Stockholm based-ARCOS Capital has launched an inaugural evergreen private debt fund with support from a small number of unnamed large institutional investors.
“We approached experienced investors and decided to go with a few with deep pockets rather than a large number,” says Johan Hultner, founder and managing partner of ARCOS. “It’s a way for them to allocate quite significant amounts of capital.”
Hultner says the evergreen structure has several benefits including access to permanent capital, the flexibility for investors to commit on a deal-by-deal basis rather than up front and the ability to offer larger tickets and to continually support borrowers in need of finance (which may be problematic in a closed-end fund nearing the end of its investment cycle).
ARCOS was established in 2018 and, according to Hultner, spent its early years setting up its institutional framework. The firm considered premarketing a commingled fund but decided not to launch it amid the covid pandemic. “Unless you were raising your fourth or fifth fund and asking for re-ups then launching a commingled fund during the pandemic could be a waste of time,” says Hultner. He adds that the firm remains open to the option of launching such a fund in due course.
The firm focuses on senior loans in the Nordic, DACH and Benelux regions in what it sees as the lower risk end of the market where banks have traditionally dominated. It targets stable companies with more than €10 million of EBITDA and seeks to apply tight deal terms and modest amounts of leverage.
“Investors can already get quite a lot of exposure to unitranche through the direct lending funds but they see us as a way to capture the safe, senior end, and diversify their risk-return,” says Hultner.
He also says private equity firms prefer low leverage multiples in a market where they are often seeking substantial and rapid increases in the EBITDA of portfolio companies: “If you have such an ambitious strategy, it doesn’t really matter to them whether the leverage is 4.5 times or 6.5 times from an IRR point of view because it doesn’t move the needle. But it does move the needle on risk.”