Reflections from SuperReturn North America

Manager perspectives

• Private debt managers are referring to the 2023 vintage as the “Goldilocks era” for private debt with the “just right” market conditions of high-interest rates pushing unlevered returns into the double digits with signs of distress remaining low. Managers believe 2024 will continue to prove favourable, although there are some concerns of increased defaults.
• Managers also referenced increased access to higher quality deals at lower leverage points and potentially more favourable terms. Better terms are not ubiquitous across the market, in some sectors competition remains high keeping terms more lax. This is also true in Europe, for example with some real estate debt deals remaining covenant lite.
• There have been no significant changes to incentive structures, such as preferred returns. Read our analysis.

LP perspectives

• Although fundraising is down, global private debt fundraising is projected to return to a growth trajectory from 2025¹. Investor sentiment towards private debt remains positive with c.45% still looking to increase allocations to private debt².
• Some investors for which private debt had not typically been as attractive, such as endowments, are now considering some strategies within the asset class.
• LPs are currently asking two key questions:
  • Will deployment be able to keep up with supply?
  • What are the expected defaults and recovery rates?

Speciality and asset based lending

• There is an increasing interest in differentiated strategies, including specialty and asset-based, which have been characterised by panellists as "markets where there is a higher barrier to entry" and "anything that's not corporate".
• LPs present at the conference mentioned they are looking in a range of directions including sports, receivables, appraisal rights, intellectual property, litigation finance and regulatory finance, the latter having become particularly interesting lately given the increased pressure on banks. This illustrates an array of strategies that, for the most part, have a larger expression in the US than Europe.
• These strategies require increased team specialisation, particularly in Europe where country-specific knowledge adds a layer of complexity - the varying legal, regulatory and bankruptcy regimes can impact a GP's ability to manage downside scenarios.

Non-sponsored lending 

• Lower M&A deal volumes have contributed to an increase in discussions on non-sponsored lending.
• Managers presented data to illustrate how such deals may achieve higher margins, on average higher by 150 to 200bps.
• This is also a common topic in Europe and was discussed at the AIMA ACC conference in October, where additional comments were made on the risk profile of sponsored deals given the higher levels of leverage (6x for sponsored vs 4x for non-sponsored were the figures provided to illustrate the difference).

GP financing and other liquidity providers

• The tougher fundraising environment is fuelling secondaries as they allow LPs to exit early and increase commitments to a new fund. Currently, private debt secondaries are growing 30% year on year according to panellists at the conference. This creates opportunities both for GPs looking for liquidity and for those with secondaries strategies which may find more attractive deals.
• There is increased interest in NAV loans. One panellist mentioned they are seeing more GPs hardwiring language in their limited partnership agreements to allow for NAV loans. Still, some LPs remain cautious.

¹ Source: Preqin, Future of Alternatives 2023

² Source: Preqin H2-23 Investor Outlook