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More opportunities opening up in the private debt market

The pandemic has opened up new opportunities for private debt investors, delegates heard at Real Asset Media’s European Debt Finance & Investment Briefing, which was held online this week.

“The private debt market saw the crisis as a chance to widen its activities and take advantage of more liquidity,” said James Mathias, portfolio manager, real estate debt, PGIM Real Estate. “There will be tremendous opportunities for non-bank lenders to move in the traditional banking lending space.”

James Mathias, Portfolio Manager, Real Estate Debt, PGIM RE

Insurance companies and pension schemes are targeting investments that are alternatives to fixed income and they can “actually offer a very competitive cost of financing in the EU markets,” he said. “I can see rotation and fragmentation across those markets.”

Every year €100 billion of loans are renewed in France, Germany and the UK and this means there will be €435 billion’s worth of financing in the next five years, some of which will be extended. PGIM Real Estate estimates that senior lending will retrench by around €130 billion over the next five years in Europe.

“This will leave a very meaningful gap that’s available to private debt investors and there’s a growing number of them across the sector,” said Mathias.

In the US, non-bank lenders make up 25% of the market, while in the UK, the most advanced market, it is under 10%. In Germany banks make up 90% of the market.

Opportunities expanding for alternative lenders

“It’s open to debate whether Continental Europe will ever get to 25%, but the direction of travel is very clear,” said Ali Imraan, director of debt and special situations, LaSalle Investment Management. “There’s a real holdback on the banking side and there are lot of opportunities opening up that insurance companies and people like us can take up.”

Diversification in the market is likely to intensify.

“With the impact of Covid there will be winners and losers,” said Norbert Kellner, head of syndication, Berlin Hyp. “The losers will get refinancing, but on totally different terms. It will be interesting to watch new players come in to fill the gaps in those specific areas.”

As banks stick to their core clients and insurance companies target ‘A’ cities, there will be space for others on the wide risk-reward spectrum.

 “There will be more pockets of capital, more options for borrowers,” said Deepak Drubhra, co-founder, Westfort Advisors. “The landscape will be busier to navigate and it will give us plenty to do as there are likely to be bottlenecks ahead.”