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Private Debt: America vs. Europe

North America is home to the most investors – and assets – but appetite is growing among Europeans.

  • Staff

North America is dominating the growing private debt market as investor appetite increases in Europe, according to new research from Preqin and consultant bfinance.

Of the nearly $600 billion invested in the asset class as of June 2016, vast amounts are being committed to North America-focused managers. In distressed debt, for example – the largest sector of the asset class, accounting for 38 percent of total assets – $24.3 billion of the $32 billion raised last year went to North American funds, according to Preqin data.

The region is also home to the majority of global private debt investors, with North Americans representing 58 percent of institutional allocators versus roughly a quarter in Europe, Preqin found. But interest in private debt – particularly senior debt – is rising among European pensions and insurers, according to UK-based bfinance.

The consultant said it worked on $1.25 billion in private debt mandates in 2016, more than double the prior year’s volume, as European investors demonstrated a growing appetite for U.S.-focused mandates.

“As a group, U.S. senior debt funds tend to produce higher returns than their European counterparts, in large part due to the additional leverage they use at the fund level,” wrote Dharmy Rai, a private markets associate at the consultant.

U.S. funds tend to lever senior debt funds by multiples of 1 to 2.5, compared with zero to 1 in Europe. However, Rai added that the levered funds typically come with a “heftier price tag,” as well as a level of risk that European investors may not be willing to tolerate.

According to bfinance, many asset owners find “the current roster of senior private debt funds somewhat too risk-seeking for their needs.” Leverage on unitranche loans, for example – the “instrument of choice” for managers in direct lending – is “creeping up to the higher end of historical averages,” the consultant reported.

Overall, bfinance argued that trade-offs between risk and reward in the sector are “less favorable” now compared to four years ago, even as management fees have come down “noticeably” in both Europe and the U.S.

Yet Preqin found that investors continue to view private debt positively: 68 percent of investors reported a positive perception of private debt, while 62 percent planned to increase their allocation to the asset class over the long term.