“Global investors are looking at the US differently than they did before the most recent administration. We always viewed the US as a place with very little political risk, a very safe place to invest. That’s mostly still the case, and obviously governments change. But we want to build a portfolio that’s highly resilient, highly diversified, and can weather challenging environments,” van Vuuren says. “The thesis was similar on the equity side people looked at their currency and geographic exposure and said, “we’re very overweight the US, so diversification is prudent.” I suspect that’s what drove part of the run, with large institutional investors allocating more capital to foreign equities. And in credit, spreads have tightened as investors have allocated more capital to European credit.”
Nicola is taking a “crawl, walk, run” approach to their European private debt allocations, and van Vuuren doesn’t think the US pre-eminence in their portfolio will change anytime soon. Nevertheless, he sees Europe as a natural next step for private credit allocations. Developed European markets show strong rule of law and a tendency towards creditor-friendly legal frameworks. Loans in Europe typically come with a bit more spread, a bit more of an upfront fee, and documentation tends to be better.
An allocation to Europe can also help control for the currency risks inherent in a massive allocation to US assets. There is a growing private credit management industry in Europe, too, which gives Nicola local partners to work with. van Vuuren notes that his firm’s approach is mirroring North American pension investors who are also diversifying their private credit allocations by looking to Europe.
Unlike private equity, which has found far more purchase in global markets, van Vuuren explains that the need for stronger creditor protection has kept private credit allocations limited to North America, and Europe. Australia and Japan are developing as markets, he says, but they remain nascent opportunities.
When working on European private debt deals, van Vuuren says the approach remains similar to deal in North America. His team starts with an assessment of borrower risk, looking at recurring revenues, margin stability, industry cyclicality, and profitability. They asses the strength of the management team and the capitalization of the sponsor buying that business, as well as the loan-to-value on the transaction. In the example of a $2 billion purchase by a private equity firm, van Vuuren says the ideal loan-to-value is around 40 per cent.
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