1. finance
2. investing
3. venture capital

ALTERNATIVE CAPITAL
market view
Private Credit Boom
H1, 2015
But will the new generation of direct lenders
connect with the heart of corporate Europe?
With Euro interest rates to remain low for the foreseeable future,
THE MARKET CONTEXT
activity in European private credit markets is burgeoning. Several
Page 2
European alternative mega-funds closed in 2014 and early 2015,
PRIVATE DEBT
joining an already busy pipeline. ICG amassed a second direct lending
vehicle at 3bn in the first quarter of this year, while Ares Europe,
BlueBay, Partners Group and Ardian have each closed large direct
lending funds. At least another 21 managers are on the road seeking to
raise up to EUR 20bn in European private credit funding.
However, this flood of money is smothering an ever-
diminishing supply. Many so-called “direct lending” funds are still
highly concentrated in what ACMV calls “private debt” strategies lending to private equity firms to finance buyouts and refinancings.
But deal pickings in this sector are slim. In the year to October 2014,
less than 40 buyout deals were done in the part of the market the
large credit funds would typically target - firms with enterprise
Page 3
DIRECT LENDING
Page 4
INVOICE FUNDING
Page 5
GROWTH CAPITAL
Page 6
ACMV TOP THEME
Page 7
REAL ESTATE
FINANCING
Page 9
values of 100-250mm and EBITDA of 25-100mm.
FOCUS TRANSACTION
A TAXONOMY OF
PRIVATE CREDIT
The supply and demand imbalance is leading managers
to look for deals in the less well-served “lower middle market” or in
direct corporate situations. It will be interesting to see whether these
firms manage to balance the challenge of sourcing deals in unfamiliar
tropics while retaining the quality deal flow upon which they depend
for continued investor support.
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Page 11
ALTERNATIVE FINANCE
PARTICIPANTS
Page 12
ALTERNATIVE CAPITAL
A TO Z
Page 13
PAGE 2
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
The Market Context
Capital market highlights
•
US equity markets beat their all time highs and most analysts expect yet another positive year
•
US Fed talk remains dovish, with any tightening expected in the second half of the year
•
Bund yields hit zero before surging as Euro-zone future remains uncertain
•
Downward pressure on oil price continues
•
Global High Yield dips temporarily but remains well-bid
•
Eurozone launches QE
Figure 1: Credit market timeline
20%
18%
Moody's Global Spec. Grade LTM Default Rate
18% Fed
Fund
Rates
U.S. Federal Funds Rate
Severe
Recession
16%
Black
Monday
14%
12%
Drexel
Fails
Tech/
Telecom
Bubble
S&L Crisis
Asian
Liquidity
Crisis
10%
Sovereign
Debt Crisis
2%
0%
Enron &
Worldcom
Fail
Nikkei Crash
Continental
Illinois Fails
2nd Real
Estate
Crisis
Brady
Bonds
LTCM
Default
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
4%
Credit
Crunch
Basel I
6%
Credit Markets: Low Defaults and Low Yields Persist For Now
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
Asset Class
Correlations
Intensify
3rd Real
Estate
Crisis
European
“Periphery”
Debt Crisis
Dow Closes
above 17,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8%
Financial
Crisis
Source: Arbour Partners
PAGE 2
Private Debt
Table 1: Private debt (buyout) strategies – typical features and returns
FEATURES
MIDDLE MARKET
LARGE LBO
Return
Cash
interest
Return
Cash
interest
Additional
returns
Deal source
Mezzanine financing
– Europe
12-15%
4-8%
Floating
13-16%
4-8%
Floating
PIK,
Warrants
PE,
Investment Banks
Mezzanine financing
– US
12-15%
9-12%
Fixed
13-17%
12-14%
Fixed
Warrants
PE,
Investment Banks
Unitranche
– Europe
6-8%
5-7%
Floating
7-9%
6-8%
Floating
PIK,
OID
PE,
Banks
Senior loan
2.5-4%
2.5-4%
Floating
3-5%
3-5%
Floating
OID
PE,
Banks
Source: Arbour Partners
P
rivate debt is best described as the provision
debt facility that combines features of senior and
of credit by investors to private equity firms
mezzanine loans without the need for inter-creditor
to finance buyouts – the balance sheet
agreements has been the focus of key players such
complement to private “equity”. The private debt
as Ares Management and GE Capital. The multi-asset
market has been a big beneficiary of continued low
managers at Tikehau Capital have also structured
interest rates in H2 2014. Financial repression has left
and funded several European unitranche deals.
