The financial crisis has created significant opportunities for investors in private debt, according to James Witter (pictured), Head of Investment Advisory & Solutions at SVG Advisers…
One of the big investment opportunities to have emerged out of the current economic environment is the provision of private debt to the buyout community.
Banks are continuing to deleverage and retrench in response to increased regulatory capital and higher wholesale funding costs. At the same time, the majority of the outstanding universe of collateralised loan obligations will be coming to the end of their investment periods, and a refinancing wall of leveraged loans is looming on the horizon in 2014 and 2015 . All this adds up to a financing gap and an increased need for new providers of leveraged credit for private equity transactions.
This financing gap will be significant and will potentially offer some attractive risk/reward opportunities for providers of both senior and second-lien debt, as well as single tranche and mezzanine capital to new and existing buyouts.
I think this could be one of the lasting effects of the recent crisis, and may result in the emergence of private debt as a more recognised and relevant investment choice for investors. Distressed debt will also offer interesting opportunities in the next several years, as some of the weaker leveraged companies in the market struggle to refinance their existing capital structures.
Another trend I expect to continue is increased deal volume in the secondary market as a consequence of regulation such as Basel III and Solvency II. Regulatory changes are already having a significant effect and will continue to do so for the next several years, with banks seemingly being the most affected. We have already seen quite a few banks, especially European ones, selling their private equity portfolios due to tougher liquidity and capital constraints from Basel III; in the US banks have also been trying to offload their private equity holdings due to the Volcker rule restrictions. Furthermore we anticipate insurance companies will adjust their portfolios in light of the impending Solvency II Directive.
