The European wing of the US private placement market has witnessed substantial growth in bilateral PPs this year as more institutional investors — besides the giants Pricoa and MetLife — cut their teeth in self-origination.
US investors Apollo, Barings, MetLife, NY Life and Pricoa all have London offices and are looking for bilateral deals, while UK investors such as L&G have also thrown their hats into the ring.
The historical benefit was clear. If an investor committed resources to self-origination, it typically received more generous margins and larger allocations in exchange for providing certainty of execution. There was no risk of having orders scaled back at allocation and the investor also built a strong, direct relationship with the borrower's treasury team with future debt raises in mind.
But as bilateral PPs become more competitive, the picture sheen may start to come off this strategy. Pricoa and MetLife have been able to build large books using this method without much competition until now, but as more investors begin to dabble, there will be more pressure on pricing and terms.
Terms are often tighter and pricing wider in bilateral deals than syndicated ones, partly as there is a lack of competition between investors for the deal, but also because the risk the investor takes is higher.
PP investing is usually a buy and hold endeavour, but there are bound to be exceptions now and then. If an investor is lending to a particular company on its own, selling that risk on later may be even tougher than in a typical private placement where several other investors already have a view on the credit.
Meanwhile, with the rising number of investors on the road looking for new deals, companies may find they need a middle man to make sense of the different offers.
Part of a bookrunner's job is to keep a borrower informed about what goes in the market and what doesn't. While investors may be inclined to tell a borrower when market spreads are widening and nudge pricing higher, it would be in their interests to keep schtum when spreads come in.
Maybe — a novel thought — an agent is needed to inject some competition into the process and provide a company with market intelligence about comparables and spreads.
Bilateral PPs were great as a little secret for a few smart investors. But if everyone tries to go for them, the results may be less neat.
If syndication had not already been invented, there would be as many reasons as ever to come up with it now.