The evolution of the financial market in Europe is marking a before and after in the financing strategies of companies, according to Borja GonzálezAssociate Director de M&G Investments. The growing inclination towards private debt is presented as a paradigmatic change compared to traditional sources of bank financing, a phenomenon that, according to González, reflects the search for diversification in financing sources and more personalized structures by companies in to the detriment of other more traditional formulas.
This growing interest in private debt is due, in part, to the still heavily banked nature of the European market, a stark contrast to the US landscape. In the United States, 70% of private or unlisted companies opt for private debt, compared to 30% who prefer bank financing. In Europe the situation is reversed, although the M&G expert anticipates a progressive reduction in banking dependence. Factors such as regulatory impact, which increases capital requirements, and competition from new market players, such as fintechs, are driving this change.
González adds another technical factor in favor of financing through private channels, as the volume of IPOs has fallen significantly in recent years. He observes that the profile of companies that debut on the stock market today is much more mature than in the past, with larger companies. This context has led to, on average, between 20 and 40% of each private equity operation is financed already through private debtreflecting the growing acceptance of these financing alternatives.
The diversification of financing sources not only benefits companies, but also represents an attractive investment opportunity. Private debt, once the exclusive domain of insurers, pension funds and sovereign wealth funds, now attracts a broader range of investors, creating new opportunities in this segment of the market. The expert indicates that M&G Investments has a broad investment platform in different assets within the private markets, such as private debt, private equity or the real estate, which has been developed over the last 20 years for the investment portfolio of the group’s insurance company. From this extensive experience, González emphasizes the relevance of private debt not only as a financing mechanism for companies, but also as a diversification tool for investors. Specifically, he states that both the private equity as the private debt They are the two sectors with the most promising prospects in the coming years, and in fact there is a growth of 14% for European private credit and 11% for the United States (Prequin forecasts).
The arrival of American companies in Europe, seeking to finance new operations, demonstrates the growth expectations for private debt in Europe with which the sector works, which further opens the range of investment opportunities, he adds.
Education on how these funds work is crucial to adapt especially to clients who have been investing in alternatives only for the last four or five years. These are clients who had taken the step towards this asset class due to the low returns offered at that time by more traditional assets, particularly fixed income; Now that conventional debt once again offers an attractive yield, the firm aims to help its clients understand the dynamics of private markets and the benefits that an allocation to private debt can provide beyond attractive returns. Including it in the portfolio should increase its diversification, reducing its volatility due to its largely floating nature and generating stable long-term income. Of course, always for trained investors who understand the risks involved in these types of investments.
This applies to ELTIF which the firm launched in November of last year, the M&G Corporate Credit Opportunities. Promoted by M&G’s Private Markets division, the fund seeks to invest in the best available private debt opportunities, aiming to achieve a profitability target of Euribor+5%-6% gross in the medium term.
The strategy combines complementary private credit asset classes in which M&G has extensive experience and the ability to adjust its weightings to obtain the best relative value to design a diversified portfolio adaptable to market conditions. It will include two investment baskets, one in illiquid corporate credit (mainly direct lending to large and medium-sized companies and junior loans with strict covenants) and another with liquid corporate credit, focused mainly on senior secured syndicated loans at a variable rate. González highlights that it is practically the only ELTIF created with these criteria, and that the manager has made the conservative decision to offer monthly liquidity and quarterly reimbursement to protect its clients. The fund is managed by M&G’s Private Credit team, which began investing in private corporate loans in 1999.
2024-03-05 08:32:12
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