ESO Capital to fully deploy its latest fund by year end – Exclusive

The SME lender sees a pick-up in its special situations deal pipeline amid mounting dry powder in the European private debt market.

European Special Opportunities (ESO) Capital, a London-headquartered European special situations investment firm, is to fully deploy its latest special situations fund by the year end, Tingting Peng, head of investor relations and fundraising at ESO Capital told Private Debt Investor.

The manager’s latest flagship fund, the 2015 vintage European Special Opportunities Fund VI has deployed 80 percent of its $250 million capital, 35 percent of which has gone into real estate debt opportunities.

The firm is looking to deploy the rest of its capital into special situations lending to European corporates.

ESO Capital raised its capital from at least 17 investors based in the US, according to an SEC filing disclosed in February 2017.

PDI understands that Fund VI has an anchor investor based in the UK, while the remaining commitments come from state-backed pensions and corporate pension funds in the US.

The firm typically invests €10 million to €30 million apiece in lower mid-market SMEs with a focus on the UK, Northern Europe, and German-speaking European countries, according to Peng.

The 2013-vintage predecessor vehicle, European Special Opportunities Master Fund V, targeted $230 million, according to PDI data.

ESO Capital also has exposure to European non-performing loans via one of its German portfolio companies in fund VI, LOANCOS Group, as per PDI reporting.

The firm’s investment strategy mainly focuses on a combination of cash and payment-in-kind (PIK) – for which the firm realises its return at the maturity of debt instruments, rather than on a quarterly basis – depending on the type of business and deal.  

Asked if the capital will be fully deployed within the target timeline, this year, Peng said: “Market observers say there is $80 billion dry powder in the European private debt market, but as a flexible capital solutions provider, we continue to see interesting deals in our pipeline.”

ESO Capital is not the only SME lender to point out the growing dry powder mountain in the European private debt market.

“People will have to work hard, and there will be some players out there, the weaker funds, who will struggle to deploy capital on returns acceptable to the LPs,” Jon Herbert, a managing director of the UK SME fund at Beechbrook Capital told PDI during an interview recorded last week.

PDI understands that the ESO fund has a six-year life with a target gross internal rate of return of 16 to 18 percent per annum across both debt and equity on an unlevered basis. For debt instruments, the firm targets an internal rate of return ranging from 12 to 14 percent per annum.

The firm has €550 million in capital under management and invests across the full capital structure, providing bespoke solutions, according to a member list provided by the Swiss Private Equity and Corporate Finance Association.