Loan Note: Deloitte finds Europe’s deal activity is slowing; Epsilon launches second Oz fund

They said it

“Inflation remains high and sticky – surprisingly so – in most major developed economies”

Nigel Green, chief executive officer of deVere Group, the UK-based independent financial adviser

First look

A market divided: activity levels in Europe are down, but four sectors are in favour (Source: Getty)

Deloitte’s tale of two markets
The story from the European private debt deal frontline in the first quarter of this year was one of decline. It was also one of bullishness.

First, the decline: according to Deloitte’s Private Debt Deal Tracker, Q1 saw 145 deals across Europe – a more than 12 percent fall compared with the 165 deals concluded in the fourth quarter of last year. The Q1 deal tally was the lowest for three years, dating back to the onset of the covid pandemic in 2020. Deloitte attributed the subdued activity to “the disruptive impact of wider macroeconomic conditions”.

The core markets of the UK, France and Germany were badly hit, with deals in the latter down 37.5 percent quarter-over-quarter. The proportion of deals in markets outside these three countries reached 36 percent of the total in Q1 – the joint highest level since 2017. The Netherlands saw a strong quarter, beating activity in Germany for the first time in over five years.

Second, bullishness: in the four most popular sectors – business, infrastructure and professional services; TMT; healthcare and life sciences; and financial services – appetite was greater than ever. Among the top 10 most-active fund managers, these four sectors accounted for 78 percent of their deal activity.

In addition, leverage multiples associated with deals in these sectors rose. The proportion with leverage of 6-7x increased from 11 percent to 13 percent on a “last 12 months” basis, while those with leverage of 5-6x went up from 19 percent to 25 percent.

Epsilon highlights Oz direct lending opportunity
The announcement that Melbourne-based fund manager Epsilon Direct Lending has launched its second open-end corporate debt fund arguably represents a significant step in the maturation of private debt in Australia – when the firm launched its first open-end fund two years ago, it was billed as the first “pure play” Australian corporate direct lending fund.

In conversation with PDI this week, Paul Nagy – one of the firm’s three founding partners – said the latest fundraising stands to benefit from a two-year track record in which the firm has invested around A$200 million (€124 million; $136 million) into mid-market companies including IT professional training firm EdventureCo and listed medical device manufacturer SomnoMed.

Nagy said economic conditions in Australia are just as challenging as in many other markets around the world, with 12 interest rate rises in the last 14 months having an impact on corporate earnings and growth. But in this context, he said mid-market lending represented “a large and diverse opportunity set to meaningfully deploy and benefit from the floating rate returns”. The firm’s A$200 million of deployment so far compares with a total addressable market estimated at around A$70 billion.

While the likes of Carlyle, Ares Management and Apollo have all made moves into the Australian market, Nagy says it would be wrong to overestimate how easily the domestic banks can be replaced. “Traditional banking is still here in Australia – there’s not been a massive retreat. But some sophisticated borrowers want a more bespoke funding solution that can’t be provided by regulated entities.”

Next stops: Japan and Korea
A heads up that our Private Debt Investor events calendar, which has already encompassed Singapore and London this year, takes us to Seoul and Tokyo next week (26-29 June) for Japan Korea Week.

The fifth iteration of our annual visit to two of Asia’s most important investor hubs has already attracted more than 300 Japanese and Korean institutions and global private debt leaders.

Among the keynote speakers at the event are Tadasu Matsuo, managing director and head of global alternative investments at Japan Science and Technology Agency; Andrew Lockhart, managing partner at Metrics Credit Partners; and Todd Leland, president of Goldman Sachs International.

If you haven’t already, make sure to book your place now!


Fund leaders survey: we’d love to hear from you! 
This year’s Fund Leaders survey is up and running and we want to hear from you! Submit your form to us by 17 July and you will get a complimentary copy of the results when they are published at the end of July, as well as entry into a prize draw to win a $250 Yeti Cooler.

Topics covered in this year’s survey are as follows:

  • Fundraising (market sentiment, factors impacting performance, performance predictions)
  • Sources of capital (private wealth capital, digital fundraising platforms, geographic distribution of investors, continuation funds)
  • Headcount and AI (changes in headcount, priority areas for increasing headcount, AI implementation across firms)
  • ESG and DE&I (factors driving ESG adoption, link between ESG and performance/value creation, DE&I in portfolio companies)
  • GP stakes (GP stakes interest, objectives and considerations in selecting buyers)

KBRA sees mid-market resilience through further rate hikes
The Kroll Bond Rating Agency, in an updated assessment of the impact of a sharp increase in interest rates on its private credit assessment portfolio, finds that the mid-market may prove very resilient to further increases, because the hikes that have already occurred have exposed the unhedged. In other words, as the report says, “the damage is mostly done”.

The report, issued 15 June, covered roughly 2,000 mid-market companies. (It reiterated its conclusion in October 2022.) Both papers agree that 16 percent of the companies in the assessment portfolio will become unable to meet interest payments from current cashflows if the reference rate rises to 5.5 percent. At the time of the June 2022 report, the Fed’s rate was 3.13 percent.

On the day before the release of the updated report in June, the Federal Reserve decided to pause its pattern of regular increases of its target rate. It paused at a level very near that contemplated by KBRA in October at 5 to 5.25 percent. This unsurprisingly raised the question: what happens if it resumes its upward march? Indeed, the Fed suggests strongly that it will resume.

The new report says that the predicted stresses have “started to materialise”.

KBRA is seeing “more portfolio companies on watchlists and the beginning of a period of amendments, capital infusions and restructurings”.

KBRA says that terminal reference rates of 6 to 6.5 percent imply all-in interest costs of 12.5 to 13 percent. That will not be welcome to mid-market companies, but will not be as significant as the movement that has already occurred, and that companies still solvent have survived.

Going forward, KBRA predicts the markets are likely to experience a lot of payment-in-kind toggles and loan extensions, and that there will be greater interest in convertible debt. All these represent ways to reduce the interest burden on companies, pushing refinancings further out.

New credit head for ICG
ICG has appointed Mathew Cestar as global head of credit based in ICG’s London office. The newly created role will see him provide strategic and operational leadership to ICG’s credit platform globally spanning private and public debt.

ICG’s global credit business covers private debt strategies as well as CLOs, liquid loans, multi-asset credit and alternative credit. Cestar has more than 25 years’ experience in global capital markets, investment banking and technology.

He joins ICG from ION, a private fintech company in financial software and data, where he was chief executive officer of ScION Tech Growth. Prior to this, he held numerous roles at Credit Suisse in London and New York – most recently co-head of investment banking and capital markets in London with responsibility for mergers and acquisitions, debt and equity capital markets and the investment banking sector and country coverage teams.

He chaired the Global Credit Products Capital Commitment Committee in London and coordinated Credit Suisse’s underwriting and capital commitment activities.

LP watch

Institution: Louisiana State Employees’ Retirement System
Headquarters: Baton Rouge, US
AUM: $12.68 billion
Allocation to alternatives: 23%

Louisiana State Employees’ Retirement System announced a new debt commitment in its May 2023 board of trustees meeting.

The Baton Rouge-based public pension committed $200 million to Gramercy Capital Solutions Fund III. The senior debt fund managed by Gramercy was launched in early 2023.

Gramercy is a Greenwich, Connecticut-based investment firm that specialises in emerging markets investments. Its debt investments are spread across Latin America, Central and Eastern Europe, and the Middle East and Africa, with minor investments in North America.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing