Epsilon aiming to be first ‘pure’ Australian corporate direct lending fund

Set up by former Commonwealth Bank of Australia executives, the firm has attracted backing from a cornerstone investor as it seeks A$500m for its maiden vehicle.

Epsilon Direct Lending has secured a commitment from an unnamed private wealth firm, alongside various other private wealth groups and family offices, as it sets out to raise A$500 million ($388 million; €321 million) for its debut fund from Australian investors.

The fundraising is expected to reach a first close by the end of May this year. It is an open-ended fund, structured as an unregistered unit trust, with a three-year lock-up period providing predominantly senior loans with an average loan life of three and a half years. The target return is around 6 percent net.

The three founders of the firm – Mick Wright-Smith, Joe Millward and Paul Nagy – all formerly worked in leveraged finance at banks. All three most recently worked at Commonwealth Bank of Australia where Wright-Smith was executive director and national head of middle market leveraged finance. Millward was previously head of loan funds at RBS Asset Management in London, and Nagy has been a private equity client of both Wright-Smith and Millward.

Millward and Nagy told PDI the Australian opportunity is largely driven by a scarcity of capital. Although Australian lending is dominated by the banks, deteriorating bank appetite and focus, particularly for mid-market growth and event-driven financings, has created a gap for lending tailored to the requirements of borrowers.

Epsilon believes that, out of a A$1 trillion total corporate loan market in Australia, there is a gap for mid-market growth and event-driven lending worth around A$70 billion. The equivalent market in the US is thought to be worth around $900 billion. The firm will typically lend around A$30 million, with an upper limit of A$60 million and lower limit of A$10 million. It anticipates around 60 percent of the capital will go to sponsor-backed deals and 40 percent to non-sponsored.

Millward and Nagy said they believe the fund is the first mid-market focused “pure play” corporate direct lending fund in Australia. Other similar lenders tend to have broader sector or geographic focuses such as real estate, special situations and syndicated loans.

The two men say one big difference of Australia relative to Europe and the US is the absence of covenant-lite loans. In exchange for flexibility and certainty of financing, borrowers in Australia are typically willing to agree to at least three covenants.

Epsilon has targeted predominantly Australian investors – including superannuation funds, and private wealth groups which have shown a willingness to back direct lending funds in Europe and the US – but are also aiming to pursue international investor interest to complement local demand.