In sauna-like wooden meeting huts scattered around private capital’s annual marquee event in Berlin, executives are looking for the next hot spot.
Apollo Global Management’s President Jim Zelter thinks he’s found one. The firm could deploy as much as $100 billion for financing in Germany alone over the next decade, he said in a conversation with Bloomberg News, in an effort to fund Europe’s “renaissance.” The country’s economy minister, Katherina Reiche, later attended a dinner hosted by the firm, where she made a case for private capital investment, according to people familiar with the matter.
A ministry spokesperson confirmed that Reiche attended the event but didn’t elaborate on the details.
With mergers and acquisitions scarce amid the fog of tariff policy, fund managers at the SuperReturn International conference have been talking up the case for Europe as an investment destination, with executives from behemoths such as BC Partners, Permira and Brookfield Asset Management also noting the shift in sentiment toward the region.
And while Europe may be the geographic focus of the moment, asset-backed finance is looking like the investment of choice for many attendees. Heavyweights like KKR & Co., Blackstone Inc. and Carlyle Group Inc. have already jumped in.
The move toward asset-backed finance reflects a growing appetite for counter-cyclical assets as global economic risks mount. Much of this market, involving borrowing against the cash flows from assets such as residential mortgages, credit cards and student loans and the like, offers attractive risk-adjusted returns. And because it’s backed by real collateral, it’s often considered safer than private credit’s bread-and-butter strategy of lending to heavily leveraged companies.
Financing buyouts, it seems, is yesterday’s news.
“We’re doing large investment-grade solutions,” Zelter said, speaking on a conference panel about the future of the industry. “We’re not even at half time in the private credit market evolution.”
Read more: Apollo Targets Investment Grade Private Credit, Zelter Says
The hunt to innovate comes as growth and fundraising in private markets slow, after years of rapid expansion that has taken the industry to $22 trillion and thrust its biggest players into the limelight.
Now these investment giants are grappling with a prolonged slowdown in dealmaking, as private equity firms are reluctant to sell assets at depressed valuations. That’s made for a clear shift at this year’s SuperReturn, where buyouts have become more of a footnote as a topic.
“The advisers are still very busy, but the new M&A deals are not as visible,” said Claire Harwood, co-head of the direct lending investment team at Permira Credit. “This is business as usual now, it’s just that the flow of activity is a different split.”
Under Pressure
In the short term, the lack of asset sales is turning up the heat on buyout shops. Julian Salisbury, Sixth Street Partners’s co-chief investment officer, said private equity firms are facing “incredible pressure” from their investors to return capital.
Orlando Bravo, co-founder and managing partner of buyout giant Thoma Bravo, even went so far as to say that the industry has “lost its way” in recent years.
“We have to get down to the basics,” he told Bloomberg Television. “There are many, many great companies to be bought and as a control owner and change agent, which our industry is, there are so many companies to transform.”
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Those not delivering will also be looking over their shoulders for the robots.
Vista Equity Partners’ founder Robert F. Smith prompted audible gasps from the conference audience when he said that advances in artificial intelligence would mean 60% of them would be looking for work next year.
Read more: Vista CEO Says AI to Force 60% of SuperReturn Crowd to Seek Work
In the meantime, disgruntled private equity investors may seek comfort in the bedrock of private credit: direct lending to companies. Backed by cash flows rather than hard assets, these loans have delivered strong returns, as a period of higher interest rates has enhanced their typically floating-rate structure.
“Senior loans are providing equity-like returns, benefitting from rates that are still high compared with recent historical averages and we think will continue to stay high,” said Vivek Mathew, president at Antares Capital Advisers. “We think the current overall situation is a strong proposition.”
Safer ABF
Direct lending, however, still relies on private equity sponsors to do leveraged buyouts with large debt packages. Asset-backed private credit, on the other hand, is free from such pressure.
That offers fund managers a chance to make some returns, albeit smaller than in the private equity sphere, and allows them to avoid the spread compression seen in other credit markets.
“Spreads in asset-backed finance have been wider. It’s safer, but still lower returning,” said Dylan Ross, group head of TCW’s asset-backed finance investment team.
Some private investment-grade deals can return “significant” levels of excess spread, said Dan Leiter, the head of international for Blackstone Credit & Insurance.
“Asset-backed finance is on everyone’s lips but it’s worth remembering we’re still at the beginning of a global mega trend,” Leiter said. “That’s why you hear so many LPs asking about it.”
Certainly the industry can still pull in plenty of stars. Speakers at the event ranged from Serena Williams and Bono to former Formula One driver Nico Rosberg.
Though perhaps fittingly, 2024’s high-octane set by rapper Flo Rida gave way to a more subdued performance by emotive rock band Snow Patrol in one of this year’s after-hours parties.
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