Private Capital Call

Last week we tuned into Fitch’s European Leveraged Finance Mid-Year Update. The discussion – covering the economy, ratings, and structures – was virtually indistinguishable from recent US market conferences. Apart from the distinguished accents.  

Volume, for example, has returned to pre-Covid levels. Terms, that were so investor-friendly a year ago, are now decidedly issuer-friendly. Price recovery is so complete, there’s nothing to tamp down frothy conditions.  

Our friends at Tikehau reported 1Q activity, combining both loans and bonds, was €80 billion; more than double 4Q’s performance...

Our fondness for colorful metaphors led us, in our 2016 series, to compare European direct lending to Burger King’s new hot dog venture. The burger giant’s thesis was to apply “sixty years of flaming-grilling expertise,“ but also recognized they’d have to “chop the onions a little differently.”  

Apparently, hamburger prowess didn’t translate to frankfurters. They were pulled off the menu six months later.   

Similarly, there are fundamental differences between US and European private credit markets. A recent survey in Private Debt Investor showed only 22% of private equity sponsors favored unitranche solutions, preferring bank loans instead....

Say what you will about last year’s Covid-induced downturn in the US beginning in March. But it paled in comparison to the UK’s economic cratering. Not since the Great Frost of 1709 had that proud nation suffered such a dramatic slump.   

But then, like the US, the UK and Europe began to recover in similar fashion. In the credit markets as well: from revolver draw-downs, to the commercial upswing and deal snap back in the fall, and the rush closings at year-end.  

Five years ago we published a white paper that highlighted how European leveraged lending has historically been dominated by the commercial banks...

Higher #inflation generally impacts fixed income assets negatively as increased rates erode bond values.   

Yet so far, as our Chart of the Week shows, those rates have actually decreased, resulting in fixed income instruments returning better yields for the second quarter.    

Higher rates will benefit floating-rate instruments. As our high-yield bond friend Marty Fridson reported in a recent LCD piece: “The adjustable rates of leveraged loans would siphon off investment capital from high-yield....

We caught up with Joseph Lavorgna, Natixis’ chief US economist, who served recently as chief economist of the National Economic Council.   

“People forget what real inflation is,” he told us. “I was seven years old during the oil embargo in the 1970’s when there were gas lines. Oil prices went from $4/barrel to $40. Imagine going now from $60 oil to $600.  

“Today we’ve compressed years of economic build-up into one. Inflation expectations are stable, you’ve got a much more global economy, and demand for products and services has outstripped supply...

We continue our special inflation series with Nuveen’s chief investment strategist, Brian Nick. Are inflation worries overblown?  

“Prices of certain goods and services are rising for a variety of reasons,” he told us, “all we believe will be transitory. April’s CPI report showed inflation will peak at a higher level this year than expected. But this “bump” should be over before the end of the summer.   

“Even accounting for energy prices last month’s 0.9% rise in core consumer prices is a very high number. What contributed to that was a combination of stimulus, reopening pressures (see our Chart of the Week) and supply chain shortages...

The Federal Reserve is standing firmly behind its view that, despite April’s CPI increase of 4.2%, the highest since 2008, any inflation will be transitory. But some observers worry that pent-up consumerism will create inflation akin to the 1970’s. 

In a thought piece published last month entitled “Why Our Managers Disagree on Inflation, Interest Rates and Growth,” Franklin Templeton’s strategists agreed prices were on the rise but questioned whether this was “cyclical” (moving with markets) or “secular” (a long-term event).

The Fed sees a wide variety of data, including very depressed sectors. Unemployment remains almost double of pre-Covid levels...

A question came from a reader on our series about the Lincoln Senior Debt Index. She asked: “I’m curious how the benchmark accounts for where the loan is in the cap structure?   

Recovery rates for unitranche, 1st lien and second lien are different. So any portfolio would have to match the composition to effectively compare against the benchmark.”  

Lincoln’s Larry Levine gives us the answer:   

“We prepare various analyses of the Index, which contains only performing loans. As the first Chart of the Week shows...

Private debt is a relatively recent entrant to the alternative asset class. In 2007 private debt AUM measured less than $200 billion. Today illiquid credit is $900 billion with growth estimates of 50% over the next 5 years.  

The Lincoln Senior Debt Index provides lenders and investors a much-needed tool to assess portfolio performance and benchmark returns in this otherwise opaque market.  

We asked Lincoln’s Larry Levine, what is the average yield direct lending investors can expect to achieve?

Private debt practitioners have noted the shortage of credible benchmarks against which to compare various managers’ performance. Well, our friends at Lincoln International have decided to do something about it.   

Their team has developed a loan index created from the 2400 private companies they value. Leveraging expertise across that broad middle market portfolio affords Lincoln the opportunity to contribute meaningful data to investors.  

We asked managing director, Larry Levine, to give us more detail about the composition of the Index, and why it’s significant...