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Private debt evolves into attractive asset class

Amanda White




The private debt market is growing dramatically and constantly evolving, making it an attractive asset class for investors, says Michael Levitt, vice chairman of Apollo Credit Management.

“30 years ago you wouldn’t have invited any of us on to this stage – it would have been the banks. In fact 20 years or even 10 years ago we wouldn’t have been on this stage. Only recently banking regulation changed that, and today private debt is a very dynamically growing market, and we’re up on stage.”

Regulation has not only impacted banks and what they can do, but what it’s really doing, Levitt says, is growing the market that investment managers participate in.

“The types of debt we can provide today, I didn’t even dream – in my long career – we would be entering. It is evolving very quickly. Never in my wildest dreams did I think I would be going to investment committee meetings and reviewing aircraft finance. But I do, regularly. I thought Citi would own that for the next 100 years.”

Levitt defines private debt as lending money to an institution, company or an entity on the basis that is bespoke, or negotiated, or discussed but not very liquid.

“It’s private. It’s complex. It’s not very liquid. But you can get paid for that complexity and liquidity.

“As banks exit markets, rational capital providers are filling that void. That will continue for a long period of time,” Levitt says, highlighting this is not cyclical but secular change.

“Every January I do a tour of NYC, see the folks who run fixed income, leverage finance and capital markets businesses of all the major banks. Every single person said the regulations and regulators are getting tighter, they are spending more time with them, and going into greater detail. It’s not getting any better for the banks. But it’s getting better for us and for you,” he said.

Regulation has driven change in both the US and Europe, but Levitt says the US banks “took their medicine very early, and you could argue European banks haven’t taken their medicine yet”.

From the European market viewpoint, the supply of non-performing assets is going up not down.

Levitt says investors need to think of private debt in a broad spectrum, as the opportunities are evolving.

He highlighted non-performing loans – noting that there is a couple of trillion euros of non-core loans stranded on European financial institutions balance sheets, and this is expected to increase – and structured credit in particular.

“Structured credit is not what it once was. We are managing student loan portfolios, peer-to-peer portfolios.

“One of the perverse outcomes of the crisis is that guys like us are lending money to the bank at a high rate of interest so they can manage their capital efficiently. It’s crazy.

“In terms of the asset classes that can be in direct loans, we’re in the fourth inning of nine, not even in the middle yet.

“The economy is relevant. When QE is rolling off, you need to be careful with investment managers and watching the economy and the impact. We are in a low-rate, low-growth environment for a long time. That’s pretty good for credit.

“We are in an extended credit environment. This is an asset class that is growing and expanding. We think the future is bright.”