Has private debt reached a watershed moment where simply being a good credit picker with the ability to offer flexible financing is no longer enough? As more and more managers raise ever-larger funds – PDI figures cite Q1 2017 as the most prolific quarter for fundraising since 2008 – does an increasingly competitive environment demand the addition of new strings to the bow?
In the private equity world, ‘operational value-add’ has been a vogue expression for years. Of course, it means different things to different people and all equity managers would claim to possess the ability to help portfolio companies improve how they function, one way or another. A compelling example would be Stockholm-based fund manager EQT, with its network of around 250 industrial advisors used initially by its private equity team since the 1990s but which its credit team has also utilised in recent years.
But perhaps the crucial importance of operational expertise in the private equity universe may increasingly apply to private debt as well. An indication of this may be seen in the launch of Apera Capital, a mid-market manager focused on European SMEs which is headed by Klaus Petersen, a former senior executive at BlueBay Asset Management and Park Square Capital. The firm is launching a debut fund said by market sources to be targeting around €650 million, though Apera declines to comment on fundraising.
The firm has been backed by the founding partners of German mid-market private equity firm Findos Investor. As a result of this relationship with Findos, Apera is able to offer the management teams it works with access to three portfolio managers plus a network of nine large German conglomerates operating across various industries and geographies.
The portfolio managers offer their services through a business known as FI Portfolio Management, a separate legal entity from Findos Investor. Little is disclosed about the business, but a LinkedIn search reveals that it is staffed by former UniCredit managing director Stefan Happak; experienced M&A and commercial advisory consultant Joachim Scholz; and health industry consultant Peter Schulz.
What all this means is that, for any deal it works on, Apera will be able to offer strategic advisory services not commonly associated with providers of debt.
“People will come to realise that to crack the mid-market you need to offer something more than just capital”
Petersen says Apera will bring these experts to the table when it is originating deals, as well as being able to offer the advice to companies it has lent to. For example, it may provide useful insights when a firm is entering a new industry or geography.
“Management teams will know in five minutes whether you know their business,” he says. “And if you don’t, you’re just a capital provider,” adds Petersen, making it clear that this is a description he’s keen to avoid. “We can call on experts from family-owned businesses who will be able to give us the inside view on the risks and opportunities of a specific industry. With that knowledge, we can have an eye-level discussion with the management and sponsor, which sets a very different tone.
“On the debt side, and especially in the SME field, it’s only been about capital. We’re credit experts not industry experts, but you need to understand both the capital and the business requirements. If you can put financial knowledge together with industry expertise, then that’s a powerful offering.”
Apera partner David Wilmot stresses the importance of being able to talk the language of management teams: “Many businesses and their markets have changed in nature quite significantly over the past 15 years, and continue to do so. With that dynamic comes an obligation to stay on top of these changes by having a strong industrial content to your investment analysis. Inputs and insights from experts with sharp-edge industrial experience are crucial in today’s market.”
But Petersen is keen to stress that adding advisory services is not the bedrock of the business. “Our main work is credit work,” he insists. “We have deep credit experience. Our business is essentially about doing the right credit work and making sure we get the returns we need for the credit risk we are taking. We don’t do a deal just because we have additional services.”
Apera partner Joanna Hislop also stresses the importance of good relationships: “Whether it’s unitranche or mezzanine, we’re essentially direct lenders and we negotiate and structure the deals. This is not syndicated lending. We negotiate with the company and shareholders and build relationships with management.”
Adds Wilmot: “Scale and funds under management are not the be all and end all. You need to gain trust which comes from having a good experience with sponsors. You need a good connection with the guys who bring the deals and our aim is to provide a good service to sponsors across Europe.”
Petersen launched Apera towards the end of last year having left BlueBay in July. Since 2013, he had been partner and head of Germany in the direct lending team at BlueBay, as well as a member of the investment committee. Prior to that he had spent six years at Park Square Capital – where he had responsibility for the German business investing in mezzanine, PIK notes and senior debt in European LBOs – and five years at Allianz Capital Partners, where he helped establish a mezzanine business.
He is currently joined in the firm’s London office by partners Hislop and Wilmot, from Park Square Capital and Babson Capital (now Barings Asset Management) respectively; as well as chief financial officer Rob Shaw, investment professional Florian Haas and associate Sebastian Afflerbach Ruiz.
Mind the gap
The rationale for the launch of Apera was based around the belief that both the banks and the debt funds that originally occupied the space have neglected the mid-market. In the former case, this has been due to regulatory pressures while, for the latter, fundraising success has meant they have increasingly gravitated to the larger deal size end of the spectrum.
Petersen does not believe the mid-market is fully appreciated. “There’s not enough understanding of the mid-market opportunity,” he says. “People often associate it with more risk. The stats show that up to 75 percent of the market for M&A transactions with more than €50 million enterprise value has relevance for us. This is the biggest and deepest market. At the larger end of the market, with EVs of more than €250 million, you have the biggest businesses but there is such fierce competition that returns are lower and terms weaker, because there are fewer transactions and all the banks are actively defending that market as it is the most lucrative for them.”
“Whether it’s unitranche or mezzanine, we’re essentially direct lenders and we negotiate and structure the deals”
Petersen points to the continuing inclusion of covenants (which are being eroded from larger deals), more modest use of leverage, the control that comes with frequently being the sole provider of finance, and good default and recovery rates as solid arguments in favour of the mid-market. But these are shared features that will not separate you from the crowd as a fund manager.
Wilmott adds: “Managers rightly talk a lot about the need for investee companies to have a strong reason to exist and the same requirement applies to fund managers and their strategies. In our case the market conditions are favourable as we will be focused on the SME market segment where demand outstrips supply.”
