MV Credit may have a new look and feel, but the firm formerly known as MezzVest is not so different from what it used to be. Established back in 2000 by Doug Evans, Frédéric Nadal and Lemy Gresh – who all remain actively involved in the firm – as one of the first movers in subordinated lending in the UK, it started out offering investors access through funds and managed accounts to subordinated loans to European corporates owned by private equity sponsors. Since then, the team of 12 investment professionals, the most senior of whom have worked together for well over a decade, has invested over €4 billion through more than 290 debt financing transactions.
The strategy remains predicated on supporting reputable private equity sponsors and strong management teams in the upper mid-market private debt space, with a philosophy based on rigorous credit analysis and active portfolio management. What has changed is simply the types of loans the firm is willing to target.
Managing partner Nicole Downer, who has been in the business since 2005, says: “Our brand has evolved as we have diversified the type of loans we make. We are lending to the same corporates and the same private equity sponsors, but across the credit spectrum, from senior loans to preferred equity.”
TOWARDS A FULL PLATFORM
What prompted the name change was the team’s decision to launch its first private debt fund last year, when it raised around €100 million from a single investor to make credit investments in a variety of instruments, including senior, unitranche and second lien loans. That commitment took the form of a separately managed account, and drove the London-based, traditionally mezzanine-focused, manager to move towards developing a full private debt investment platform.
Downer says: “Our brand has developed in line with the market. When we first started, the typical lenders in the senior space were predominantly banks, and a handful of institutional lenders, of which we were one, provided subordinated loans. As the market has evolved and the number of products being offered has grown, with second lien, PIKs, and most recently the unitranche concept, so we see a larger menu of choice for borrowers. Who lends at each level has also changed, with a retrenchment of the banks and an emergence of a much stronger what used to be called alternatives market, but is now just the market.”
Now the firm is fundraising for a private debt fund focused on senior debt, aiming to establish a vehicle that will target returns of around 7 to 9 percent, with an asset mix including some unitranche and second lien loans alongside more senior facilities.
MV Credit certainly has a strong fundraising track record. MezzVest I raised commitments of €280 million in 2002 and invested over €1.2 billion in subordinated debt, now fully realised with returns of 1.6x cash-on-cash and net returns of 16.5 percent. Then came MezzVest II, raised in just seven weeks and a single close in 2005, with commitments of €571 million that led to 128 investments worth a combined €1.8 billion. A more challenging vintage, Mezzvest II will deliver a net 8 percent return to investors.
The last was MezzVest III, closed in December 2013, with final commitments of €585 million plus a co-investment vehicle of an additional €170 million, which is currently around 75 percent invested.
VERY STRONG ON ORIGINATION
Establishing the new private debt platform is a work in progress. “It is early days,” says Rafael Calvo, a managing partner with the firm since 2001. “But our investors see us as very strong on origination, on the back of our origination track record in subordinated debt, and they see us as real solution providers. When you have a whole array of solutions to offer, and you understand the financing of LBOs and what the sponsors require, that’s a pretty attractive proposition.”
The firm also plays an active role in syndication, maintaining strong relationships across banks, sponsors and debt advisers, which its investors see favourably.
The sponsored market continues to be MV Credit’s sweet spot, and there are no plans to embark on unsponsored deals any time soon. Downer says: “The reason we focus on the sponsor side is that, from our perspective, we accept that when you are making loans to companies, those companies don’t always perform in the way you hoped they would. Most of our time and energy is focused on making sure we get our money back and get good returns for our investors, and so we need owners of those companies that we can rely on and who can react in a timely fashion if things aren’t going according to plan.”
She adds: “We find private equity businesses tick all the boxes and typically we expect to see lower losses on companies owned by private equity businesses than on the unsponsored deals.”
The firm is also shunning the unitranche-only strategy it says is currently in vogue in the private debt space. Managing partner and founder Frédéric Nadal explains: “Our strategy for private debt, which our investors are really keen on, is not to focus 100 percent on unitranche. We believe that in order to minimise losses, diversification is very important, and if you want to diversify in unitranche you need to have a huge fund, just because of the nature of the product.”
He adds: “We think you can achieve high single-digit returns on the back of portfolio diversification, and lower losses, and that’s how we plan to provide better returns for our investors. They seem to like that strategy, because in this space a lot of people have been promising a lot but so far delivering little.”
The MV team members also believe their part of the market is far less competitive than the smaller, unsponsored unitranche space, where there are so many European players chasing relatively few deals.
Calvo says: “The unitranche private lending space is becoming extremely crowded, and at this stage there’s a limited number of transactions with all the usual suspects chasing them. It is very attractive from a yield perspective, but very competitive. We believe that, on a portfolio construction basis, you can actually recreate those returns to provide high single-digit net returns to investors, with companies that actually in our experience represent lower risk because of their mid to upper-cap nature.”
Certainly the firm has one of the more experienced teams in the European leveraged buyout space, especially in the most complex parts of the capital structure, and enjoys a strong track record. Hence it was investor demand that prompted the move into lower-risk debt.
And how do they see the market right now? “What we see today is a lot of volatility,” says Nadal. “For the types of deals we are looking at, everything is now becoming correlated to a certain degree, and therefore volatility is affecting the bond markets, the equity markets, and then the private debt markets, which was not the case 15 years ago. Today, volatility is an issue for everyone, especially in terms of pricing.”
The answer is to stick to fundamentals: “We will keep focusing on sponsored transactions in diversified companies in Western Europe,” he says. “We are back to fundamentals, and those are companies worth investing in. We are credit people, so this is not something we are going to do for a cycle. Our strategy for the last 15 years will be our strategy for the next 15 years, and that means reducing losses as much as possible.”
Despite a brand overhaul and a new twist on the strategy, MV Credit is sticking very much to its knitting.
This article is sponsored by MV Credit. It appeared in the May 2016 issue of Private Debt Investor.