Conway: Debt and Europe provide opportunities

Limited partners in private equity funds should focus more on debt investing and debt products such as CLOs, according to The Carlyle Group's Bill Conway.

Investments in debt products and European businesses represent two of the most attractive opportunities for limited partners in the near future, according to co-chief executive officer of The Carlyle Group William Conway.

“My specific advice would be, I would look to do more in yield products. I think CLOs generally [and] some distressed products are good places where [LPs] can earn their greater return,” he said.

Conway was speaking at the Dow Jones Private Equity Analyst conference Thursday in New York.

A total of 22 distressed debt funds funds raised a combined $29 billion last year, according to Private Equity International research, and LP sentiment is similarly bullish on the sub-segment of the asset class – roughly 89 percent of respondents to a Coller Capital survey earlier this year said they expected medium-term net returns of more than 11 percent from distressed debt investments.

Europe represents another attractive destination for capital because “everybody hates it”, Conway said.

William
Conway,
co-CEO,
The Carlyle
Group

“Everybody’s afraid, so I think there are some opportunities that will come up there. European financial [institutions] are a place to look for good investment ideas because they’re going to be selling frankly everything they can,” he said.

Still, a panel of distressed investors at the conference pointed to unfavourable bankruptcy laws, especially in Southern European countries, as one of many challenges for distressed investing in Europe.

“Until these bankruptcy laws get solved it will be very hard for global allocators of capital to commit much to Southern Europe when you don’t have very good creditors’ rights,” said Tripp Smith, senior managing director at GSO Capital Partners. “We like to focus on the beer drinking countries in Europe and not the wine drinking countries. Those processes are horrible. They’re not very creditor-friendly. I think it would be great to have a pan-European bankruptcy code like the US.”

During the past four years, GSO has invested between $2 billion and $2.5 billion in Europe.

While countries in South America have changed bankruptcy laws to make them more “creditor-friendly”, Smith and other panelists do not expect European countries to do the same in the near future.

“To modernise the bankruptcy laws to make them more creditor-friendly I think is a very long process,” said chief executive officer of Tenex Capital Management Michael Green. “I was investing in Brazil when they modernised the bankruptcy laws. It’s a hard thing to do.”

While Tenex has invested in Europe in the past, specifically in Germany and in industrial companies in northern Europe, the firm is not currently investing in the region.

“Europe is setting itself up for what many people call ‘ugly de-leveraging’ [where] you’re going to have to do it through austerity and that’s very, very difficult, which is one of the reasons we’re not investing there right now,” Green said.

Still, GSO’s Smith believes that eventually Europe will become a more attractive destination for distressed investors.

“I think there’ll be great opportunities, but it will play out very slow.”