What new products or approaches might be needed in debt funds to cope with this future situation?
With the main issue for European enterprises being liquidity during the shutdown to compensate for lack of revenues, the immediate reaction of our fund managers has been to get in touch with their SME borrowers and help them deal with the crisis measures announced by the Member States.
It’s fair to assume that the bulk of credit lines will be provided by the banking system, with access to public guarantee schemes in certain countries and sectors.
The approach of credit fund managers in the last two weeks has been to help with the concession of payment holidays, as needed. In particular, one of our funds has granted a three months deferral of principal payments to all SMEs in their portfolio. And this has been very much appreciated by SMEs.
In the coming months, I expect private credit funds to focus on:
More short- to medium-term financing—two, maximum three years—for the purpose of helping businesses to cope with working capital issues and debt re-financing (for example, fund managers would be typically providing add-ons on top of what they already gave in the past to the same company.);
We can see the credit market developing towards special situation financing, as a way to provide support to those companies that need to address specific needs that would not be considered market standard debt financing, and where bank financing is not available.
How difficult will it be for private credit funds to adapt? To develop new solutions?
While managers of credit funds are indeed adaptable, more adaptable than traditional lenders, their main constraint is availability of capital from private investors. Existing funds with significant commitments will be best placed to engage in new business opportunities during the Covid-19 crisis, but it will be very difficult to do so for new fund managers, as they have to fundraise and convince investors that they have a strong investment case, even if they lack a track record and established network. And in the current environment, I’m afraid, this will be quite difficult.
What effect might this have on everyday life for citizens? And for the European economy?
These days most EU citizens are affected by physical distancing and are trying to cope with this.
We are affected by unavailability of certain products, due for example to issues on the supply chain of enterprises. If an enterprise cannot sell its products, it will not have the money to buy supplies from someone else, and it’s a vicious circle, unless banks or credit funds are there to provide new cash.
More broadly, as EU citizens we all strive to make our economy resilient in the long-term, to make it more sustainable and environmentally friendly.
We need to ensure employment and innovation for the current and for future generations.
Private credit funds have a key role to play in a resilient European economy, as the most innovative and fastest growing businesses often need a tailor-made finance package.
No two businesses are alike, and neither are their financing needs. A technology company, for example, with intellectual assets, may lack the collateral for a ‘plain vanilla’ bank loan.
Or, a fast-growing business investing its early profits in acquisitions might prefer to make a single repayment at the loan’s maturity rather than smaller payments throughout the life of the loan.
This is where private credit funds come into the picture, to address specific financing needs of our most innovative and fastest-growing businesses and support the employment that they create.
A particular sector of alternative lending is the crowdfunding platforms’ sector, providing modern online lending solutions. It is a completely different experience, compared to having to go to a bank branch, sit down and talk, before starting a process that could take quite some time. I would say it is actually a type of lending fully compatible with physical distancing .
Crowdfunding is more and more reliant on institutional investors’ money, and because of this, the private credit market is important to us as Europeans and for our economic environment.
What we are experiencing today, since the outbreak of COVID-19, is that credit funds do not have private investor capital to provide the cash needed by SMEs.
We need to keep strong the connection between institutional savings and Europe’s real economy.
What will the European Investment Fund’s role be in this new situation?
The European Investment Fund is supporting, even more than last year, the private credit funds; with particular attention to funds focusing on SMEs. This includes new managers or managers launching new funds in EU countries where alternative lending is less developed.
The European Investment Fund supports Europe’s growing private credit market by taking cornerstone investments in new credit funds, under a programme called EFSI Private Credit tailored for SMEs.
The goal of the EFSI Private Credit Programme is to channel private institutional investment into credit funds, to support more market-based, tailor-made funding solutions for the European economy; to increase the volume and diversity of alternative debt financing available to European SMEs; and in doing so to contribute to the development of a Capital Markets Union by supporting pan-European investment activity.
With the main issue now being availability of capital from private investors , the European Investment Fund envisages dealing with the situation by increasing the EIF’s share in certain funds, or increasing the EIF’s commitment at subsequent closing to ensure continuity in the fund-raising . Unfortunately, a few credit funds we would like very much to support will be unlikely to close their fund-raising this year, given the hostile market dynamics.
With more support from the European Investment Fund we show confidence in the market and encourage investors to continue investing in private credit funds.
Read Does This Change Everything? from the European Investment Bank, the EU bank. Subscribe to the podcast on iTunes, Acast and Spotify.