When the Alternative Credit Council and law firm Dechert unveiled their Financing the Economy survey to a roomful of private debt professionals last October, there was a surprise in store. This attendee cannot claim to have heard audible gasps or seen raised eyebrows, but it was that kind of moment: private debt laggard Germany had been cited by the survey’s respondents as the world’s most promising market.
In the conversations immediately afterwards, and at PDI’s Capital Structure Forum the following month, the response to this was sceptical at best. Indeed, at the forum, one delegate seemed exasperated that this view of Germany’s potential could even expect a fair hearing. It was self-evident, to his mind, that – for reasons to do primarily with culture and pricing – Germany was, and always would be, a banking market. Simply no room for debt funds.
And then came the latest MidCap Monitor survey from GCA Altium showing that – on the back of a 166 percent surge in sponsored unitranche deals in the German mid-market last year – debt funds almost trebled their level of deal activity in the country. This raised their share of German mid-market LBO deals to more than 30 percent – incredibly around the same figure as that in the UK, assumed to be by far Europe’s pre-eminent private debt fund market.
So what happened? Conversations with market insiders, including GCA Altium managing director Norbert Schmitz, suggest that growing awareness and use of the “first out/second out” structure was a major factor both in delivering more unitranche financings per se and also in allowing debt funds to claim a large proportion of these financings.
One obvious benefit of first out/second out is cost-based: by utilising cheap bank debt, the average margin of the unitranche can be lowered – making facilities involving debt fund participation less expensive than in the past. But perhaps the more significant point is around bank/debt fund collaboration through these deals.
The relationship between the two – perhaps especially in the German context – has been viewed through an adversarial lens. But having not been supportive of debt funds up to now, banks are finding merit in participating alongside them in what they consider to be the relatively secure ‘first out’ piece.
Indeed, we are told that the major banking players in the market typically now have standard inter-creditor agreements with the top five to 10 debt funds – making it easier for these banks and debt funds to work together on a repeat basis and thereby entrenching the notion of partnership.
There is a belief that with German debt funds having now gained such a solid footing in terms of market share, the banks could no longer turn the tide completely in their favour even if they wanted to. Joining them rather than beating them would seem to be the way forward.