In the view of the industry, non-bank private debt capital is on the verge of an upswing, though the private credit firms are discussing which financing models and players will prevail. „Corporate leverage will increase,“ Hauke Burkhardt, Head of Trade and Corporate Finance at Deutsche Bank for Germany, Austria and Switzerland, said at the 7th Private Debt Conference organised by Börsen-Zeitung in Frankfurt last Thursday. „It is very simple maths.“

The reason is that new technologies and infrastructure require high investment, without being rapidly accompanied by corresponding returns. Higher debt is the outcome. However, the trillions required cannot be mobilised via banks and development institutions alone. „We're not going to put it all on bank balance sheets – we will strongly rely on the capital markets," said Burkhardt.

However, the space for debt fund providers is limited, said Robert Scheer, Co-Head of Private Credit Origination at UK-based M&G Investments, whose view is that "exponential growth in the number of providers is over.“ Although there will continue to be market entrants, it will be difficult for organisations without an established platform and profile.

„Since the coronavirus, the wheat has been separated from the chaff,“ added Johannes Tussing, Head of Private Debt at Talanx subsidiary Ampega. In particular, small firms with high debt leverage have come under pressure.

However Florian Wimpff, Managing Partner of Elf Capital Group, pointed to the challenge of finding staff with the right skills. „You need a strong team on the ground,“ he said. It is critical to understand medium-sized companies. „It's difficult when you fly in from London with a cane and top hat and then sit at a medium-sized company and throw Anglicisms around.“

At the same time, the industry is arguing about risk versus return. „Double-digit returns don't come for free,“ Ampega manager Tussing commented to Elf partner Wimpff, who holds out the prospect of 12% to 18% for riskier transactions. Wimpff replied that there is a premium for solving complex cases.

Robert Meyer zu Starten from Octane Capital also expressed scepticism with regard to double-digit returns. Some customers asked for a form of financing in the investment grade area, but at the same time demanded a return of around 15%. „It doesn't look right,“ he said in an English-language discussion.

However, it is possible to outsource default risks and still achieve a solid return, said George Nijborg, Head of Private Placements & Insured Strategies at the fund subsidiary of Dutch insurer Aegon. Any credit default is insurable, so that a high credit rating is possible. He also argued that the return is based on a premium resulting from the complexity of the financing. As an example, he referred to the financing of a British start-up that had hardly generated any income to date, and now had a need for outside capital.

However, the risk appetite of investors varies greatly, said Nedelina Lazarova, Head of Private Debt at HQ Trust, which acts as a multi-family office for high net worth families. „Our clients can subscribe to whatever they want,“ she added. This sets them apart from regulated investors such as pension funds. „Many family offices tend to invest opportunistically.“

At the same time, multi-generational families in particular tend to be conservative, added Lucas Pech, who is responsible for private credit in asset management at the Swiss private bank Lombard Odier. Families often draw their income primarily from the assets they have saved, so regular income is important. This is also confirmed by Uwe Hermann, Private Market Manager at Rothschild & Co. The segment is less volatile than equity investments. „Private debt can have a stabilising effect.“

While wealthy families currently account for less than a fifth of investors in the private debt segment, they will be slightly above this mark in the future, according to Lombard-Odier manager Pech. Debt funds are making a real effort to attract the investor group, says HQ Trust Manager Lazarova. „I don't have a business card. The debt funds find me.“

However, banks are known to provide the lion's share of financing – a fact that the industry has apparently come to terms with. „The banks have resources that we don't have,“ said M&G manager Scheer. „They also live from cross-selling.“

The industry's answer is to offer financing where banks are no longer willing to participate – especially in very risky areas. „Opportunistic is for us what a traditional investor would not even consider,“ says You-Ha Hyun, head of a private debt programme at the German family office Perpetual Investors, in the English-language discussion.

Börge Grauel, Partner at Yielco, added that acquiring bad loans is a possible area for investors. The difficulties at Meyer Werft and the agricultural goods group Baywa are just a foretaste. „There is more stuff to come," he said.