By Daniel Lanyon on 28th July 2016
The past month since the United Kingdom’s historic vote in favour to leave the European Union has created a new wave of uncertainty for investors, but BlueBay's head of its direct lending business Anthony Fobel is feeling somewhat bullish.
Further bank retrenchment from loaning to SMEs following the Brexit vote is likely to be a huge boon for direct lending investors, according to Anthony Fobel, head of private debt at BlueBay Asset management
There has been flurry of launches in recent years of funds offering investors exposure to higher yielding fixed income like returns in the form of private debt strategies. This is widely known as direct lending, and is a process where by a fund makes illiquid loans to companies within a portfolio in a similar manner to private equity but then receives an annual coupon as well as the principal back at the end of the term.
This fills two voids. Firstly, a pullback in lending by traditional banking firms and secondly a compression of yields in regular fixed income markets as a consequence of quantitative easing by the worlds’ leading central banks that has pushed investors into other asset classes in the search for income.
BlueBay, the hedge fund and alternatives specialist has two specialist debt funds Direct Lending Fund I which has assets under management (AUM) of €1bn. It closed to new money in 2013. They also have its successor Direct Lending II which has an AUM of €2.8bn which closed in 2015. Their Private Debt Group has €200m of further commitments including segregated accounts.
Fobel, who heads the private debt side of BlueBay, says the awareness of direct lending funds has grown exponentially and rather than this prompting more activity from banks, it has been the reverse. Especially since the UK’s vote to leave.
“We have seen a pretty marked increase in appetite since Brexit for the type of loans we have been providing,” he said.
“What we have seen since the Brexit vote is a number of deals that would have gone done the bank route, the people responsible for organising the loans have phoned us up and have said that is not happening now and would you guys be interested in providing the loan.”
“Typically, what we find is that whenever there is a difficult market environment the banks retreat even further. Banks are now very focused on their own profitability and regulatory concerns they have come out of mid-market lending completely.”
As a consequence of choppier credit markets, Fobel adds, BlueBay’s funds are seeing both better prices as well seeing more volume as concerns sets in about how the UK economy will fair as the Brexit blow-up continues.
Lloyds was one of several companies this week to announce further job losses, although the broader UK equity market is a pillar of strength with the FTSE 100 at its highest level for more than a year.
Fobel says the team at BlueBay are feeling somewhat less confident than before the vote on the UK, but that the picture is far from a that of the financial crisis.
“We are certainly more cautious about the UK until we have better visibility on what direction the UK is heading. If the UK is heading into a mild recession then we don’t care, from an investing perspective, because we are not investing in UK's gross domestic product [GDP], we are investing in five or six businesses in the UK,” Fobel said.
“You wouldn’t want to be doing this if you felt that Europe is heading into a 2008 scenario. If you felt that was the case, then you wouldn't want to invest at all and just hide under the bed for three years. But we are not in that environment, it is still quite benign economic environment. A 2008 would be a very different scenario. Then you wouldn’t want to do anything in the UK. While our businesses are resistant to GDP, there are very few recession proof businesses."
He adds that despite the Brexit vote, he sees a huge potential for growth in the industry as more and more yield-starved investors look to direct lending portfolios to add income payouts.
"This process hasn’t even begun. If you look at private debt allocations at this point as a percentage of peoples' overall asset allocation it is probably not even a rounding error. That is the opportunity, that it will grow very significantly,” Fobel said.