May 22, 2020 / 2:44 PM / 14 days ago

Direct lenders raise billions in ops funds amid market turmoil

LONDON, May 22 (LPC) - A number of European direct lenders are opportunistically raising billions in high return funds to deploy to borrowers in much need of liquidity, taking advantage of the volatility caused by Covid-19.

Pemberton, Hayfin and Arcmont Asset Management are among direct lenders raising money in opportunistic funds that will be deployed across a range of sectors and companies including large performing corporates to mid-market stressed and distressed firms.

While much of the fundraising launched ahead of the March lockdown, the timing could not be better, several sources said, with a compression in secondary loan prices and a significant increase in corporate funding needs.

Unlike plain vanilla direct lending funds, whose strategy mainly targets primary mid-market deals, opportunistic funds adopt a more diversified mandate by investing in primary and secondary markets across stressed and distressed situations via rescue financings and debt restructurings.

As such, the returns for these funds are generally higher than pure direct lending funds, especially in the current market conditions.

HAPPY RETURNS

Pemberton is raising up to €2bn for its second credit opportunities fund and will target high-teen returns on its credit investments, as opposed to the mid-teens achieved in the firm’s first fund, sources said.

“We expect 2020 credit opportunities funds to be one of the best returning vintages because private debt fund managers could get a higher return to provide financing solutions in the current environment,” said Ben Gulliver, strategic credit portfolio manager at Pemberton.

The second fund will stick with the same primary-focused strategy as its first fund, predominantly offering performing companies flexible first-lien senior financing to meet their needs for acquisitions, buyouts, capex and working capital. This will include carve outs from large corporates or underwritten buyout deals that investment banks are unable to syndicate and eager to shift.

“A number of these situations didn’t exist six months ago,” said Gulliver. “Super senior facilities are also now pricing in a context that we are now willing to consider.”

Pemberton intends to restructure any underwritten buyout deal it invests in to fit its requirements including pushing pricing higher and tightening the loose loan documentation.

“It won’t be the same terms as syndicated loans. We provide bespoke documentation that strips out freebie baskets, tightens covenants and removes Ebitda adjustments,” said Robin Challis, strategic credit portfolio manager at Pemberton.

The investor base for Pemberton’s second credit opportunities fund spans pension funds, insurance companies, large institutions and high-net-worth individuals, sources said.

HIGHER RISK

Some direct lenders will go a step further to lend money to underperforming companies that need to bolster their liquidity positions.

Hayfin Capital is in a process of raising about €2.5bn for its third special opportunities credit fund.

It will aim to deploy capital to undervalued and non-performing loans and illiquid hard assets, as well as rescue financings and debt restructurings.

HIGHLY SKILLED

Given the complexity of the investment opportunities, firms have been hiring specialists to deal with the situations.

Arcmont this year hired Bain Capital Credit’s David Brooks and Pimco’s Alice Cavalier to lead its new capital solutions strategy, which focuses on providing capital to underperforming businesses affected by the turning credit cycle.

“It’s a very different skill set for special situation funds. Their analysis is much more focused on liquidation value, short term cashflows and legal structuring of the transaction,” said Floris Hovingh, partner and head of alternative capital solutions at Deloitte.

“Ultimately, a credit manager would need to be prepared to own the company and enter into often messy restructuring negotiations with a number of other stakeholders.”

DIVERSIFY AUM

It’s expected more managers will raise money for credit ops funds to diversify their portfolios and take advantage of the current market dislocation, which has not been seen since the aftermath of the 2008 financial crisis.

While the market was getting pretty toppy over the past couple of years and direct lenders recognised an opportunity to diversify, the outbreak of Covid-19 has intensified the situation as many countries globally face recession.

Europe-focused distressed debt fundraising has been increasing over the past few years and the aggregated capital raised for distressed debt strategies in 2019 reached US$6.2bn, the highest volume since US$7.9bn in 2016. It stood at US$3.6 in 2018 and US$2.6 in 2017, according to data from Preqin.

“I believe a number of direct lenders will add another string to their bow by raising special situation funds alongside their vanilla direct lending platform to offer their LP’s the option of a higher returning asset and at the same time diversify and increase total Assets under Management,” said Hovingh at Deloitte. (Editing by Claire Ruckin and Christopher Mangham)

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