Could you tell us a little about your firm and its involvement in the private debt market?
Valin Funds is the asset management arm set up by IKB Deutsche Industriebank with a focus on private debt for European SMEs with a strong focus on Germany. The platform solely focuses on non-sponsored investments into corporates and has €730 million of committed capital available to invest across senior and subordinated strategies.
We understand German private debt may be on the verge of some important evolutions. Could you describe what’s happening?
The European bank disintermediation trend has finally reached Germany. Balance sheets of all German banks combined shrank by an incredible €1 trillion over the past four years alone. This ongoing loan volume and capacity reduction by public sector banks cannot be solely absorbed by SMEs’ internal financing, foreign bank players or the Sparkassen and Landesbanks, and has hence opened a tremendous market opportunity for private debt funds in the corporate sector in the years to come.
Secondly, the German regulator BaFin has recently initiated several important regulatory changes: private debt funds are now able to make credit investments directly to German corporate borrowers without the requirement of fronting structures. There have also been several important adaptations for managers to invest more easily via non-domestic AIF funds.
Lastly, following amendments to German investment guidelines and the introduction of Solvency II, German insurance and pension groups are now preparing to shift billions into the asset class.
There is a view outside Germany that the market is not large currently and hard to penetrate effectively. Is that correct, and will it change?
The German corporate financing market is the largest in Europe with more than €250 billion in syndicated loans and Schuldscheins outstanding alone. However, penetration of private debt in relation to the overall size of the German financing market and compared to the country’s GDP is one of the lowest in Europe. This is set to change: the question is not whether private debt will take market share in the German financing market, but rather how quickly and how managers can capture the opportunity.
How do you view prospects for bank lending in Germany, and what implications are there for private debt managers?
We already observe significant limitations in the German SME bank financing market, when it comes to non-plain-vanilla, more structured financings. In contrast, our Valin Funds platform enables more flexibility. For example, the standard maturity in the corporate loan market is three to five years, but via our debt funds we can offer mid-cap CFOs sizable loan tickets targeting the longer maturity spectrum of seven to 10 years for little yield increase – much to CFOs’ delight. This is a clear competitive advantage. At the same time, our fund investors – all major European insurance companies – receive attractive coupons for relatively low-risk senior loans.
Could you identify one or two keys to operating successfully in Germany?
The sponsored direct lending opportunity in Germany is relatively straightforward to address. That being said, local financial sponsors have so far reacted rather carefully with respect to unitranche offerings, on the one side because bank liquidity in this segment remains solid, but more often because they simply do not know the acting fund players well enough.
Furthermore, to capture the rising market opportunity on the non-sponsored and corporate SME side, I strongly believe that you must be local, have a very experienced investment team that has worked with the Mittelstand and can execute transactions in local language, plus ideally employ German documentation. German mid-cap CFOs bank on trust and long-term relationships and hence this market segment remains difficult to enter for funds operating solely out of London.
One good solution to overcome the origination dilemma – albeit second-best only – has been to partner up with local bank partners, such as IKB and others, to access deal opportunities.