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Investors Fleeing Negative Yields Fuel Private Debt Cash-Pile

Investors Fleeing Negative Yields Fuel Private Debt Cash-Pile
(Dollar Photo Club)

Thursday, 08 August 2019 07:40 AM

Investors seeking shelter from the sea of negative-yielding assets may provide a further boost to Europe’s direct lending market.

Private debt fund managers say the ultra low interest rate environment is set to drive more money into the business of lending to mid-sized companies. Fundraising for the strategy totaled $10.7 billion from January to June, according to research firm Preqin, and the second half of the year is off to a bumper start with several multi-billion-euro fundraisings already announced.

“We expect increased demand from investors looking for higher yielding private credit assets with strong downside protection in an ultra-low rate environment,” said Eric Capp, head of origination for U.K. and Ireland at Pemberton Asset Management.

In a world brimming with $15 trillion of negative-yielding debt, European direct lending funds typically offer a return in the high single digits, and some managers add leverage to boost yield by a few more percentage points.


Expectations for prolonged ultra-low rates in Europe should attract investors that have so far put little or no money into this area of the debt markets.

“We’ve seen a lot of people who are first time allocators to the asset class coming into our fund,” said Adam Wheeler at Barings LLC, which announced the closing of its second European direct lending fund with 1.5 billion euros ($1.68 billion) this week.

Investors building up their exposure to private corporate loans include pension funds and others, who have turned to direct lending while opportunities for attractive yields elsewhere diminish.

“As the asset class becomes more established, we may see more interest from investors who have historically been less active in the space such as family offices,” said Mark Brenke, head of private debt at Ardian.

Institutional investors’ appetite is driving fund sizes higher. Barings, Alcentra Capital Corp, and the private debt arm of LGT Capital Partners AG have all announced European funds worth 1 billion euros or more since the start of July. Those currently fundraising include CVC Credit Partners LLC and GSO Capital Partners LP, the latter with a 6 billion-euro target for its fund.

But as the market balloons and competition for deals increases, investors are growing wary of risks stemming from weaker underwriting standards. Regulators have also flagged the illiquid nature of private debt assets, as investors are putting their cash into closed-ended funds with virtually no opportunity to withdraw until the assets mature.

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Investors seeking shelter from the sea of negative-yielding assets may provide a further boost to Europe's direct lending market.
investors, negative, yields, private, debt, cash, pile
Thursday, 08 August 2019 07:40 AM
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