Private debt investors doubt their ability to handle defaults in post-pandemic denial – Finance and Banking

UK: Private debt investors doubt their ability to handle defaults in post-pandemic denial

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An overwhelming majority (87%) of capital markets investors pursue direct lending strategies, although nearly half (47%) lack confidence in their ability to handle loss recovery, which could have serious consequences if business defaults increase as government support programs due to the pandemic are put in place. took of.

The report also reveals that the majority (57%) of capital markets investors have an existing direct lending strategy they are looking to develop and 30% have a strategy they are in the process of executing.

With $207 billion deployed by 327 direct lending funds globally over the past 10 years, the study highlights a lack of confidence among investors that their direct lending capabilities will be sufficient to weather the storm. They expressed the least confidence in handling loss recoveries (47%), risk assessment (53%), filing returns (54%) and monitoring commitments (57%).

Our report is based on independent research conducted with 100 capital markets decision makers working in investment banks and private equity firms in Europe, North America, Africa and Asia to assess their operational readiness as they plan their post-coronavirus pandemic investment strategies.

Respondents from start-ups less than 10 years old were the least confident in their loss recovery abilities when it came to direct lending, with only 41% expressing confidence. Regionally, levels of confidence in having strong loss recovery capabilities were lowest among European respondents (28%) – significantly behind North American (40%), African (48% ) and Asians (72%).

Despite their concerns, some 92% of respondents expect corporate insolvencies and restructurings to present them with opportunities over the next 12 months, including 22% who believe these opportunities will be significant.

Alan Booth, Global Head of Capital Markets, said: “Relatively few defaults to date suggest that private debt investments have been resilient, but government support and low cost of funding may mask a varying degree of trauma in the market. As this support is and interest rates rise, we can expect to see distress and even opportunity in some sectors. The reaction of private debt managers will be varied and we are likely to see more hawks than doves.

“Despite operational concerns and weakening near-term fundamentals in private credit markets, investors are increasingly drawn to the sector in anticipation of debt restructurings as well as mergers and acquisitions activity stemming from the pandemic. real estate to direct lending may have difficulty adapting their infrastructure to meet their need for rapid execution.”

“It is essential that managers have sufficiently robust and scalable operational, risk management and compliance processes, either in-house or through an outsourced arrangement, to avoid unnecessary delays and risks to themselves. and their LPs.”

To learn more, download the full report Navigating CovExit: Looking for Value in Debt Markets here.

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