If we look at the credit market, focu­sing on the two major markets of Europe and the U.S., in the last quar­ter of 2014, 89% of the EUR 10.4 billion in corpo­rate finan­cing was provi­ded as loans and only 11% as capi­tal market instru­ments, while in the same period 32% of the USD 7.6 billion in corpo­rate finan­cing was provi­ded in the form of loans and 68% via capi­tal market instru­ments. Banks domi­nate corpo­rate finan­cing in Europe. In Germany, just under 70% of corpo­rate finan­cing is provi­ded by banks. As a result of the strict requi­re­ments on the capi­tal base of banks as well as the liqui­dity regu­la­ti­ons of the reform package of the Bank for Inter­na­tio­nal Sett­le­ments known as Basel III, Euro­pean banks have redu­ced their lending for corpo­rate loans, real estate loans and project finan­cing, in some cases very shar­ply. With the above in mind, I believe that private debt via funds or other invest­ment vehic­les, i.e. the money that flows into the credit market via insti­tu­tio­nal inves­tors, fills a perma­nent gap. First: In infra­struc­ture, because banks are comfor­ta­ble at the short end but not at the long end due to rest­ric­tive EC and liqui­dity crite­ria of banks. SecondIn real estate finan­cing, private debt has a place in mega-deals because decis­ion-making paths have to be short. ThirdIn the field of corpo­rate finan­cing, private debt plays an important role, espe­ci­ally for small and medium-sized enter­pri­ses, where banks have in some cases with­drawn shar­ply. Here, private debt often also appears as a mezza­nine loan. The ques­tion arises whether the port­fo­lios of credit funds are riskier than a bank’s loan book. From a statis­ti­cal point of view, there are still no state­ments on default rates and reco­very rates for private debt funds in Europe. I believe that port­fo­lios are riskier by neces­sity, howe­ver, credit fund mana­gers, who are — pardon the slightly limp compa­ri­son — “stock pickers,” will select the best expo­sures through detailed due dili­gence or credit review and appro­priate contracts.

There are, of course, enorm­ous diffe­ren­ces in quality and approa­ches in the private debt busi­ness. As ever­y­where in the private capi­tal market segment, the top prio­rity is the quality of the team (inclu­ding expe­ri­ence, compo­si­tion so that all skills neces­sary for the lending busi­ness are present in the team, the length of time team members work toge­ther, etc.). Even more than with other private capi­tal stra­te­gies, it is important in the credit busi­ness that the proces­ses are precis­ely defi­ned and struc­tu­red. It is important to have a credit culture that is focu­sed on buil­ding and moni­to­ring a first-class loan book. In gene­ral, condi­ti­ons in Germany are more favorable than in England, and may be just as compe­ti­tive as in Scan­di­na­via. The cost of finan­cing through private debt funds can be seen in the table “Euro­pean private credit market”. The returns that can be achie­ved in the indi­vi­dual credit market segments consist of seve­ral compon­ents: a) Inte­rest rate of the loan, b) Fees for the arran­ge­ment of the credit, c) fees for early repay­ments of the loan; and d) Utiliza­tion of opti­ons gran­ted on shares in compa­nies, etc.

In view of the lack of returns in liquid debt markets, private debt invest­ments are ideal for inves­tors looking to gene­rate ongo­ing income, espe­ci­ally life insu­rance compa­nies, pension funds and provi­dent funds. With a view to capi­tal preser­va­tion, this asset class is also very popu­lar with family offices and foun­da­ti­ons. Accor­ding to Solvency II, attrac­tive forms of invest­ment are those that offer rela­tively high returns as well as a rela­tively high degree of invest­ment secu­rity. This puts the focus on alter­na­tive forms of invest­ment such as credit funds, which are based on assets from the real estate or infra­struc­ture sectors, but also on corpo­rate loans. Over­all, we see very high demand for loan funds, espe­ci­ally infra­struc­ture loan funds and corpo­rate loan funds.