Exclusive: Swiss Capital eyes $400m for direct lending

The $5 billion asset manager will target first-lien investments in the US mid-market.

Swiss Capital Group is seeking to raise up to $400 million for its first fund dedicated to direct lending, PDI can reveal.

The Zurich-based asset manager has invested in direct lending before but has gathered commitments of more than $100 million so far for the Swiss Capital Disintermediation Fund focused on the strategy.

The firm will target first-lien mid-market corporate debt strategies in the US and Europe with a leaning towards the American market, which offers the best risk-adjusted returns, Hans-Jörg Baumann, chairman and senior partner at Swiss Capital, told PDI.

Spreads in private debt remain attractive relative to US and European government paper, particularly since January when government bonds entered negative yield territory, Baumann said.

But the direct lending market in Europe is smaller and more fragmented than in the US, he added.

“On a risk-adjusted basis, one is best compensated in the US. There were times when it was more attractive in Europe. However, Europe is a limited market with over-demand from investors as there is simply too much liquidity,” Baumann said.

He also thinks that banks in Europe pose too much competition on a local level.

“Europe is not ready yet for disintermediation. Banks are forced to reduce their balance sheets. However, so far they have more focus on reducing their cross-border business and less so on reducing their local business,” he said.

Swiss Capital is targeting gross internal rates of return (IRR) of 9 percent and a net IRR of 8 percent for the fund.

The firm manages money on behalf of institutional clients, including insurance companies and large family offices, with a strong presence in Switzerland, Germany and Austria. It also has an office in Dublin, where roughly a third of its 45 staff are based.

The firm works on the basis of selecting sub-contractors or investment managers in various regions. Managers then invest according to individual investment guidelines through separately managed accounts.

Swiss Capital typically oversees mandates of at least $100 million and invests in corporate, real estate and infrastructure debt. However, in order to facilitate smaller investors with ticket sizes in the range of $20 million to $50 million, it has launched six closed-ended club deals, allowing a number of investors to come together for a bigger mandate, usually of $200 million to $300 million. Two of these have been fully repaid.

For its latest fund, Swiss Capital will aim to invest roughly 70 percent to 80 percent of capital in direct lending and the rest in other disintermediation-linked lending.

“We prefer first-lien debt. In the next two to three years, there is a reasonably high probability that equity or mezzanine will experience a correction,” Baumann said.

“Real estate has undergone a tremendous repricing during the last 18 months and in infrastructure debt, investors are not adequately compensated”, thus making corporate debt the most attractive opportunity, he added.

Swiss Capital has $5 billion in assets under management of which $3 billion is private debt.