"Generalist managers see this as a new asset class to complete their offering, and they can leverage on their high-yield experience", says Claudio Bocci, senior manager at Prometeia, although his analysis suggests generalists are able to command lower fees. They average just 0.9 per cent a year, compared with 1.2 per cent for alternative managers and 1.5 per cent for private equity houses, with most funds levying performance fees on top. The wave of entrants has been encouraged by the emergence of a new roster of investors, in Europe at least, which has long lagged behind the more mature US private debt market.
Prometeia’s analysis suggests 152 asset managers have launched 186 private debt funds since 2011, providing potential capital of €110 billion, although that assumes all the vehicles currently in fundraising mode (about €15 billion worth) hit their target allocations. Fundraising in Europe has outstripped that in the US over this period (accounting for 26 out of 32 new funds in the first half of 2013), no doubt encouraged by a continuing decline in lending to non-financial corporations by eurozone banks. "Banks are deleveraging their balance sheets and are progressively less willing to provide financing to corporates, especially to SMEs [small and medium-sized enterprises], as increasing borrower risk implies higher capital requirement", Mr Bocci says.
Mr Bocci says institutional investors hope that private debt funds will provide them with diversification and protection from potential interest rate rises (given that the debt is generally floating rate), as well as a decent return. These returns typically vary from 4-7 per cent for bank loan funds to 6-10 per cent for bonds issued by unlisted SMEs, 7-16 per cent for funds engaging in direct lending and 15 per cent for mezzanine debt vehicles, he says.
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