pension funds, insurance companies and sovereign
wealth funds chasing an ever smaller supply of deals
The immediate challenge to the private
and hence yield. Floating rate loans and historically
debt market is over-supply of capital. The return of
high recovery rates have also enticed some fixed
the CLO market, renewed bank activity and an influx
income crossover investors to private debt funds.
of freshly-raised funds has required managers to
graze new pastures in the hunt for deals. But to do
“
The immediate challenge to
the private debt market is oversupply of capital. Renewed bank
activity, and the significant new
funds raised, requires managers
to look to new sources for deals
this may require new skill-sets, new relationships
and even extra geographical reach. Specialist firms
such as Beechbrook Capital, Metric and Kreos have
strong private equity relationships in the lower
middle market and growth capital sectors. It will be
interesting to see if some of the larger private debt
firms attempt to muscle in on this bespoke and high
returning sector.
One of the key features of recent quarters
has been significant sums committed to private
debt funds where unitranche is a core strategy. The
PAGE 3
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
Direct Lending
Table 2: Direct lending strategies – typical features and current returns
SMEs
MIDDLE MARKET
FEATURES
Return
Cash
interest
Return
Cash
interest
Additional
returns
Deal source
Sponsorless mezzanine
– Europe
14-18%
4-8%
Floating
13-16%
4-8%
PIK,
Warrants
Corporates,
Advisors
Sponsorless mezzanine
– US
15-18%
10-15%
Fixed
13-16%
8-12%
Warrants
Corporates,
Advisors
Senior corporate loans
3-5%
3-5%
Floating
N/A
N/A
N/A
Corporates,
Advisors
Private high yield bonds
7-10%
7-10%
Fixed
7-10%
7-10%
N/A
Corporates,
Advisors
Source: Arbour Partners
D
irect lending is the provision of credit directly
is whether a manager can enter into dialogue with
to middle market companies for growth or
enough companies and their advisors across Europe
acquisitions without the sponsorship of a
to build a diverse and robust portfolio.
private equity firm. A credit constrained European
SME market and attractive yields has seen direct
There are key advantages and also specific
lending become a big focus for investors over recent
risks to the true direct lending approach. When
quarters. Several large UK pension funds as well as
financing markets are tight, a well-capitalised
global sovereign funds have turned their attention
and skilled direct lending group with a somewhat
to the sector, enticed by the favourable risk return
counter-cyclical strategy can provide credit with
profile from senior secured lending strategies.
strong yields in a less crowded space. Asset managers
with their own origination capability are less at risk
“
of being outmuscled by other lenders. In a work-out
A credit constrained European
SME market and attractive yields
has seen direct lending become a
big focus for investors over recent
quarters.
situation, however, the absence of a well-capitalised
sponsor with an incentive to inject more capital also
means that the direct lender needs to select deals
very carefully.
Key to the next phase for direct lending may
be bank relationships as the­banking sector starts to
Most credit managers are still combining
recover. Managers seeking to source deals away from
their direct lending transactions with private
private equity might need to provide capital alongside
debt deals. The skill-sets required are certainly
regional banks, rather than trying to compete.
