Non-sponsored deals are likely to garner attention from a number of private debt participants. With more capital being raised in debt funds, even larger market participants will look to the sponsorless space with only a limited number of private equity-backed deals seen each year.
That’s the view of Paul Shea, managing partner at London-based fund manager Beechbrook Capital. Shea will be participating in a panel on origination in the non-sponsored deal space during PDI’s Germany Forum in Munich later this month.
“It’s going to have to grow as a market,” Shea told PDI. “There’s simply not enough private equity-backed deal flow.”
It means even large managers used to investing in sponsored deals in the upper-mid-market will soon find themselves chasing non-sponsored lending opportunities. “A lot of these people raising big funds are going to have to start deploying in sponsorless,” Shea added.
Moving into sponsorless lending is no easy transition. While the fundamental credit analysis may be little different to the sponsored deal space, there are several nuances which a lender has to get to grips with, Shea noted.
Extra care should be taken when assessing a company’s corporate governance and management, Shea said. Financial reporting and the finance team behind a company – something often provided by a private equity owner – also needs to be assessed in greater detail.
Figuring out how returns will be generated is also a topic of discussion when looking at sponsorless deals. “There’s the crucial part of actually getting your money back,” Shea noted. An exit is usually anticipated when working with private equity sponsors, but there’s obviously a different dynamic without a sponsor involved.
Shea also noted he anticipates investors will pay attention to the sponsorless space, but will also want to know certain defining characteristics of this type of debt. “What they’re going to want to know is what the pricing is and what is the risk,” he said.