PrivateDebt

Mise à jour 01/03/2023

Private debt: an investment partner even in challenging economic times (version anglaise)

Image
Eurazeo views tribune 4
26/01/2023 - 4 mins

As tough economic times are putting the squeeze on traditional bank loans and effectively shuttering the CLO market, Europe’s small & medium businesses are increasingly turning to private debt funds to finance their growth plans. Vivien Buttiaux, Valérie Ducourty and Maxime de Roquette-Buisson explain what’s driving the market, and the criteria for a successful investment strategy.

 

European SMEs seek alternative financing options from private debt providers

Private debt funds can be an important ally to companies in times of economic stress, raising the prospect of rising demand for the asset class.

As it becomes harder for many companies in Europe to raise bank financing, due to the combined impact of solvency rules, capital requirements and justified concerns about the economic outlook for small & medium-sized businesses especially, so alternative sources of financing are growing in importance.

Worries about a rise in default rates are growing as the flood of cheap money dries up and companies find themselves having to pay back the state guarantee loans delivered through banks that kept them going through the Covid pandemic.

This means a wave of restructuring and insolvencies might now begin, putting further pressure on the bank financing sector. At the same time, a lack of visibility going forward has caused the CLO market to all but dry up, therefore reducing the debt liquidity on the large cap market.

Of course, this isn’t the first time that private debt as an asset class finds itself facing new demands to fill the gap for debt financing. The same phenomenon hit hard after the 2008 financial crisis, when banks’ balance sheets were put under severe constraints.

 

SMEs spotting opportunity in times of crisis

It isn’t simply these constraints on the banks and CLO market that are fueling the appetite for private debt today. There is likely to be a significant demand for debt financing from companies of all sizes looking to take advantage of the current upheaval. An economic crisis may threaten many companies, but for some it can also present significant opportunities for market consolidation or expansion.

When entrepreneurs spot such an opening, for example to make a “buy & build” acquisition, they need to move quickly. At such sensitive moments, the ability of private debt funds to be more flexible and nimble than banks in their approach makes them an important ally for the entrepreneur and management.

Other elements are also driving demand for private debt. First, some entrepreneurs are reluctant to seek financing from equity investors under current valuations, all the more so for those reluctant to cede majority control or even to simply open their capital to financial sponsor.

Second, private debt funds enjoy the ability to offer those companies quasi-equity solutions, such as mezzanine debt, which today is once again a relatively attractively priced financing option. This is in part thanks to higher interest rates on senior loans and also because quasi-equity solutions provide a more suitable structure of repayment for some medium-term projects.

Third, even though the pace of their fund raising has slowed recently, private equity funds which have raised significant amounts in commitments from their limited partners in recent years, will continue to deploy equity on new deals, driving further demand for debt financing of leveraged buyout transactions.

 

Public market turmoil sparks an asset reallocation

Upstream from the private debt funds themselves, institutional investors reviewing their asset allocation strategies are themselves facing some questions. The recent turmoil on the public markets has caused a mark-down in their liquid assets, inevitably leaving many overexposed to illiquid asset classes such as private equity and private debt. The consequent need to readjust their portfolios to bring them back within their investment guidelines will be prompting many investors to rethink their allocation strategies for 2023.

For investors considering renewing or expanding their exposure to the private debt market, the key questions to ask before selecting fund managers should now focus on their investment teams’ longevity and track record in the market, and above all their recovery rates, proving their ability to work with borrowers through tough times and steer them back to solvency.

In such times of crisis as we are currently witnessing, no borrower will be immune from shocks, and so the private debt lenders operating in the market today must be able to show that – over the years, through difficult periods such as the 2008 financial crisis and the 2020 pandemic - they have displayed the means and the know-how to lead a restructuring, working with management and finding solutions.

This depth of experience will be key as lending conditions shift under the dual impact of a rising demand for private debt on the one hand, and the increased sensitivity of borrowers to the risks of higher interest rates. Both GPs and lenders have already reverted to a more cautious approach to financings, notably a careful assessment of prospective borrowers’ interest coverage ratios, an important KPI easily overlooked when money was cheap.

À lire aussi

Vignette
Eurazeoviews2-Flak-Teisseire

19/09/2023 - TRIBUNE

The era of the adaptation economy, and the need for a common ESG benchmark

4 min

Vignette
Eurazeoviews2-Girard-morin

19/09/2023 - TRIBUNE

Making the most of ESG reporting

4 min

Vignette
Eurazeoviews-lambry-makaya

19/09/2023 - TRIBUNE

Towards a cleaner, more sustainable shipping industry

3 min

Vignette
Eurazeoviews2-Mombert-Sesboue-Meignen

19/09/2023 - TRIBUNE

A promising future for Tech M&A

5 min

Vignette
Eurazeoviews2-Cohen Devillard

19/09/2023 - TRIBUNE

Decarbonising cities: the New Electricity Era

6 min

Vignette
Eurazeoviews Orsi - Cassam - Lariviere - Zins

19/09/2023 - TRIBUNE

The revolution in the healthcare sector

5 min

Image
eurazeoviews-2-doat-bertay-debock

19/09/2023 - TRIBUNE

Responsibly addressing the opportunities of Gen AI

5 min

Vignette
Eurazeoviews-agathe-bubbe

19/09/2023 - TRIBUNE

Democratization of private equity: the way forward

4 min

Vignette
visuel Virginie Morgon

25/01/2023 - TRIBUNE

Responsible investing – a powerful tool for better growth (version anglaise)