The objective of being distinctive is also where FI Portfolio Management comes in. “We’ve known Findos for 10 years,” says Petersen. “I actually did my first mezzanine deal at Park Square Capital with one of the Findos founders while he was still at EQT, and I also completed a further two transactions with Findos when I was at BlueBay. So I experienced first-hand how their portfolio management helped to develop the businesses…
“People will come to realise that to crack the mid-market you need to offer something more than just capital. The banks have been offering ancillary services in addition to providing debt and, as fund managers, we need to do the same. If you bring expertise, you can also engender strong relationships and trust.”
Findos Investor has until now focused on the DACH region (Germany, Austria and Switzerland). The partnership with Apera will bring it access to the UK market through the firm’s London base, while the firm is also intending to open offices in Paris and Munich within the next six to 12 months.
“We knew from the start that we would need a local presence,” says Hislop. “You don’t have credibility if your people are travelling to other markets from London. That’s fine for the large-cap players, but not for those in the SME space.”
Petersen says he, Hislop and Wilmot will spend time rotating between the three offices, with the intention of making them all strong operations. “Some firms have offices around the region but they are all effectively independent and the only thing tying them together is a weekly call,” he says.
Prior to the Paris and Munich offices launching and the dispersal of the senior management team, the priority will be creating a close-knit Apera culture within the London office. “Initially, we’ll sit together and gel together,” says Petersen. “That’s helped by the fact that we have comparable backgrounds. All of us are from institutions with very strong credit picking cultures and we have also invested together – at Park Square Capital in the case of me and Joanna, but also more generally on co-investments.”
With around 40 percent of European private debt deals currently taking place in the UK, Petersen says that strategies described as European often typically have a strong UK bias with perhaps a smattering of French deals and a tiny proportion done in Germany. Apera, by contrast, will aim to complete a roughly equal share of deals across its three target markets.
“Managers rightly talk a lot about the need for investee companies to have a strong reason to exist and the same requirement applies to fund managers and their strategies”
“That’s a very rare thing,” claims Petersen. “The industry emerged and developed in the UK, while Germany has only recently allowed non-bank lending. Things have begun to become more open now and we think we can crack the DACH market, but you need to be local. If you think about it in GDP terms, private debt should be an equal opportunity across the UK, France and Germany.”
Petersen says the plan is to have deal originators on the ground in each of Apera’s target markets. Starting with an investment team of five people, he says the plan is to have nine people in place for the firm’s “initial phase” of growth. He acknowledges that growing generically is a “big challenge”.
But weathering challenges is something Petersen anticipated when he was thinking about an appropriate name for his new firm. “Apera” is a Latin word that refers to grass that bends with the wind, thereby withstanding the elements and proving strong and sustainable. With its innovative model, Petersen will be hoping that the choice of name was an inspired one.
THE OUTSIDER'S VIEW OF APERA
“It’s a good angle as long as there is proper integration and strong information flow that can be genuinely helpful. In Germany I can’t think of too many managers that have a similar set-up and it is a competitive advantage there. Could it also be an advantage for Apera in the UK and France? Potentially”
Senior executive at European advisory firm
“I would say this is very unusual for a debt fund. It’s much more common on the private equity side, where most firms at the least have operating partners. But I’ve not come across this on the debt side”
Europe-based fund of funds executive
APERA CAPITAL: WHO'S WHO
Klaus Petersen, founder and partner
Was a partner at BlueBay Asset Management, which he joined in 2013. There he served as head of Germany for the direct lending team as well as a member of the investment committee. Prior to that, Petersen was a partner at Park Square Capital, where he was a member of the investment committee and responsible for the German business investing in mezzanine, PIK notes and the senior debt of European LBOs. He co-led Park Square’s first Credit Opportunities Fund from 2007, which focused on the senior debt of European LBOs.
Joanna Hislop, partner
Spent six years at Park Square Capital where she was a partner and member of the investment committee, mainly focusing on subordinated debt and special situations investing in France and across Europe. Prior to Park Square, Hislop spent 12 years at Goldman Sachs International in London where she was a managing director and a founding member of the European mezzanine debt investment business within the principal investment area.
David Wilmot, partner
Most recently spent 16 years at Babson Capital (now Barings Asset Management) where he was joint head of European private finance. Wilmot was instrumental in establishing Babson’s presence in the European buyout market and served as a member of the private finance investment committee. He was also a portfolio manager and investment committee member of several of Babson’s CLO funds. Before joining Babson, he was head of the UK leveraged finance team at Société Générale.
Rob Shaw, chief financial officer
Has responsibility for finance, operations and investor relations. Shaw has worked in the alternative investment space for 10 years, most recently as COO of Aimed Capital, a systematic global macro hedge fund. Prior to that, he co-founded alternative investment firm JJR Capital and served as CFO at Frog Capital (growth technology), group financial controller at Vision Capital (buyouts), and transaction finance manager at Babcock & Brown (real estate).
Florian Haas, investment professional
Joined Apera to focus on the German market. Haas has significant experience in leveraged lending for SMEs, gained over the last nine years at Commerzbank as associate director in the Mittelstandbank. At Commerzbank, he worked across 10 transactions arranging senior debt totalling more than €300 million for German and international private equity funds.
Sebastian Afflerbach Ruiz, associate
Joined Apera to support the team in London. He worked at UniCredit Bank in Munich supporting the financial sponsor solutions group. Prior to that, he spent a year in the M&A team at LNP Corporate Finance in Copenhagen.