Private Debt Investor Decade Report: How private debt grew into a trillion-dollar market.

The private debt industry has changed beyond all recognition in recent years. From humble beginnings, the asset class has grown into a vital part of the global financial system – and its expansion shows few signs of slowing down.

Robin Doumar, founder and managing partner at Park Square Capital, looks back on the past decade and shares his key predictions for the future. Despite the enormous changes, he believes many of the key ingredients for success in private debt will remain constant. Most important of all, he says, is maintaining discipline and ensuring alignment of interest between lenders and investors.

What did the private debt industry look like when you established Park Square in 2004?

Leveraged finance in Europe only really began in the mid to late 1990s. The world was extremely different then, as banks dominated lending and often took massive hold positions. There were around 20 banks in Europe that each could do deals of more than $100 million.

The big difference between Europe and the US banks was their take and hold appetite.  Junior debt in Europe developed as an extension of the banking market – unlike in the US, where junior debt and much of senior debt developed as an extension to the bond market.

When I arrived in Europe around 25 years ago, it felt as though banks could do whatever they wanted in terms of price. It was crazy to compete with them because they had the ability to make the price super-low to win the deal, and then held it all on their balance sheets – which in retrospect was very risky.

What gave you the confidence to think that a different market for private debt could evolve?

I was convinced that an independent firm focused on making good investments would have a big competitive advantage. When organisations reach a certain size, they tend to lose focus on their performance and can have conflicts of interest and misalignment between investors and fund managers.

I believed that creating a conflict-free organisation that was investor-oriented and fully aligned on a strategy would not only be successful, but also could take on the banks. At this time, banks were very aggressive in senior lending, but shy of junior lending because you could get very badly burned if you get it wrong. So, there was always more of an opportunity in junior lending to solve problems for clients.

The European market also presented a big opportunity, although I thought the opportunity was likely to trend in the direction of the US market. Private debt was always an interesting space, but I couldn’t have predicted that the asset class as a whole would gather such momentum.

What have been the key steps in the evolution of the industry over the past decade?

Two critical things have happened. Firstly, after we went through the global financial crisis, it became clear that we needed to be very careful about banks making risky bets with depositors’ money. The regulation and the retreat of banks from the lending space created a big market opportunity for private credit.

Secondly, very low interest rates pushed institutional investors, in their search for yield, to look for alternatives to traditional credit and fixed income.

What really changed things was the movement of pension funds and institutional investors into alternative credit as a standalone asset class. Private equity allocations, historically, were quite small; credit managers were raising money from that small alternative allocation.

But big, sophisticated institutional investors – pension funds, insurance companies, and others – created separate buckets in the form of fixed income alternatives, including for private credit. That has had an enormous impact, because when you start taking sizable percentages of entire pension fund allocations, it translates into a massive amount of capital available for the market.

June 2023