Having first intended, quite naturally perhaps, to enter the US market, Muzinich & Co instead opted to try to exploit the growth potential of Europe’s emerging private debt markets rather than become just another contender in a US market that was already mature.
A second peculiarity in Muzinich’s approach was that – contrary to most European GPs – the firm started with local country-focused funds rather than basing its operation in London and then gradually venturing out into the mainland.
“That is one of the differentiators,” says Kirsten Bode, the firm’s co-head of pan-European private debt. “People have expanded through satellite offices but very rarely do they have full teams on the ground [in the UK, France, Spain and Italy] who are properly integrated into the ecosystem in the different jurisdictions.”
A couple of other aspects of Muzinich’s approach that Bode highlights as distinctive are its focus on the lower mid-market and its willingness to do sponsorless deals. Bode points out that the European market has been heavily influenced by the impact of large US-based managers such as Ares Management, Blackstone Credit and KKR. But Muzinich targeted ticket sizes of €10 million-€50 million, a part of the market that many other players grew out of – and where Bode believes there is now less competition, combined with high barriers to entry.
While Muzinich has been a private debt player for the last decade, it has a 35-year investment track record, with the first 25 years based around liquid markets. Asked whether that background has been influential, Bode says: “The DNA is very much what we have learned from our public market colleagues, so it’s focused on capital preservation. We play mostly in the conservative parts of the capital structure, minimise leverage and sometimes take an equity upside component, but it’s overall quite a conservative structuring methodology compared to the market average.”
From its roots in Europe’s smaller deals, Muzinich has branched out into the US – where the firm has a small fund purely focused on sponsorless transactions – and Asia-Pacific, where in June this year it announced a final close of its debut fund in the region on $500 million.
Asked about the firm’s approach there, Bode replies: “The deals work a little bit different. In Asia, more than in any other jurisdiction, it’s important to have people on the ground as you work much more with asset security and personal guarantees and you need to do background checks to make sure you’re dealing with the right people. So again, having people on the ground is vital – which we have in Singapore, Hong Kong and Australia.”
She adds that the firm is also open to doing secondaries transactions in Asia-Pacific – mainly buying exposures from the banks – which is not a characteristic of its direct-lending approach elsewhere. While the three markets mentioned above are the main focus for deals, Bode says the firm will also consider other markets. It has done one in India for example, albeit with an offshore element to the structuring that provided additional security. Bode says a characteristic of Asian financings is that they are often a bridge to an initial public offering.
In Europe, Bode says the firm has no intention of shunning the UK market despite its current struggles and points out that, through a selective approach, it’s possible to identify “amazing” companies largely unaffected by the headwinds.
However, she also points out that mainland Europe is a bigger focus for Muzinich than it may be for lower mid-market rivals. “In our portfolio, if you look across different jurisdictions, I would say we have always seen a larger proportion of non-UK deals in our portfolio, which is not surprising given where we’ve come from in terms of setting up our private debt capabilities in continental Europe.”
Bode believes Muzinich to be well placed in terms of its lower mid-market focus, where she sees a strong pipeline of deals as the banks’ risk departments become more cautious.
She also thinks the market has moved towards Muzinich’s conservative approach as leverage levels fall in light of the need to keep a close eye on interest coverage ratios.
She adds that deals also appear to be holding up well at the largest end of the market, where firms have been able to grab a slice of the syndication market – albeit this may prove to be an opportunity with a brief shelf life. It’s in the ‘pure’ mid-market that she sees issues with dealflow: “From what I can see, the mid-market has suffered because deal activity has decreased. People are concerned about impact on enterprise value with the change in interest rates and whether you can still get the financing done.”
Signs of life emerging in deal market
Bode sees growing signs of life in the syndications market as participants start to grow accustomed to the ‘new normal’.
In the wider private debt market, there is a “steady flow” of transactions as confidence is gained from resilient portfolio company performance and a decrease in energy price pressures – albeit that interest costs remain high. “There’s still a bit of pressure on margins, but overall I don’t see any significant deterioration in credit within the portfolio and I expect it to probably continue along the same lines,” says Bode.
In Muzinich’s deals, Bode sees leverage moving more towards 3.5x from 4x, as well as a willingness from borrowers to accept an extra covenant and tight caps around EBITDA adjustments.
She admits that deal terms have not changed dramatically, but nonetheless “slight improvements” are taken as a welcome sign of an environment more accommodating to lenders than for many years.