complementary. However, originating deals in this
space is more challenging. The question for investors
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
PAGE 4
Invoice Funding
Table 3: Invoice funding – typical features and returns
Single creditor - High yeld
Insured SMEs creditors
Return
Tenor
Senior:
80-90%
2-6%
12-24
months
Mezzanine:
0-20%
6-15%
Equity:
0-10%
N/A
Size
Single creditor - Investment grade
Size
Return
Tenor
Up to 50
4-8%
12-36
months
50-200m
12-24
months
Up to 10
4-6%
12-36
months
5-20
N/A
Up to 5
N/A
N/A
Up to 10
(US$ million)
(US$ million)
Return
Tenor
1-2%
12-36
months
Size
(US$ million)
N/A
Source: Arbour Partners
I
nvoice Financing is the funding of a buyer, or a
Supply Chain Financing (also known as Reverse
supplier of goods or services, for the provision
Factoring) is the fastest-growing sector but the
of those same goods or services. The lending is
market also includes Factoring, Invoice Discounting,
collateralised by the invoice exchanged between
Dynamic Discounting and others. Invoice portfolios
these parties and is normally non-recourse, although
can be single-creditor or diversified and may or
insurance or credit guarantees often form part of the
not be insured. However, most formats of Invoice
agreement.
Funding share some common characteristics:
•
The Invoice Financing market is mostly made
Typical lending facilities are in place for 12 to 36
up of private bilateral transactions and it is difficult to
months. The underlying invoices, on the other
assess the size of the market. However, it is estimated
hand, routinely have 30 to 180-day payment
that the Invoice Financing market in Europe alone
terms - hence the exposure can be reduced
is worth over €1 trillion (Source: “Demica Reports”,
quickly if needed
May-Oct 2012).
•
Coupon varies widely, depending on the
structure and underlying credit. As a benchmark,
Lending used to be primarily the domain
a lender can expect to receive between 1 and
of commercial banks. Regulatory changes such as
2% above the obligor’s Senior Unsecured level
Basle 3 have made it less attractive to bankers. A new
breed of peer-to-peer lenders (e.g. Funding Circle,
(actual or estimated)
•
Servicing and origination of individual invoices
Market Invoice) have targeted the smaller businesses
is usually the remit of a servicing platform.
and some of the larger corporations have set up their
The platform is responsible for due diligence,
own programs to assist suppliers. However, much of
underwriting
the void left by the banks remains open to private
invoices/borrowers
lenders.
The Invoice Funding landscape encompasses
a number of different categories and risk profiles:
PAGE 5
“
and
insurance
of
individual
Much of the [Invoice Funding]
void left by the banks remains
open to private lenders
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
Growth Capital
Table 4: Growth capital – typical features and returns
Investment horizon
Investment size
Returns
Structured growth capital
5-7 years
€5-20m
20%
Growth debt
3-7 years
€5-20m
15-20%
Venture debt
1-3 years
€1-10m
9-15%
Equity
3-5 years target
Varies
(depending on fund size)
20-30%
Source: IPF Partners
G
rowth Capital transactions have long been
a relatively small subset of the alternative
capital markets. This is somewhat surprising
“
given the high returns available from the strategy and
the mediocre performance of some buyout strategies
From both a business owner
and investor’s perspective, the
rationale for growth capital is
strong
in recent years. However in the past 12 months the
volume of growth capital investments has reached
Structured growth capital, a preferred equity
a ten-year high in the technology sector alone, with
product, is similarly versatile to growth debt. It tends
50 deals being completed in the first half of 2014.
to be offered to firms that need extra capital now to
Meanwhile, GPs have been actively bringing more
unlock latent growth potential. These investors are
product to market with Harbert Management, IPF
not there to take over the reins but to act more as a
Partners and Kreos Capital all launching new funds
financing source or minority shareholder. Structured
in recent months.
capital can be offered in various forms including
preferred shares, convertible bonds or Tier 2 capital.
From both a business owner and investor’s
The returns to structured capital tend to be similar to
perspective, the rationale for growth capital is strong.
the higher end of growth debt investments but they
Borrowers are typically second-stage firms expecting
can face more risk as they are lower down the capital
high growth. They possess a strong-selling product
structure.
but lack cash to fund the next phase of the business.
Each transaction can be tailored to meet the needs of
the firm at that particular stage. To protect interest
and principal, debt is secured against product
revenue. Growth debt investments can benefit further
by incorporating earnings participation or product
royalty participation schemes into the financing.
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
PAGE 6
ACMV Top Theme
Can the new ‘direct lenders’ serve SMEs?
