The private debt market is fundamentally changing the way European corporates raise debt finance. According to industry reports, direct private financing of independent, growing mid-sized companies runs at 300-400 transactions annually (Standard & Poors LCD data service). This is just the tip of the iceberg as tracking deals with smaller companies with a turnover below €50 million is hard to do accurately.
What’s driving the expansion in private credit is the growth in so called “private debt” and “direct lending funds” - over 80 of which have been launched in Europe in the last 2 years. These private lenders are well suited to carry the ball that banks have so dramatically dropped. Targeting SME and mid-sized companies, these lenders are backed by pension funds and insurance companies that commit capital on a locked-in, multi-year basis. This stable funding base allows the alternative lenders to invest for the long term and be patient – with typical products such as non-amortising loan with tenors 3 years or longer. Moreover, the sophistication of their credit teams, coupled with a greater risk tolerance, gives private lenders the flexibility to offer structures unavailable from their banking counterparts.
However, these new private lenders are still largely unknown amongst companies which are not covered by specialist debt advisors. Traditional corporate finance houses grew up in a market where banks where the first and last choice for companies looking to raise debt finance. The rapid emergence of the private debt market has left many executives and their advisors without the skills and knowledge to fully take advantage of the funding opportunities available. There are also cultural aspects at play: the entrepreneurial leaders of growing companies feel disconnected from the private debt fund managers which often sit in London, Frankfurt, Paris or other European capitals. Managing expectations and personalities, therefore, is a key aspect before partnerships between investor and investee can flourish into a successful debt raise.
Sectors and Regions
The growth in private debt is by no means restricted to the sophisticated financial markets of the UK and Northern Europe. The severe credit contraction that has crippled corporates in Southern Europe and further afield, is being combatted by a wave of new funds recently launched in Italy, Iberia and Poland. The market is also open for US companies investing in Europe and vice-versa, as US-based funds look to Europe as a new growing opportunity.
Unlike a generalist corporate banking team, private debt and direct lending funds often have very specific investment mandates embedded in the agreements with their investors. Other investment criteria are not explicit but practical, reflecting the skills and experience of the lending team at the fund. However, these lending constraints can also be an advantage. Without the need to pander to a wide range of clients, private debt funds can become deeply specialised in their area of expertise. This has given birth to a wealth of lenders with a profound understanding of the minutiae of their sector, whether that be real-estate, life sciences, asset-backed lending and distressed or recovering companies.
The table summarises the key features of loans that are offered by private lenders in the Altimapa network. A high degree of flexibility around these parameters is offered by the lenders themselves. Furthermore, Altimapa Capital can place both debt and equity outside of these parameters by working with a range of partners in the industry.