The pandemic has created uncertainty for dealmakers, including getting financing to close deals. Madison Capital Funding CEO Christopher Taylor advises monitoring three key themes in the lending markets.
Undoubtedly, 2020 was a tumultuous year as the global economic disruption from Covid-19 created an up and down environment for investors. Now, for many of us, we have reached the one-year mark of when we first began working remotely. Over the last 12 months, we have adapted to these challenges in a way that makes navigating portfolio management, due diligence and dealmaking from home and via Zoom seem second nature.
As we observed during the first quarter of 2021, global markets have also adjusted to this new normal, evident across the public and private sectors through increased M&A deal volume, IPO filings and SPAC activity. In the alternatives market specifically, investors are looking to allocate more to illiquid assets in search of diversification in a volatile market and yield in a “lower for longer” interest rate environment. Against this backdrop, there are three themes to continue watching across middle-market private equity and private credit while navigating the year ahead.
Heightened Demand for Resilient Businesses
After focusing on portfolio investments for much of last year, private equity and credit managers should see a welcome rebound from low deal volume, a pickup that began in late 2020 along with positive vaccine and economic news. Sellers are looking to realize returns after an anemic year, while managers are seeking to deploy large amounts of dry powder.
These market dynamics support deal activity but could also create a competitive environment across private equity and private credit – especially for highly desired companies. Given the unique economic situation created by the pandemic, performance among middle-market firms has been bifurcated, with services firms generally performing well and those in industries such as retail and leisure more negatively impacted, which could continue until the pandemic has passed. As the more resilient businesses come to market, robust auction processes could drive enterprise values toward the highs seen in early 2020.
Momentum Gains for European Private Credit
Capital continues to flow to European private credit, including from U.S. managers seeking geographic expansion into the growing market. Having largely developed following the Great Financial Crisis, European private debt is faring well through its first major test. And with flexible financing offerings, private lenders are well positioned to continue taking market share from banks who have been de-emphasizing lending to middle-market businesses. Successful European players have a pan-European footprint, offering diversification in sourcing and investment holdings that have been critical to navigating the pandemic environment.
Growing Focus on ESG
For several years, there has been a push by U.S. alternative asset managers to incorporate environmental, social and governance (ESG) factors into their businesses, with the economic, political and social events of 2020 accelerating this trend. There is a growing acknowledgment in private markets that considering ESG factors is smart for investing. No longer about downside protection or negative screening, investors are recognizing that companies with strong ESG controls tend to be better managed businesses. That helps drive returns that are on par with other strategies – or potentially better – while also making a positive impact. As more investors allocate to ESG strategies, they will likely look for increased transparency and consistency in reporting so they can compare managers more easily and track ESG data alongside financial statistics.