Kirstie Brewer

07/12/2011 Author: Kirstie Brewer

Eurozone woes could fuel credit space growth

With the financial world on red alert for eurozone sovereign defaults, lending markets have all but frozen in recent weeks, resulting in a pent-up demand for credit from institutions starved of funding.

As a result, investor interest in hedge funds in the credit space – including the return of distressed debt – is on the increase, with due diligence requests and searches being seen from institutional investors in particular. High levels of activity are expected in 2012, particularly if industry rumblings of US managers setting up European branches to access the credit space are to be believed.

This week, Muzinich & Co, a global institutional asset manager, announced plans to launch a new credit long/short fund next year. Meanwhile, the $9.2bn New Mexico Educational Retirement Board is poised to allocate about $300m across up to three hedge funds in the opportunistic credit area, while Scandanavian banking group SEB has disclosed a 2% allocation to the credit long/short space as part of its 2012 investment strategy.  

Phillip Chapple, executive director at KB Associates, says that while investors have been looking intently at the European credit space, they are not opening their cheque books quite yet. “We have seen investors lining up three or four names they feel comfortable with in time for when the markets correct,” he explained. “Next year the European credit market could come down, many bank loans are due for refinancing or restructuring – there could be significant pressure on renegotiating terms.”

It seems 2012 could bring a host of difficult conversations that spell opportunity for hedge funds and their investors.

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