Private debt funds – why now?

Author: Danielle Myles | Published: 27 Jan 2014
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  • The popularity of private debt funds is set to continue, financing borrowers too small to tap the European HY market or US loan market;
  • Combined offerings from private debt funds and banks are encouraging familiarity and comfort with new forms of finance;
  • The terms being offered by alternative credit providers are also showing the first signs of standardisation.

Low borrowing costs and the rise of non-bank lenders are tipped to boost M&A activity across Europe this year.

Traditional financiers, notably high street and investment banks, have responded to the rise of alternative fund providers by partnering with them to offer combined finance solutions.

Europe’s new breed of lenders, most notably private debt funds, first appeared on the funding scene in late 2012. But they gained significant traction over the past 12 months.

"Looking out over the debt landscape at the start of 2014 feels very different to the beginning of last year," said Macfarlanes senior counsel Kirstie Hutchinson, speaking at last week’s European In-house Counsel Summit. "Including because private debt funds have made some significant inroads into the market."

According to Hutchinson, there are three primary reasons why private debt funds have become more prominent over the past 12 months.

First, they have found a niche in the market for small to mid-cap deals.

"Private debt funds have been willing to lend in the space where banks had retrenched and bigger ticket European high-yield market and US-sourced bank lending was not economically viable," she said.

Many started by offering facilities as low as $30 million. Now they are offering up to $150 billion, and that looks set to rise throughout the year.

Second, they are adaptable to the borrower’s needs.

"Although they are typically more expensive than traditional bank debt, they offer greater reach – in the sense of spanning senior and subordinated leverage in a single facility – and flexibility for sponsors," said Hutchinson.

By blending senior and mezzanine debt, in the form of a unitranche facility, these lenders can offer bespoke terms and adapt to a borrower’s changed circumstances.

Finally, over the course of last year a number of recognised positions have emerged in non-bank funding arrangements. While it’s too early to describe such trends as standardisation, it suggests a maturing market that is increasingly acceptable to borrowers.

A related trend is banks partnering with alternative financiers to fund mid-market deals. A number of UK banks have recently announced their intention to offer a combined solution alongside private debt funds.

The private lender offers a term loan on attractive terms, while the bank provides working capital facilities.

"I see that as encouraging a virtuous cycle of familiarity and comfort with the product and providers, and leading to increased efficiencies in execution," said Hutchinson.

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