Debt funds pass banks in German LBO financing

Go back to the year 2012 and debt funds had yet to surface in investment bank GCA Altium’s MidCap Monitor study of the leveraged buyout market in Germany. That year, all 28 senior debt and unitranche deals recorded by the study were financed by banks.

Having appeared on the scene in 2013, debt funds have been eroding the banks’ market share ever since – almost reaching parity last year when accounting for a 48 percent share compared with the banks’ 52 percent. In the first half of this year, the banks were breached as debt funds reached 56 percent compared with the banks’ 44 percent.

Overall activity in Germany’s unitranche and senior debt markets was subdued in the first half, with 32 transactions compared with 46 completed in the first half of 2018. The share of primary deals reached a record 44 percent while secondaries tumbled to 16 percent. The study noted that some processes were terminated as they struggled to meet sellers’ price expectations, and some ended up going to strategic buyers instead.

German senior and unitranche deals reached a high of 103 in 2017 before falling to 89 last year. With just 32 wrapped up in the first half, 2019 looks set to fall to levels last seen three or more years ago.

With just seven completed in the second quarter, senior deal capital deployment by banks has fallen to the lowest level recorded by the MidCap Monitor since its inception in Q1 2015. Average loan sizes remained in line with previous quarters at around €40 million.

The UK, meanwhile, has defied Brexit uncertainty with a relatively strong level of activity. The second quarter of 2019 saw 49 LBO, add-on and recap/refi transactions completed, only one down on the first quarter (which was the highest number since the fourth quarter of 2017).

More than half of UK deals in Q2 were senior, with unitranche accounting for 44 percent and subordinated 3 percent.