Bank disintermediation since the financial crisis has proven a big opportunity for private equity firms to boost their direct lending and other private-debt activities.
They are also buying up fintech ‘disruptors’ that are active in banking and mobile payments, or lending at the smaller end of the credit spectrum. At Centerbridge, a leveraged buyout and distressed specialist, a disruptive ‘devil’s advocate’ provides a contrarian perspective to every transaction.
Nevertheless, at private equity conferences like Berlin’s SuperReturn you still see a few old-fashioned ‘masters of the universe’ – or Heuschrecken (locusts) as they were once termed by a senior German centre-left politician.
For every two speakers at SuperReturn’s private debt summit voicing concerns about the abundance of covenant-light leveraged loan deals, there was at least one private equity heavyweight in the main conference to shrug off the concerns.
A leading thread in conversationswas about a need for precision: as valuations get richer, there needs to be consistency and understanding of EBITDA as this can be easily massaged by excluding key components, thereby reducing debt-to EBITDA-multiples and making deals look less risky.
More and more investors are finding a ‘sleeve’ in their asset allocation for alternative credit, including private corporate debt. But investment committees are notoriously slow, and the lack of common definitions leads to understandable confusion.
As one might expect, there is greater optimism about Europe at the moment – contrast this with the mood several years ago when talk was of distressed opportunities and North American investors were braced for a euro-zone break-up. Now, six of the top 10 most competitive countries are in Europe, according to the World Economic Forum.
Yet the question of the credit cycle is never far away – even if most speakers are adamant that it “doesn’t look like 2007” and valuations are not overstretched. As Cerberus chair and former US vice-president Dan Quayle put it: “Something can happen to disrupt everything.”