This week brought another tie-up between an alternative lender and an investment bank. Yet the arrangement between BlueBay Asset Management and Barclays was a little different to the GE Capital and Ares Management joint venture which launched last year. In that instance, the pair launched a vehicle they co-sponsored, whereas BlueBay and Barclays have simply signed an agreement to work together on selected UK deals.
It is however noteworthy, because it suggests banks are really starting to take notice of private debt funds, even if they don’t fully understand whether they represent a welcome addition to the market, or a threat.
Anthony Fobel, a partner and head of private lending strategies at BlueBay, spoke to Private Debt Investor about the deal. Asked about banks’ changing attitude to funds of his ilk, he responded: “It’s a difficult one for banks. They don’t really know what to make of alternative lenders. Are we partners or competitors? Are we even relevant?”
Some banks are no doubt concerned they’re losing out to unitranche providers, who are able to push leverage multiples beyond a level banks feel comfortable with. They’re missing the chance to underwrite and also provide ancillary services to borrowers.
“Barclays realised they could work in partnership with us, to everyone’s advantage,” Fobel added.
The mechanics of any deal under this arrangement are interesting: while the borrower receives a single loan, the debt comprising the unitranche package is diced to meet the differing needs and appetites of the two lenders. So Barclays underwrites a lower risk tranche, at a lower margin, while BlueBay takes the higher risk tranche at a higher margin.
Significantly, BlueBay also controls the loan in the event something goes wrong. If there is a default, or distress, BlueBay can restructure the loan and only right at the end of any process would Barclays step in (even though it is first in line for any repayment).
Other private debt fund managers PDI spoke to agreed the deal made sense for both parties, although some felt Barclays had more to gain than BlueBay. While BlueBay will obviously benefit from the broader origination platform Barclays offers (Fobel again: “The biggest challenge private debt funds face is finding deals”), the additional firepower it brings (enabling it to target bigger deals), and the greater certainty of execution, Barclays gets to tap into a whole segment of deal activity that it otherwise wouldn’t have access to.
This last point really is a key one. Thanks to the raft of post-crisis regulations, banks are constrained as to the type of deals they can underwrite. They are still lending, but only to industries they know well and at more modest leverage multiples. They’re also increasingly parochial in geographic terms.
As a result, they’re missing out on a whole slew of deals that private debt funds are merrily piling into, able to finance them due to their greater flexibility and appetite for risk. For a bank, losing out on an underwrite isn’t too painful, but the lost opportunity to market all the ancillary services they provide really is.
This deal then is a neat solution from Barclays’ perspective. Interestingly, it’s not the only bank that’s been in discussions with a private debt firm. BlueBay had been approached by other lenders before choosing to partner with Barclays, and rival firms have also explored similar partnerships with the banking community (aside from those already agreed like GE and Ares). You can be sure further partnerships will follow.