Debt fund fightback in Germany

After suffering declining market share, German debt funds have recorded a notable pick-up in fortunes in the first half of this year.

Debt funds have increased their share of German mid-cap buyout deals from 18 percent in the whole of 2016 to around 30 percent in the first half of this year, according to GCA Altium’s latest MidCap Monitor report.

The revival would appear to represent a fightback against the stranglehold over deals that was previously enjoyed by the banks. However, this has been achieved by adjusting terms.

“In past quarters, banks made life particularly hard in the German LBO market for debt funds with very aggressive structures,” said Johannes Schmittat, a managing director in GCA Altium’s Frankfurt office.

“The funds have responded and have sharply reduced their average interest margin rates by including favourable senior tranches held by banks,” he added.

He said this was reflected in the prevalence of ‘first-out, second in’ structures and added that “it will be interesting to see whether the debt funds will be able to defend this high market share throughout 2017”.

Until this year, German debt funds operating in the mid-cap LBO market had been seeing their market share diminishing over a two-year period. 

Market share chart 411


The backdrop is a booming LBO market in Germany, with transactions involving a credit volume of between €20 million and €500 million reaching 41 in the first half of this year – a 46 percent increase on the same period last year.

The report also noted that the European market for unitranche finance provided by debt funds set a record in the second quarter of 2017 with 44 transactions. This quarter alone saw the same number of deals as were recorded in the entire first half of 2016.

GCA Altium is the European division of GCA, a global investment bank focused on growth companies and offering services in M&A, debt and public and private finance, as well as restructuring advice.