P
rivate credit is now a dominant theme for
of awareness of the capital solution on offer from
global institutional investors. Several fund
the fund management community.
managers have had to upscale their direct
Private credit is well-suited in most respects
lending funds in recent quarters due to demand
to carrying the ball the banks have so dramatically
primarily from fixed income investors. ICG will follow
dropped. Fund structures are invariably still in the
its 1.75bn Direct Lending Fund I with a 3bn Fund
locked-up GP-LP formats that favour pension funds
II in 2015. BlueBay is readying a 1bn-1.5bn fund for
and insurance. Therefore as a direct lender the GP
market to follow its 2013-2014 fund of a similar size.
is required to be both long-term and patient in the
GSO, Ares Management, Permira and Legal and
way it provides capital. Loan tenors are in the 4-10
General-backed Pemberton Capital Advisers are the
year range. Moreover, lending funds are typically
most prominent group of 1bn funds now expected.
able to be more flexible in their terms than banks
– using senior loan, mezzanine, unitranche or
These direct lending funds are now
subordinated debt structures to varying degrees
increasingly looking to source their lending
to match a borrower’s requirements. This is
opportunities in the European corporate middle
still not well-known outside the buyout sector or
market. This is because the supply of credit
amongst firms which are not covered by specialist
opportunities from large buyouts has not even
debt advisers.
come close to keeping up with this new investor
demand. The Standard and Poors LCD data service
reports a run rate of only 60-70 European middle
certainly cultural factors at play. Leaders of growing
market buyouts requiring private debt finance in
industrial
Europe per year. By comparison, direct unsponsored
managers or engineers, still feel disconnected from
(non buyout) deals financing growth situations,
the alternative investment community ensconced
acquisitions and refinancings of middle market
in its offices in Europe’s most expensive capitals. All
companies with earnings between 25m and 1bn are
business leaders want their capital to come from
running at 300-400 per year according to LCD. This
people who “get them”. Both origination and credit
is just the tip of the iceberg. The unserved European
teams in the lending funds will need to spend
middle market which fund managers now intend
more time out in the world where middle market
to finance could see deals done running at many
companies operate to build the required respect.
multiples of this amount.
Operational industry experience within lender
As well as a knowledge deficit there are
companies,
whether
entrepreneurial
teams as well as direct lending experience in
But before the direct lending asset
class can reach its huge potential there are still
banking will be a source of competitive advantage
when trying to build out large borrower bases.
significant challenges to overcome at the point
of interface with corporate Europe. Not least,
asset managers seeking to serve SMEs face
end of the telescope, from the lending fund manager
lingering suspicion of the asset management
perspective, the lack of detailed information provided
sector amongst CEOs and CFOs of medium sized
by smaller private companies or rating firms is the
firms. This stems in most part from a simple lack
key hurdle. In private equity-sponsored situations
PAGE 7
Looking at the market through the other
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
the acquirer will have done its own detailed due
good returns to investors are based on faultless
diligence. This does require recalibrating from a debt
performance, there is little room for error. Monitoring
perspective, but at least it’s there. There are moves
a portfolio company after investment may not be
afoot to help fund managers to overcome this hurdle.
challenging in good times, but becomes rapidly so if
Standard and Poors is rolling out its own 1-8 rating
problems arise in a credit. Managers fighting fires
scale for smaller firms and reports strong take-up
with more than one or two portfolio companies
among fund managers. Some fund managers such
are going to need strong workout experience and
as Pemberton are investing significant resources to
a critical mass of people to work on more than
utilise credit analytics and externally-validated rating
one situation. In the case of a full bankruptcy
processes, encouraged by their insurance company
the lender group will have to spend considerable
investors. If portfolios come under stress there
time in a court process without other lenders
will need to be considerable workout experience
or sponsors to share the burden of time and of
in lending teams to be able to use this information
negotiating power.
effectively even where it exists.