6 min

Vignette
Tribune Sophie Flak zoé Fabian

26/01/2023 - TRIBUNE

Europe’s sustainable tech sector draws intense investor interest (version anglaise)

3 min

Vignette
Christophe Bavière Tribune

26/01/2023 - TRIBUNE

After the euphoria: Eurazeo's strengths in a challenging market (version anglaise)

5 min

Vignette
Eurazeo views tribune décarbonisation

26/01/2023 - TRIBUNE

Why is Europe ahead in decarbonizing the economy? (version anglaise)

5 min

Vignette
Eurazeo views brands

26/01/2023 - TRIBUNE

Brands’ social and environmental responsibility: illusion or reality? (version anglaise)

5 min

Vignette
Eurazeo views Christophe Simon

26/01/2023 - TRIBUNE

The rise of GP-led transactions (version anglaise)

4 min

Vignette
Eurazeo views tribune SMES

26/01/2023 - TRIBUNE

Growth prospects remain intact for European SMEs (version anglaise)

4 min

Vignette
Eurazeo views vignette 3

26/01/2023 - TRIBUNE

Biotechs, the ultimate post-pandemic winners? (version anglaise)

5 min

Vignette
visuel tribune eurazeo views 1

26/01/2023 - TRIBUNE

European sovereignty: myth or reality? (version anglaise)

4 min

Vignette
Tribune Caroline Hadrbolec

16/11/2022 - TRIBUNE

Féminisation des métiers : la parité, accélérateur de performance

5 min

Image
Image - tribune on democratizing private equity by Virginie Morgon

08/11/2022 - TRIBUNE

Démocratisation : la nouvelle frontière à franchir pour le private equity

5 min

Vignette
visuel Virginie Morgon

30/09/2022 - TRIBUNE

L’avènement des plateformes de marchés privés

4 min

Vignette
Vignette Laurent Chatelin

22/09/2022 - TRIBUNE

Les infrastructures au cœur de la transition écologique

4 min

Vignette
Visuel Sophie Flak

16/06/2021 - TRIBUNE

NFRD, CFRD, SFRD, Taxonomie … kesako ?

6 min

Image
Tribune Virginie Morgon

02/06/2021 - TRIBUNE

Une nouvelle identité pour une nouvelle ambition

4 min

Vignette
Tribune Mathieu Baret

24/12/2020 - TRIBUNE

Agir pour le climat : ce que les investisseurs peuvent faire

4 min

Image
Tribune Sophie Flak

28/04/2021 - TRIBUNE

The Reason Why

2 min

Vignette
visuel Virginie Morgon tribune

07/04/2021 - TRIBUNE

Digital health: accélérer les innovations et les investissements (version anglaise)

5 min

Vignette
Visuel Virginie Morgon tribune 2

23/03/2021 - TRIBUNE

Le moment pour le private Equity est maintenant (version anglaise)

4 min

Vignette
Tribune Caroline Hadrbolec

08/03/2021 - TRIBUNE

Garantir un milieu de travail véritablement inclusif est la clé pour former les femmes vers le sommet

2 min

Vignette
Tribune Virginie Morgon

10/11/2020 - TRIBUNE

Une vue générale sur les challenges et opportunités du marché privés (version anglaise)

3 min

Vignette
visuel Virginie Morgon

30/09/2020 - TRIBUNE

Présentation du nouveau programme RSE pour les 20 prochaines années, O+ (version anglaise)

3 min

Vignette
visuel Virginie Morgon tribune

02/09/2020 - TRIBUNE

Stabilité et réactivité en temps de crise & dans quelle direction irons-nous après (version anglaise)

5 min

Vignette
Tribune Marc Frappier

04/06/2020 - TRIBUNE

Résumé sur la Chine (version anglaise)

4 min

Vignette
Visuel Virginie Morgon tribune 2

03/04/2020 - TRIBUNE

La solidarité nous donne de l'espoir face à la pandémie de Covid-19 (Version Anglaise)

2 min

Vignette
Tribune Benoist Grossmann

16/12/2019 - TRIBUNE

Encourager l’entreprenariat au féminin : 5 conseils pour réussir sa levée de fonds

5 min

Vignette
Tribune Virginie Morgon

15/08/2019 - TRIBUNE

L’évolution de l’économie globale a diversifié l’industrie du capital investissement (version anglaise)

4 min

Vignette
visuel Virginie Morgon

23/04/2019 - TRIBUNE

Diversification audacieuse : Un nouveau standard pour promouvoir la longevité et la prospérité (version anglaise)

3 min

Vignette
Visuel Virginie Morgon tribune 2

04/03/2019 - TRIBUNE

Un challenge audacieux pour le Private equity (Version Anglaise)

3 min

Vignette
visuel Virginie Morgon tribune

30/01/2019 - TRIBUNE

Comment le Private Equity conduit le changement dans le commerce de détail (version anglaise)

3 min

Alerte vigilance

Tentatives de fraude et d'usurpation d'identité