The increasing prominence of alternative lenders was best exemplified in a panel devoted to the role of debt transactions in mid-market private equity deals on the second day of the ACG Eurogrowth conference held in Barcelona.
Chaired by Jeremy Harrison, regional group head at Bank of America Capital, the session delved into the role non-bank lenders can play in assisting with sponsor-led M&A deals.
The overarching feeling was that the last couple of years have been great a time to be a borrower. As private debt funds continue to attract more commitments from investors, the push to deploy capital has meant corporates and private equity firms have a wide range of debt financing options available.
Rolf Kobabe, a partner at German law firm Luther, said “private equity firms like the idea of working with debt funds because they can be more flexible”.
Joshua Shipley, senior vice president at Pricoa, added that funds’ ability to provide a number of instruments, including unitranche, mezzanine, senior and co-investments with equity added to their attraction. “There is more awareness and willingness from borrowers to look to funds. We’re seeing them evolve to compete with banks as firms look to alternative sources of capital,” he said.
Such competition in the debt market, however, has meant funds have sometimes acted aggressively in pursuit of deals. This was noted by Pam Hendrickson, chief operating officer at The Riverside Company, in an earlier panel in which it was said that valuations had gone up as a result. Her point was echoed by some involved in the discussion on debt, where participants pointed out that many private equity firms have moderated their returns.
Nevertheless, the consensus was that non-bank lenders are here to stay and are likely to increase their presence across Europe, tapping into markets that were seen as impenetrable only a couple of years ago.
Italy and Spain are two destinations where funds are expected to seize on opportunities. Ken Goldsbrough, managing director at advisory firm Duff and Phelps, said that funds are even beginning to penetrate the larger end of the market, referring to the €625 million loan underwritten by GSO Capital Partners earlier this year backing the merger of Italian and US plastic companies Polynt and Reichhold.
The continued march of funds across the continent will not proceed without a fight as banks are expected to compete on deals where they have existing clients. Despite being the largest economy in Europe, the German market still poses problems for funds as banks continue to dominate the finance landscape. This, combined with a cultural aversion to private funds, makes Germany a difficult place to access. “At the end of the day, the banks are the major lenders and I expect to see that for the foreseeable future,” Kobabe said.