Typical investment periods for direct lending
After navigating these headwinds managers
funds are set at three years, with some as short as two
then face a whole series of practical issues in the
years. The average size of a new direct lending fund is
establishment of lending processes for smaller
1bn Euros. This level of throughput of loans requires
firms. The first of these is simply establishing
a large number of deals to put through monthly due
positive contact with sufficient numbers of firms
diligence if a lending group’s “look to book” ratio is
that will satisfy credit criteria and require capital
not to be dangerously tight at this stage in the credit
– “origination”. There are three main ‘routes to
cycle. Successful deployment of funds in the next two
market’ typically relied on by asset managers:
years is going to be make or break for some asset
direct
managers.
relationships
with
borrowers,
deals
sourced through “advisors” - local lawyers and
accountancy firms, and deals done alongside
These
challenges
are
certainly
banks. Only a handful of asset managers have
surmountable. But there needs to be rapid
extensive relationships with corporate borrowers
progress if the private credit market is to continue
on a pan-European basis. These are typically former
its healthy growth.
bank teams fused together on lending platforms.
GE Capital and Ares Management are two examples
The prize on offer is enormous. If the fund
of well-established lenders. However, these firms
management community can connect properly
operate extensively in the larger buyout spaces. More
with corporate Europe and channel the demand
common are smaller local groups which specialise in
from global investors, it will be one of the key
a country or region or on an industry sector. These
factors in Europe’s recovery.
groups are more likely to have the social relationships
within business networks and to be able to generate
referrals for investment opportunities. Oquendo in
Spain, Tikehau in France and Beechbrook in the UK
are examples of groups which are very well-placed
to build direct lending operations.
From here, managers move into “due
diligence” mode with scarce data and in some cases
relatively-short operating histories. In credit, where
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
PAGE 8
Real Estate Financing
Table 5: Real estate financing – typical features and returns
Core Europe
UK
Southern Europe
Return
Cash
interest
Additional
return
Return
Cash
interest
Additional
return
Return
Cash
interest
Additional
return
Senior:
0-60% LTV
2.5– 4.5%
2.5-4.5%
N/A
2-4%
2-4%
N/A
4-6%
4-6%
N/A
Whole loan:
0-75% LTV
4-6%
3-5%
Deal fees
4-6%
3-5%
Deal fees
6-8%
5-7%
Deal fees
Stretched
senior:
60-75% LTV
6.5-9%
5.5-8%
Deal fees
6-10%
5-8%
Deal fees
8-11%
7-10%
Deal fees
Mezzanine:
75-85% LTV
9-12%
5.5-8%
Deal fees,
Capital
11-15%
6-9%
Deal fees,
Capital
12-16%
7-10%
Deal fees,
Capital
Source: Arbour Partners
I
n 2014, the pace of real-estate-backed lending
dated paper has triggered a fall in long duration deals
activity increased considerably, with credit
secured by prime properties.
margins on all levels of debt falling (Cushman &
Wakefield have reported all-in cost of debt for prime
lending in the UK at its lowest level since 2000), with
particular declines in core lending. In addition, the
legacy of the bad loans from the previous cycle have
“
continued to decrease – most notably in the UK with
Liability-driven investors are
drawn to the benefits of the long
duration loans that are on offer
the continental lenders lagging behind.
A key market trend to watch out for in 2015
Much as in other private credit sectors, bank
is the continued Southern migration of European
retrenchment is being driven by capital considerations
real estate capital. Spain, Italy and Greece doubled
and regulatory burdens. This has meant the surge in
their share of tracked lending in 2014, with an 80%
real estate financing is increasingly being supplied by
increase in volumes. Prime lending now comfortably
debt funds and alternative lenders – which now make
sits in the 55-70% LTV range for most countries across
up around half of all European lenders. Liability-
Europe and the whole loan market has grown and
driven investors are drawn to the benefits of the long
is expected to continue to do so, with whole loans
-duration loans that are on offer.
being secured at 70-80% LTV.
The changing structure of the real estate
financing market has precipitated two further trends.
Firstly, the high risk tolerance of the institutional
investors in debt funds has led to a rise in leverage.
