LONDON, May 22nd (LPC) – A number of European direct lenders are opportunistically raising billions in high-return funds to deliver to borrowers in dire need of liquidity, taking advantage of the volatility caused by Covid-19.
Pemberton, Hayfin, and Arcmont Asset Management are among the direct lenders raising money into opportunistic funds that operate across a range of sectors and businesses, including large corporations to medium-sized companies that are strained and in need.
While much of the fundraising started ahead of the March lockdown, the timing couldn’t be better, multiple sources said, as secondary loan prices are falling and corporate funding needs have increased significantly.
In contrast to plain vanilla direct loan funds, whose strategy is primarily aimed at primary SME businesses, opportunistic funds pursue a more diversified mandate by investing in stress and crisis situations through rescue financing and debt rescheduling in primary and secondary markets.
As a result, the returns on these funds are generally higher than pure direct loan funds, especially in current market conditions.
Pemberton is raising up to € 2 billion for its second loan opportunity fund and is aiming for high returns on its loan investments as opposed to the mid-range returns on the company’s first fund, sources said.
“We believe Credit Opportunity Funds will be some of the best-performing years in 2020 as private debt fund managers could generate higher returns in the current environment to provide financing solutions,” said Ben Gulliver, strategic loan portfolio manager at Pemberton.
The second fund will adhere to the same primary strategy as its first fund, primarily providing high performing companies with flexible, senior priority financing to meet their acquisitions, buyouts, investments and working capital needs. These include carve-outs from large companies or signed buyout deals that investment banks cannot syndicate and would like to postpone.
“Some of these situations didn’t exist six months ago,” said Gulliver. “Super senior institutions are now also praising in a context that we are now considering.”
Pemberton intends to restructure every underwritten buyout deal it invests in to meet its needs, including increasing prices and tightening loose credit documentation.
“The terms will not be the same as with syndicated loans. We offer bespoke documentation that eliminates advertising baskets, tightening covenants and removing Ebitda adjustments, ”said Robin Challis, strategic loan portfolio manager at Pemberton.
Pemberton’s second credit opportunity fund investor base includes pension funds, insurance companies, large institutions and high net worth individuals, it said.
Some direct lenders will go a step further, lending money to underperforming companies that need to bolster their liquidity positions.
Hayfin Capital is in the process of raising around € 2.5 billion for its third special opportunity loan fund.
The aim is to use capital for undervalued and distressed loans and illiquid hard assets, as well as for rescue financing and debt restructuring.
Given the complexity of the investment options, firms have hired specialists to deal with the situations.
This year Arcmont hired David Brooks of Bain Capital Credit and Alice Cavalier of Pimco to lead its new capital solution strategy, which focuses on raising capital to underperforming companies hit by the twisting credit cycle.
“These are completely different skills for funds for special situations. Your analysis is much more focused on liquidation value, short term cash flows and the legal structure of the transaction, ”said Floris Hovingh, partner and head of alternative capital solutions at Deloitte.
“Ultimately, a credit manager would have to be willing to own the company and enter into often chaotic restructuring negotiations with a number of other stakeholders.”
More managers are expected to raise money for credit ops funds to diversify their portfolios and capitalize on the current market turmoil, which has not occurred since the aftermath of the 2008 financial crisis.
While the market has been quite stalled in recent years and direct lenders saw an opportunity to diversify, the Covid-19 outbreak has exacerbated the situation as many countries around the world face recession.
Fundraising for distressed debt with a focus on Europe has increased in recent years, and aggregate capital raised for distressed debt strategies in 2019 reached $ 6.2 billion, the highest since $ 7.9 billion a year 2016. It was $ 3.6 in 2018 and $ 2.6 in 2017, according to data from Preqin.
“I believe that a number of direct lenders will further strengthen their arc by raising funds for special situations alongside their Vanilla Direct Lending platform to give their LPs the option of higher returns while diversifying and diversifying their assets under management to increase. “Said Hovingh from Deloitte. (Adaptation by Claire Ruckin and Christopher Mangham)