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The competitive landscape and risk horizon

At Monday morning's Private Debt & Mezzanine Finance fireside chat at SuperReturn International in Berlin, industry veterans took to the stage to discuss the current state of affairs in their business.

 
For instance, how were they navigating the competitive landscape, in particular with regard to new entrants?
 
Most of the panel were fairly dismissive of new contenders, arguing that they didn't necessarily have the experience to survive in the long term. Some would find it difficult to make a profit and would disappear. That said, one of the biggest dangers they posed was their relative gung-ho attitude to lending in comparison to some of the more established players.
 
Blair Jacobson, Partner at Ares Management, summed up the general feeling when he said that, in order to succeed and make investors happy, you needed to have two key success factors – scale capital and large, local teams that could originate.
 
The macro perspective
 
From a macro perspective, Robin Dumar, Managing Partner at Park Square Capital, said that volatility was a good thing, although markets hadn't priced much of it in yet.
 
"Liquid markets are pricing in something very close to smooth sailing today, and I don't think smooth sailing is what we have on the horizon," he stated.
 
Whilst underlying growth was good, there were still plenty of risks around, as he went on to explain:
 
"This time last year we were very concerned about Chinese growth and oil prices, now no one seems to be pricing in the prospects for China in a world where the US becomes more protectionist," he said.
 
Uncertainty was good but only up to a point, cautioned Christophe Evain, CEO at ICG. It made some players less aggressive and therefore lending conditions better. But on the other hand, uncertainty could also be a precursor to crisis.
 
"In Europe we have two situations that could lead to deteriorating conditions," he explained. "The economic impact of Brexit on the UK, and the impending French election."
 
However, what concerned Symon Drake-Brockman, Managing Partner at Pemberton Asset Management, certainly in terms of the day-to-day, were the swings and roundabouts of the banking industry. Uncertainty, he said, was something they had all learned to live with.
 
The Credit Cycle
 
To what extent did the panellists think that the credit cycle was in its late stage?
 
Symon said that it was early intervention and monitoring that made the real difference in terms of default. There had to be a fundamental underwriting process and depth of analysis in the first place," he added.
 
Robyn said that he didn't feel the cycle was at its end, but that it wasn't at its early innings either. Echoing Symon's comments, he said that discipline and quality were key:
 
"We're happy to sacrifice a little bit of return in favour of lending to businesses that are high quality," he said.
 
How active are European Banks, and what threat do they pose?
 
Blair was of the view that European banks had never entirely left the market, and that there were plenty of opportunities to differentiate.
 
"They do things that either we don't do or we don't love to do, and they approach the market quite differently," he said.
 
"We can offer scale and we can deliver quickly. There are also more subjective measures, such as being able to lend to a higher LTV, and being more creative in documentation," he said.
 
Christophe felt that banks were making a comeback, but not to previous levels. He said that cross-border lending had all but disappeared, as banks focussed on their home markets. Banks were also a lot less aggressive now, he said.
 
But there was another string to the private debt bow, he said: "Some will remember how difficult banks were."
 
The risk landscape
 
What are the biggest risks facing the European debt asset class today?
 
For Robyn, the biggest risk was a lack of discipline and indiscriminate lending from some parties, though this was less of an issue at the larger end of the market.
 
For Symon, the political landscape over the next six to nine months would take centre stage. "France leaving the Euro would have a negative impact on the banking market as a whole, and ultimately on direct lending," he said.
 
Blair said that the number one concern he heard from LPs was the supply and demand of capital, but he felt that their focus on this was misguided.
 
"Our view is that LPs should be a lot more focussed on credit losses," he said. "Our industry will be defined by its bad deals, not the good deals. When something goes wrong in one of your portfolio companies what do you do? And can you get your LP's money back? That's the question the LPs should be asking," he stated.
 
Christophe's concluding comments summed up one of the main concerns aired during the session. "As I look into this market the biggest threat is excessive capital in the wrong hands, this could cause a lot of damage."

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