They said it

“Resilience in the US economy is seeping away as consumers are sideswiped by spiralling prices and companies see demand evaporate amid a whirlwind of pressures”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, in a press comment.

First look

In the face of headwinds, European deals resilient
The European private debt deal market has experienced something of a rollercoaster ride in recent years, with strong activity curtailed by the pandemic but then recovering to a record level last year. In the face of rising inflation and interest rates, together with geopolitical strife, one might have assumed this year would see another major dip – but the latest MidCap Monitor survey of pan-European debt financings from Houlihan Lokey paints a rather different picture.

It recorded 130 unitranche transactions in the second quarter of this year, up 25 percent compared with the first quarter with the UK, Germany and France continuing to dominate European dealflow. The Benelux region is also showing solid performance. Add-on acquisitions made a strong contribution, accounting for 50 deals during Q2 (38 percent of the total). The Q2 total was not far short of the 139 unitranche deals recorded in the fourth quarter of last year – a record-breaking year for deals in Europe.

While software, healthcare and technology were the favoured sectors last year, 2022 has seen growing appetite for the industrials, consumer and business services sectors, albeit with more conservative leverage and increased pricing.

“Although liquidity in the mid-market has somewhat reduced, in our view the Q2 2022 development is testament to the fact that the European mid-cap LBO market is highly resilient with significantly less volatility compared to the capital markets,” said Norbert Schmitz, managing director in Houlihan Lokey’s capital markets group.

Private markets benefit from ‘risk off’ investors
In seeking to understand the approach investors are taking to current market conditions, consultants bfinance have detected movement away from equities and towards defensive inflation-resilient assets, including in private markets, as equity and bond markets have plummeted.

The firm’s Manager Intelligence and Market Trends report for Q2 2022 found investors adopting a more “risk-off” stance with equity exposure dropping to less than 32 percent (3 percent below average) and fixed income and ‘diversifiers’ rising to 68 percent.

The report also found private markets in favour, accounting for 68 percent of all new manager search activity with the firm over the past 12 months, an increase of 13 percent year-on-year. Real estate attracted the most interest, with private debt also highly popular “as investors sought out new sources of portfolio diversification, income and inflation protection”.

Essentials

Default rate tipped for 3% in Europe
Europe’s trailing 12-month speculative-grade corporate default rate is predicted to almost triple from 1.05 percent in June this year to 3 percent in June 2023, according to S&P Global Ratings in a new report (log-in required).

With the headline risks continuing to be rising inflation and interest rates, along with the conflict in Ukraine, S&P said its pessimistic scenario was for a 5 percent default rate in June 2023 in the event that Europe sees a prolonged or deep recession.

However, S&P economists think the chances of a recession in Europe over the next year are only 35 percent, with low growth the more likely scenario. S&P added that firms were on a “relatively strong footing” to weather a small downturn.

Distress on menu for Zetland fund
London-based private equity firm Zetland Capital has raised an “above target” €620 million for its Special Situations Fund II, which invests in distressed debt as well as private equity.

The fund, which is already 80 percent invested in around 30 deals, backs restructurings, event-driven investments, special situations and trading-oriented opportunities across Europe. The vehicle raised around 60 percent of its capital from North America and 40 percent from the Middle East, with 11 LPs backing the firm for the first time. Target deals are typically in the €10 million-€50 million range.

Including existing portfolios and other fundraises Zetland, which was formed in 2016, now has more than €1.1 billion under management.

Green debut
This week, investment manager Barings became the latest property lender to join the green loan club, according to affiliate title Real Estate Capital Europe. Sam Mellor, head of European and Asia-Pacific real estate debt at Barings, explained this was part of its strategy to “seek greater returns”. Mellor sees backing borrowers with ESG-focused business plans as a way to “innovate” in its lending strategy.

The manager’s first sustainability-linked loans against European real estate included a £48.6 million ($57.5 million; €57.7 million) loan to Schroders Capital UK Real Estate Fund and Immobilien Europa Direkt for the acquisition and ESG improvement of a retail and leisure park in Romford, UK. It also loaned an undisclosed amount to manager Round Hill Capital to finance the refurbishment of Amsterdam’s Rembrandt Park One building into a sustainable office.

LP watch

Institution: Maine Public Employees Retirement System
Headquarters: Augusta, US
AUM: $18.8 billion
Allocation to alternatives: 40.8%

Maine Public Employees Retirement System approved a $30 million commitment to Sprott Private Resource Lending III, a contact at the pension informed Private Debt Investor. The commitment is subject to final due diligence by the pension fund.

The fund, managed by Three Valley Copper, will invest in North American companies and seek subordinated/mezzanine debt returns.

The US public pension’s recent fund commitments have predominantly targeted North American vehicles focused on a variety of sectors.

Institution: Montana Board of Investments
Headquarters: Helena, US
AUM: $23.8 billion
Allocation to private investments: 17.34%

Montana Board of Investments has confirmed a $75 million commitment to Tree Line Direct Lending III, according to its August board meeting materials.

Founded in 2014, Tree Line Capital Partners is a San Francisco-headquartered private credit asset management firm that targets mid-market and private debt investment opportunities across North America. It launched its third direct lending fund in June 2021 with a target size of $450 million, and held a first close in July 2021 on $120.8 million.

Montana Board of Investments has a 17.34 percent allocation for private investments, comprising $4.1 billion in capital, which includes both private debt and private equity.

In 2019, MBOI committed $50 million to the previous fund in the series. The fund closed in September 2019, having received $187 million in investor capital.

Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal