Private debt is a significant asset class with substantial growth potential

Private debt funds are now a significant market segment, the conference was told. Assets under management in European private debt funds total about $315bn (€271bn out of a European total fund market of €20.6trn), said Nicolas Bouveret, a partner with Arendt & Medernach. This is about the same size as the European real estate fund market, with the private equity space with about three times these assets. 
As well, the panel saw more room to grow, with Mr Bouveret noting that private loan assets in Europe are around half those in the US. Investors are also becoming more well acquainted with debt funds, added Alex Walker of the asset manager Alcentra. Conversations with clients are “about dynamics of the market, different credit performance and market trends, differences between geographies,” rather than basic concepts he said.

Lower volatility, lower fees, lower solvency costs

Marco Verheijen of the insurance company Athora was also optimistic, saying this asset class was attractive as it offered “high returns and lower volatility due to the less frequent valuation of assets.” 
These funds also offer advantages regarding fees. Traditionally banks took all of these when they organised syndicated loans, said Mr Verheijen but now “origination fees are shared, in whole or in part, between the direct lenders and their investors.” As well, as an insurer, he added that with this asset class “we benefit from lower solvency-to-capital charges,” under Solvency II rules.

Increasing market sophistication

The market is becoming more sophisticated with strategies proliferating and a growing client base, the panel agreed. This requires vehicles to be designed to suit individual needs. “Luxembourg has been very successful in attracting private debt funds” Mr Walker said, “because there are structures that allow us to lend into the various European geographies without regulatory or tax issues.” He also added that: “from an investor perspective, there are attractive and familiar structures here which allow us to design products that investors like.”

EU is behind the US regarding the retailisation of alternative funds

The so called “retailisation” of private asset markets – that is offering individuals exposure to alternative strategies – is substantially more developed in the US than in Europe, the conference was told. Whether for funds invested in debt, private equity and venture capital, or real estate and infrastructure, returns are higher than in traditional asset classes, and this is attracting interest from retail investors on both sides of the Atlantic. 

5% allocation in the US, less than 1% in Europe

“Historically, institutional investors have been much heavier users of alternative investments,” noted Leon Volchyok, managing director - real estate with alternatives asset manager Blackstone. Speaking about the US, he said endowments allocate around 50% of portfolios to these strategies, pension plans around 30%, while sophisticated individuals less than 5%. “In 2007 in our Private Wealth Solutions offering [designed for individuals], we had just $10bn assets under management, but today, we have over $130bn,” he said, adding that this is a trend seen more widely.
“Europe's penetration is much lower”, said Frederik Meheus managing director of private equity fund investment fund platform Moonfare. He estimated that allocations by individuals is considerably lower than 1%, with no more than ten banks offering scalable access to illiquid assets. This is despite what he sees as “massive interest” from potential investors. 

Adequate cross-border structures lacking for now

The problem, he said, was a lack of structures to be able to sell these products cross-border in Europe. The European long term investment fund (ELTIF) is there but the regulation imposes a €100,000 minimum investment level, which is too high for anyone who could be described as a “retail” client, Mr Meheus noted. 
He is encouraged by the discussion around reforming ELTIF rules and potentially reducing this minimum to €10,000,a move which he characterises as “starting to get there.” Yet beyond that “a lot needs to happen…we're looking forward to substantial changes to the regulation.” As panel chair Vanessa Camilleri of private markets investment manager Partners Group noted “fewer than 2% of all companies on planet Earth can actually be accessed under current rules.”