Secondly, the rise in appetite for good quality long
PAGE 9
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
Focus Transaction – Healthcare Growth Debt
Table 6: Recent healthcare growth transaction – features and returns
Bone Cement Company (CC)
Sector
MedTech – Orthopedics/Bone void fillers sector
Products
• PRODUCT BVF: a synthetic bone void filler, has utility in orthopedic procedures in which a bone void must
be filled, such as traumatic fractures, reconstruction, and bone cyst removal.
• PRODUCT G: an antibiotic-releasing version of PRODUCT BVF targeted at infected bone.
Use of proceeds
Growth debt will be used to accelerate sales in the US, replicate this uptake in Europe and finance further
expansion into other treatment indications and areas.
Deal size
€5 million growth debt financing
Deal structure
highlight
Financing split into 2 tranches:
• Tr1: Margin: EURIBOR+13.5% plus 5.0% exit fees
• Tr2: Margin: EURIBOR+13.5% (ratchet down to 8% once LTM revenues >€4m) plus 5.0% exit fees
Collateral
• Pledge over key IPs registered in US and EU
• Share pledge over the main operating company which holds all key assets/IP
• Pledge over escrow cash account (lock-box mechanism) and €0.5m of receivables
Downside
protection
• The neat corporate and transaction structure would allow the business to operate and be sold as a going
concern in the event of enforcement
• Covenant package with quarterly testing including Interest Coverage (ICR) and Debt Service Coverage
Ratios (DSCR)
IRR returns
17%
T
he medical and pharmaceutical sector has
bone filler market is lucrative, with an estimated
seen renewed activity from investors, with
market size of over $500m.
EMEA healthcare transactions totalling $34.9
billion since the start of 2014, up 52.7% on the same
The deal structure shows the innovative
period last year. Med-tech and bio-tech products at
financing solutions that growth debt capital can
the commercial stage often have the right financial
provide. The deal is structured into two tranches: the
profile for growth debt investments. Strong revenue
first tranche is issued upfront at a fixed return plus
projections arising from an often healthy order book
Euribor, the second tranche is subsequently issued
provides prospective cash flows to service debt.
contingent on whether the firm hits its revenue
projections. The growth debt provider mitigates
Table 6 shows a MedTech case study. Bone
downside risk through the use of bespoke covenants,
Cement Company is a bone void filler specialist. The
as well as securing collateral from the firm in the form
product is used to treat crushed limbs with multiple
of IP and access to the firm’s receivables.
fractures and other serious conditions. Bone Cement
currently has products registered with the FDA and
distribution partnerships in North America. The US
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
PAGE 10
A Taxonomy of Private Credit
After a flood of publicity, excitement and money, the private credit market has become awash with a horde
of new strategies, instruments and funds. But speak to more than a handful of market participants and it
soon becomes clear that one man’s private debt may well contain elements of another’s direct lending.
Here at ACMV, we have decided to try to introduce order into this disordered menagerie and taxonomise
the various flora and fauna that inhabit the wonderful world of private credit.
INSTRUMENTS
STRATEGIES
PRIVATE CREDIT
P
Private Debt
Direct Lending
Growth Capital
Real Estate
Private credit
assets arising
from a sponsored
transaction
Sponsorless
originated
corporate lending
to mid market
firms
Corporate issued
hybrid debt used
to finance growth
Private credit
assets secured by
real estate (often
commercial real
estate)
Capital used to
fund
infrastructure
investments
Credits of
defaulted
companies or
highly distressed
companies
Lev. Loans,
Syndicated Loans,
Mezz,
PIKs ,
Warrants
Senior,
Unitranche,
Mezz,
High Yield
PIKs,
Warrants,
Minor Equity,
Struc. Equity
Senior (0-65 LTV),
Mezz (65-85 LTV),
Equity (85+ LTV)
Senior,
Junior,
Equity
Senior,
Mezz,
Convertibles,
Equity
writedowns
Infrastructure
Distressed Debt
rivate credit is the universe of all non-public
Growth capital describes a number of
debt transactions that are not financed by
different strategies targeted at providing capital
banks. It includes debt investment strategies
to finance company growth. Deals can be highly-
with a range of risk profiles, backed by an array of
bespoke with a number of equity-like features and
securities. Private credit has been the key beneficiary
tailored protections that ensure both parties end up
of the post crisis retrenchment of European banks.
with the ideal risk return profile.
We broadly classify private credit into 6 separate subcategories.
Real estate and infrastructure funds are
characterised by the underlying security of the loans.
As discussed earlier, private debt funds
Many funds further specialise according to their
invest in assets that are originated by private
position on the balance sheet. Senior investments in
equity transactions. As supply is heavily influenced
both sectors can be very low risk but high in duration
by the health of the M&A market, typical deals
– attractive to investors with long dated liabilities.
include leverage loans, mezzanine loans and other
instruments of leveraged finance.
Distressed debt investments are made in
firms that are bankrupt or have a high probability of
Direct lending covers corporate lending to
being bankrupt. Investments are characterised by the
small to middle market firms. Debts are often senior
solvency of the company, rather than the position in
in the capital structure with unitranche being another
the capital structure or the business of the borrower.
widely-used instrument.
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ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
Alternative Finance Participants
Table 7: Principal alternative capital providers, US and Europe
Asset focus
Sources of
capital
Owner
strategy
Examples
Independent lenders
Private debt: senior
and mezzanine,
Direct lending,
Special situations
Pensions,
insurance, SWFs
IPO,
Trade sale
Beechbrook,
Tikehau,
Monroe,
Pemberton,
CORDET
Alternative investment
groups
Private debt: senior
and mezzanine,
Direct lending,
Special situations
Pensions, insurance,
SWFs,
Parent co-investment,
CLOs
Acquisitions,
Organic scale-up
Blackstone/GSO,
Partners Group,
KKR,
Bain/Sankaty
Fund of funds credit
sections
Private debt: senior
and mezzanine
Pensions, insurance,
SWFs,
Parent capital
Acquisitions,
Organic scale-up
Pinebridge,
AXA,
Portfolio Advisors,
SVG
Asset manager
credit sections
Private debt: senior
and mezzanine
Pensions, insurance,
SWFs
Organic scale-up
Oaktree,
Babson,
John Hancock,
TCW
Publicly listed
financiers
Private debt: senior
and mezzanine,
Direct lending
Further listings,
Credit facilities
Scale-up,
Acquisitions
CIT,
ICG,
SVG,
American Capital
Growth capital funds
Structured equity,
Preferred shares,
Convertible loans,
Minority equity
Pension funds,
Funds of funds,
Family offices
Organic scale-up,
Trade sale
Monroe,
Summitt,
IPF,
PrefEquity
Business development
companies (BDCs)
Private debt: senior
Listed equity,
Bank facilities
Further listings
Ares,
Apollo,
Golub,
ACAS
Real estate lenders
Whole loans,
Senior debt,
Mezzanine
Pensions, insurance,
SWFs,
Parent backing
Organic scale-up,
IPO
Venn,
DRC,
Green Oak,
Longbow
CLOs
Private debt: senior,
Syndicated loans
Issuing more vehicles
Organic scale-up,
Acquisitions
Alcentra,
CIFC,
Lyxor
Mezzanine
houses
Private debt:
mezzanine,
Minority equity,
Private debt: senior
Pensions, insurance,
SWFs,
CLOs
IPO,
Organic scale-up,
Acquisitions
ICG,
MezzVest,
Park Square,
Indigo
Balance sheet lenders
Primary LBO loans
Balance sheet
Acquisitions
GE Capital
Source: Arbour Partners
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
PAGE 12
Alternative Capital A to Z
Asset liability management
(ALM)
An investment strategy that attempts to match future asset payments with
future liability payments. It is commonly used in the portfolios of life insurance
companies and defined benefit pension funds
Direct lending
Credit finance for companies that are not majority-owned by a private equity fund
and where negotiation is with owner-management
Factoring
The provision of finance to a supplier of goods for closing the cash flow gap
between the issue of an invoicing and payment of that invoice. Factoring is the
more traditional form of Invoice Funding
General partner (GP)
The member of a fund partnership with fiduciary responsibility for the investment
management of the fund on behalf of its limited partners (LPs)
Growth capital
Financing for relatively mature companies to expand operations or to enter new
markets while they retain control ownership of the business
Growth debt
Shorter-term debt finance for small to medium-sized growing companies which is
repaid relatively quickly as revenue grows
Illiquidity
A measure of the difficulty in trading an asset, typically indicated by the difference
between bid and offer prices
Illiquidity premium
The additional yield paid to compensate investors for the illiquidity of an asset,
irrespective of its credit quality
Internal rate of return (IRR)
The rate applied to one or more future payments so that these payments have
a net present value of 100% of the invested amount. Thereby, a measure of the
return expected from the investment
Inter-creditor agreement
An agreement between one or more creditors in a particular borrower
Invoice funding
The financing of a buyer or a supplier of goods or services for the provision
of those same goods or services. The lending is collateralised by the invoice
exchanged and is normally non-recourse but may include insurance or credit
guarantees
Limited partner (LP)
An investor in a fund partnership who is not responsible for the management of
the fund
Loan to value (LTV)
The ratio of credit provided in proportion to the purchasing price of the asset
Mezzanine finance
(European corporate)
A secured loan, typically floating rate, which contracts for additional equity-like
exposure including PIK and warrants
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ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
Mezzanine finance
(Real estate)
A lower-ranked loan backed by real estate up to typical loan value levels of 85%,
with a correspondingly-high interest rate
Mezzanine finance
(US corporate)
An unsecured corporate credit investment typically with a high fixed-interest rate
and often with an attached warrant to purchase equity
Original issue discount
(OID)
A bond or loan that is issued at below its face value
Payment in kind (PIK)
A credit contract that does not involve transfer of cash flows from borrower to
lender between drawdown date and maturity. PIK interest accrues until maturity
or refinancing
Private credit
An umbrella term for the universe of all non-public debt transactions not financed
by banks
Private debt
The provision of credit by investors to private equity firms to finance buyouts
Senior loan
Loans that retain the first claim on all interest and principal repayments from the
company or property or project
Sponsorless
mezzanine finance
Mezzanine finance for companies that are not owned by private equity funds
Stretched senior loan
A highest-ranking loan that lends up to a slightly higher loan-to-value ratio than a
typical senior loan and charges a higher interest rate
Supply chain finance (SCF)
The provision of finance to a buyer of goods, commonly employed in accelerating
payments to its suppliers in exchange for better trading terms. SCF is often called
Reverse Factoring. To compound confusion, the term Supply Chain Finance or its
acronym are often used to refer to the entire Invoice Funding space
Unitranche loan
A debt facility that combines features of both senior corporate loans and
mezzanine loans
Warrant
A derivative security that gives the holder the right to purchase interests (usually
equity) from the issuer at a specific price within a certain time frame
Source: Arbour Partners
ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015
PAGE 14
Disclosures
Certain information contained in this paper constitutes “forward-looking statements”, which can be identified by the use of forward-looking
terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “estimate”, “intend”, “continue” or “believe” or the negatives
thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual
performance may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors should
pay close attention to the assumptions underlying the analyses and forecasts contained in this paper. The analyses and forecasts contained
in this paper are based on assumptions believed to be reasonable in light of the information presently available. Such assumptions (and
the resulting analyses and forecasts) may require modification as additional information becomes available and as economic and market
developments warrant. Any such modification could be either favorable or adverse. Nothing contained in this paper may be relied upon as a
guarantee, promise, assurance or a representation as to the future. Certain information contained herein has been obtained from published
and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such
information is believed to be reliable for the purpose used herein, Arbour Partners LLP and its affiliates assume no responsibility for the
accuracy or completeness of such information. Historical information is not indicative of future results, and the historical information in
this paper should not be viewed as an indicator of any future performance that may be achieved as a result of implementing an investment
strategy substantially identical or similar to that described in this paper.
©Arbour Partners LLP
Advisor and Arranger in Global Private Capital Markets
1 Cornhill, London, EC3V 3ND
Interested parties please email ACMV@arbourpartners.com
PAGE 16