Q How has Investec managed to almost double its leveraged finance lending volumes in the last year?
Focus.We’ve brought anyone who deals with private equity clients into one area and put strategic focus onto the buyout market via deepening primary client relationships.We think we’ve got a unique proposition for private equity and corporates in that we provide advisory, lending and private bank individual solutions to them.
It’s about isolating and focusing our attention on clients we want to work with and ensuring we are front of mind in delivering solutions to them.The result is more relevant deal flow and that strat- egy is bearing fruit for us with the bank deploying over £1.4 billion ($2.13 billion; €2 billion) of loans to private equity in the last 12 months across 60-plus deals.
We also pride ourselves on an open- minded and solution-focused approach rather than product-led. For exam- ple, bridge facilities, subordinated PIK tranches and unitranche structures have been deployed alongside our core senior market.
Q What’s your deal sweet spot?
From £5 million EBITDA right up to £75 million, albeit we can go left or right of those numbers. We have recently underwritten the senior debt for Eurogarages alongside three other banks which is north of £110 million EBITDA. That’s obviously a large deal but it’s a sector that we know very well having led deals for Motor Fuels Group and Rontec in recent years.
Q Do you have any interest in doing sponsorless lending?
We spend more time in the private equity space as a proportion of our book, which is natural given the volume of M&A from that client group. Directionally, we are keen to diversify further with increased non-sponsor transactions to grow our business. This is likely to be at the lower part of the size spectrum, supporting more entrepreneurial-led businesses earlier in their lifecycle. This sort of activity will help us forge deeper and longer relationships with our client base.
Q Where are we in the credit cycle?
We are getting towards the later stages in my opinion. There remains a very large level of liquidity in the market and that is a mitigant in some ways – the cycle may hold out longer because of this. There’s no doubt that M&A valuations and leverage ratios are close if not at cyclical highs, so asset selectivity is high on our agenda.
Q How does that feed into your underwriting?
Overall, the asset class remains attractive with default rates at record lows – historically anyway – and there are some very good businesses out there offering attractive yields and risk-adjusted returns. This has led to a situation, underpinned by QE strategies of US, UK and European central banks, where there is unprecedented levels of liquidity or “dry powder” available for private equity and debt investment.
We remain fairly selective and disciplined with regard to the types of assets we put onto the book. We have a very experienced team that have been in the mid-market and more importantly through credit cycles for a long period of time – this is invaluable to maintain the quality of the portfolio.
Q Could your team open up its activity to external investors in the future?
We believe we’ve got a fairly unique proposition as a long-established provider of capital to mid-market companies. This allows us to originate high quality deal flow and top tier risk-adjusted returns but more importantly a long-term track which we can point to. With increased appetite for the asset class from institutional investors, we would present an attractive conduit for them to access this market. Managed accounts and standalone funds are options we have considered however there is nothing formalised at present.
Q What’s the outlook for European mid-market lending in 2016?
The key thing is what M&A volumes are going to do, which is a question around the wider macro picture and could be influenced by the imminent US rate rises, China’s slowdown or, closer to home, the Brexit outcome. Assuming a business as usual backdrop, it would be nice to see a bit more M&A to balance the supply and demand of liquidity in the market.