Perspectives

It feels like for the first time in years, most key market stakeholders are aligned. Globally, central banks are seriously looking at rate cuts, with Switzerland being the first to pull the pin. Corporates are seemingly feeling better about the world and are working hard on M&A, while private equity firms are busy turning their attention back to operational strategies and ‘bread and butter’ private equity, having shifted from spending significant time assessing the impact of rising interest rates and COVID. Direct lenders and investment and commercial banks are open for business and spreads have come in from their peaks in early 2023. We have seen debt financing activity pick up globally, with refinancings and repricings driving most of the volume so far, but new money corporate and private equity activity has also begun to increase in recent weeks off a low base. What more could you want.

Unfortunately, it’s not all smooth sailing as geopolitical risks, sticky inflation, productivity issues and half the world’s population and GDP is heading to the polls this year¹ – and all are weighing on investors’ minds. Defaults have remained low across markets, but stressed borrowers are quietly looking for financing alternatives, a trend that we believe will continue as base rates aren’t likely to drop quickly. Winners and losers are likely to be concentrated by sectors and/or relative position within their own sectors, with the ability to pass increased costs to customers – a key requirement.

In Asia, the uncertainty surrounding China has seen a repositioning of private capital towards India, Australia and Southeast Asia with the region’s private equity dry powder reaching record levels. More than balancing that out, we believe the opportunity set in the region continues to grow, with the number and size of available investible businesses increasing, specifically marking a shift towards buyout financings as opposed to smaller, growth-focused investing (e.g., average enterprise values at the point of acquisition have almost doubled in the last few years). The valuation gap between buyers and sellers continues to shrink, with the average EV/EBITDA multiple down approximately 1.4x from its recent peak, with the median EV/EBITDA now at 10.0x according to recent analysis by Preqin². A big caveat to that is that good-to-great businesses continue to command valuations at elevated levels with strong support from debt markets.

To date, refinancing and repricing activity in Asia has been more muted relative to the global trend, with local markets exhibiting less liquidity compared to the U.S. and Europe. The pain in parts of the real estate sector has impacted some banks’ appetite for new lending more broadly and the Asian High Yield bond market. The broadly syndicated loan market has reopened but its recovery thus far has been nascent, with direct lenders open for business. That demand has met a slow increase in M&A activity led by corporates, resulting in supply/demand dynamics in favor of quality borrowers and tougher conditions for other borrowers (for now). However, activity levels by all market participants appear to be high, with signs that we may be transitioning into a period of more activity in the coming months.

The biggest question in the months ahead is whether any “event” derails a full recovery in activity, which is something we have been discussing a lot in recent years. Interestingly, despite all the big headlines and potentially earth-moving events (e.g., rapid rate hikes, Credit Suisse and Silicon Valley Bank failures, wars, geo-politics, AI, underwriting overhang), the market has largely shaken off and pressed ahead. The jarring headlines continue today with the threat of 8% interest rates, election outcomes and expanding war fronts. The prudent path is to remain focused on fundamental bottom-up underwriting and asset selection, while keeping a close eye on potentially more material swings in the macro-outlook.