last week that a near-record H1 total of $61.6bn of capital was raised for private debt globally, almost equalling the record $65.9bn raised in 2015 H1. North America attracted 59% of the focus of the capital, followed by Europe on 39% (Western Europe 20%, whole of Europe 19%), with the (negligible) remainder focused on Asia-Pacific, Middle East and Africa.
Will credit reach the heights of private equity fundraising? Probably not. Will it become an integral part of LPs’ investment portfolios? Most likely. The pace of investment will, of course, in part depend on how these markets and economies develop over the coming years.
Watch this space.