Private debt is an asset class that has fared strongly against the backdrop of the current global crisis. Preqin’s recent Private Debt report highlighted that 91% of the investors they spoke to either plan to maintain or increase their allocation to private debt in the long term. This has given rise to a number of new GPs entering the private debt arena, especially with regard to raising distressed funds.
On 15 April 2021, IQ-EQ hosted a virtual debate around the topic of ‘Debt is dead. Long live debt!’ between Richard Vague and Gabriel de Alba, which I had the pleasure of moderating.
By way of introduction, Richard Vague is the Chairman of the Governor’s Woods Foundation, and author of The Next Economic Disaster. He has previously been co-founder, Chairman and CEO of Energy Plus and the co-founder and CEO of First USA and Juniper Financial.
Richard was joined by Gabriel de Alba, an international investor who has recapitalised, restructured and built businesses across the US, Europe, Canada and emerging markets.
The virtual debate spanned across six core statements on private debt. We’ve recapped the highlights of the debate below.
1. Private debt seems to thrive in crisis only. Agree or disagree?
Both Gabriel and Richard disagreed with the statement that private debt seems to thrive in crisis only. Gabriel argued that private debt has proven to be sustainable beyond crises, while Richard argued that private debt often contributes to crisis. Both agreed that private debt can’t be seen as a single standalone asset class, and that it can typically provide much better yields than other asset classes.
2. Private debt is a safe investment in a changing environment. Agree or disagree?
Gabriel and Richard also both disagreed with the statement that private debt is a safe investment in a changing environment. Richard argued that it is very sector specific and that the rapid acceleration of debt, regardless of sector, creates opportunities and risk. There is a paradox with debt, in that the asset itself is necessary and can bring about a lot of good investment opportunities, but a rapid rise in debt levels brings problems.
Gabriel expanded on Richard’s points, arguing that the market is currently overextended as debt has kept companies afloat during the past 12 months. Adding to this, lenders are currently packaging private debt into structured products that lack the governance or required credit analysis necessary in overextended markets.
3. Is this the right time for debt, and how best to execute a debt strategy?
According to Richard, timing is key to best executing a debt strategy. Having the right level of sector specific knowledge to be able to understand the underlying trends and where the risk lies is essential to private debt investing.
For Gabriel, investing in distressed debt is where the majority of opportunities currently lie due to the expected growth post-Covid when economies reopen further. However, key to investing in distressed debt is having a team of investors who are dedicated to recapitalising, restructuring and transforming an investment – while also incorporating ESG and digital policies.
4. ESG will ensure further transparency in private debt as per other asset classes. For or against?
Richard and Gabriel both agreed that ESG will most certainly ensure further transparency in private debt, and also encourage other asset classes to become more transparent. Richard added that increased disclosures and more data will help investors avoid greenwashing and take advantage of the positive impacts tied to ESG investments.
Gabriel noted that ESG is a huge value-add approach to investing that will help stakeholders deliver risk-adjusted returns and create transparency and accountability for shareholders and employees.
5. Covenant-lite loans are often referred to as the scourge of corporate lending. Agree or disagree?
Both Gabriel and Richard agreed that covenant-lite loans are dangerous and even went as far to suggest that covenant-lite loans had been the source of most credit crises.
Gabriel argued that covenant-lite loans, more often than not, tend to end up in the hands of irresponsible investors who don’t undertake the right risk/return analysis on them.
Richard agreed with this, arguing that an increase in covenant-lite loans is a crucial signal to analysts that the market is ripe for a bust.
6. Debt is dead. Long live debt! Agree or disagree?
The overall sentiment of the debate, concluded in the final question, is that debt is very much alive. Private credit can be the agent and catalyst of economic growth and it permeates through the economy, supporting the creation of new infrastructure, buildings and more.
Richard highlighted that in the US in particular, private credit is bigger than government debt, painting a picture of the fact that investors cannot ignore private debt, but instead must utilise it to create a balanced portfolio.
In his closing remarks, Gabriel argued that private debt is undergoing a transformation due to the current market environment. This has resulted in an increase in leverage, topping 2008 levels. However, through the utilisation of ESG, digital inclusion and transformation strategies, private debt practitioners are in a position to bring back companies stronger than they were before.
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