They said it
“SMEs must take this as yet another reminder to review their existing lending structures and ensure they are prepared for further challenges”
Douglas Grant, group chief executive officer at financial services firm Manx Financial Group, following the Bank of England’s 0.5 percent interest rate hike to 5 percent
First look
Europe eyes deal uplift in H2
A pick-up in debt deal activity is expected in Europe in the second half of this year, according to DC Advisory’s latest Debt Market Monitor, as a result of a “general sense of improving stability” and “GPs’ need to monetise investments”. However, it acknowledges that the scale of any improvement is closely linked to central bank activity in fighting inflation.
The European mid-market saw deal volumes drop for the third quarter in a row, with 168 issuances in the first quarter of this year, compared with 175 in the fourth quarter of last year and 211 in the first quarter of 2022. Most activity, as for prior quarters, continued to relate to loan extensions and add-on acquisitions.
In the larger deal market, private credit funds have continued to displace syndication, with funds completing close to 90 percent of large buyout deals in the first quarter.
Activity in the UK mid-market was marginally down in the first quarter compared with the previous one, but still well down on the levels recorded a year ago. However, “notwithstanding today’s thin pipeline” for UK assets, the report sees optimism for H2 as financing costs become clearer amid evidence of plenty of behind-the-scenes preparation work to allow deals to come to market quickly when conditions are more favourable.
The report also expects an uplift in activity in the DACH region, Benelux and Spain in the second half of the year. The outlook in France and Italy appears less clear.
KKR strikes ‘buy now, pay later’ deal with PayPal
KKR has taken a big step into the consumer finance market through a major deal with PayPal, the California-based online payments firm.
The deal is described as a “multi-year commitment” that will see KKR buy up to €40 billion of ‘buy now, pay later’ loan receivables originated by PayPal in France, Germany, Italy, Spain and the UK. The transaction is part of KKR’s asset-based financing strategy, which commits capital to privately originated and negotiated credit investments backed by large and diversified pools of financial and hard assets.
The deal will see KKR’s private credit funds and accounts acquire almost all the European BNPL portfolio held on PayPal’s balance sheet when the transaction closes, as well as future originations of eligible BNPL loans. PayPal will remain responsible for all customer-facing activities such as underwriting and servicing.
The BNPL market has increased dramatically in recent years, with PayPal issuing more than 200 million loans to over 30 million customers globally since it launched its first BNPL offering in 2020. The firm’s processing of BNPL payment volume increased 160 percent between 2021 and 2022.
“Our collaboration with KKR will allow us to accelerate our PayPal Pay Later originations alongside market demand in Europe while preserving free cashflow for other strategic initiatives,” said Gabrielle Rabinovitch, senior vice-president and acting chief financial officer of PayPal.
MPG forecasts jump in retailisation of alternatives
High-net-worth individuals and retail investors account at present for around 5 percent of assets in the global alternative assets industry. But that share may be about to skyrocket, according to research by Managing Partners Group.
Research agency Pure Profile discussed alternative assets with 100 institutional investors and wealth managers in Switzerland, Germany, Italy, the UK and US in March 2023, for MPG. The investors questioned are collectively responsible for AUM of £258 billion ($329 billion; €385 billion).
The investors shared their view that regulatory changes, advances in investor education and technological change together are lowering the barriers to investment in alternative assets by individuals. They believed, on average, that the share of alternative assets investments held by high-net-worth and retail investors will be 8.8 percent in 2030. More than one in 10 (11 percent) believe the share will exceed 10 percent that year, a doubling of the present figure.
MPG runs the High Protection Fund, which invests in life settlements, that is, life insurance policies that have been sold by their original owner at a discount to their future monetary value.
MPG maintains that life settlements are a growing part of the alternatives space. They delivered net annualised returns of 8.33 percent in 2022 and attracted $25 million of net inflows the same year. Strong demand for life settlements is driven by the demand for alternative assets.
With reference to the size of the alternatives space as a whole, some estimates say that the global AUM number will be $17 trillion by 2025. The investors interviewed for MPG are all bullish on growth.
Essentials
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)
First German deal for Italy’s Equita
Equita, the independent Italian investment bank, has made the first investment from its EQUITA Private Debt Fund II in Germany, marking a first step in the firm’s diversification abroad.
The fund has completed a €15 million investment in a retailer of bakery products in Germany, alongside Pemberton, the pan-European private debt manager.
Founded in the 1960s, the company is a bakery retailer in south-western Germany, with approximately 200 branches. Its product portfolio includes bread and rolls, viennoiseries, cakes, and snacks, including ready meals. The company owns a production plant with a total capacity of more than two million baked goods per week and directly manages logistics and sales to end consumers.
Paolo Pendenza, managing partner and head of private debt at Equita Capital, said: “We are very pleased with this first investment in the DACH market… Our goal is to grow and establish a direct presence in Germany, becoming the first Italian private debt manager with a significant presence abroad”.
EPD II has invested 77 percent of its total commitments (€183 million out of €237 million raised), in 12 investments with an average ticket exceeding €15 million. The firm said it is currently working on three additional investments – one in Germany – on an exclusive basis and expects to complete its investment phase by the end of this year.
Flexpoint Ford to buy loan origination software provider
Flexpoint Ford, a private equity firm with offices in Chicago and New York, has agreed to buy Baker Hill, a provider of cloud-based end-to-end loan origination, risk management and analytics software.
Baker Hill is known for NextGen, its configurable, single platform software-as-a-service solution used by banks and credit unions to streamline lending. Baker Hill, under president and chief executive officer John Deignan, experienced record revenue growth of 15 percent in 2022.
Flexpoint, which was founded in 2005, has completed investments across a wide range of structures and asset classes. It specialises in the financial services and healthcare industries, and is a member of the consortium of institutions that last month invested in CI Financial’s US business.
An announcement of the deal, dated 21 June, by Baker Hill quoted Arjun Thimmaya, managing director of Flexpoint: “Given our deep experience in financial services, we are thrilled to partner with John and the Baker Hill team in the next chapter of their growth. Baker Hill has maintained a strong track record of innovation as evidenced by its NextGen platform.”
Flexpoint and Baker Hill say in the statement that they have agreed that the existing Baker Hill leadership team will continue to lead the business.
The announcement did not specify a closing date or price. It did note that closing of the transaction will require the “customary regulatory approvals”.
LP watch
Institution: Massachusetts Pension Reserves Investment Management Board
Headquarters: Boston, US
AUM: $91.9 billion
Allocation to alternatives: 31.7%
Massachusetts Pension Reserves Investment Management Board (MassPRIM) recently approved a commitment of up to $150 million to American Industrial Partners Capital Fund VIII, according to the public pension’s board materials.
Managed by American Industrial Partners (AIP), fund VIII was launched in April 2023 with a target size of $5 billion. The fund targets investments in mid-market industrial businesses headquartered in North America. The pension fund committed $75 million to American Industrial Partners Fund VII in 2019. Fund VII closed on its target size of $3 billion on March 2019.
Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing
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