In times of great disruption, some specialist lending strategies can have a major role to play in economic recovery in parts of the market that fall outside the scope of more traditional lenders.

Here are three market strategies that seek to address key issues stemming from the pandemic, whether they relate to supply chains, emerging markets or environmental, social and governance considerations.

Gemcorp: The emerging markets pioneer

London-based Gemcorp is a specialist asset manager focused on emerging markets, including emerging market credit.

Gemcorp lends to sovereigns and corporates operating in emerging markets, particularly in Africa and Latin America. It specialises in addressing Africa’s growing trade finance gap, which has been affected by global supply-chain disruption in the past two years as well as by covid lockdowns and a blockage of the Suez Canal in 2021.

“Our flagship fund has done well in the pandemic,” says Parvoleta Shtereva, partner at Gemcorp. “Our businesses have done okay despite supply-chain disruption.”

She adds that 2020 and 2021 were challenging years for the business. However, due to Gemcorp’s presence in the countries where it seeks to invest it was able to continue to back businesses. Firms that do not have a physical presence in emerging markets have had to suspend investing in those parts of the world because travel restrictions prevented them from conducting proper due diligence.

With a strategy focused on places where capital is most badly needed, due to insufficient local funds and a lack of development in local financial systems, Gemcorp is used to working in a challenging environments.

One major advantage of operating in underserved markets is the ability to gain strong covenant protection based on UK law, giving an attractive risk-return profile. Due to strong legal protections, Gemcorp can adopt an interventionist approach when needed. This can also prove helpful in improving ESG within portfolio companies. “We can get covenants and security that just are not available in developed economies,” says Shtereva. “These are not highly leveraged corporates and we sit at the senior secured level of the capital structure.”

Investors can gain an opportunity for impact investing. As Gemcorp is investing in markets that struggle with access to capital, the net effect of creating jobs and providing capex helps to drive further growth in emerging market economies and hits a lot of the UN’s sustainable development goals.

CIFC: Nurturing green bonds

US-headquartered CIFC is well known for its collateralised loan obligation products.

But in 2022 it launched a UCITS sustainable global bond fund in conjunction with Italian alternatives manager Hedge Invest.

Over the course of the pandemic, sustainable lending has grown far more important, going from a minor part of the market as recently as 2019 to now making up a substantial share of all leveraged loans. Sustainable loans typically feature pricing that is tied to borrowers achieving predetermined sustainability milestones. As companies clean up their operations, they will see interest rates ratcheted down, incentivising portfolio companies to become greener.

“We’ve set ourselves a target to have at least 30 percent of the fund consist of green bonds and that’s going to be tough as there are limited opportunities in the market,” says Rinse Terpstra, London-based senior analyst. He will work closely with Jason Horowitz in New York.

While there are limited opportunities to invest in green bonds, Terpstra says market growth should enable good credit selection and achieve the fund’s 30 percent target. “This market was growing very fast in H1 2021 and is now worth $500 million. The high-yield sustainable bond segment is also growing really quickly. Today there are 70 issues in the market but we believe that will increase very quickly in the next couple of years.”

For LPs, the fund offers a way to meet their own demanding ESG targets while allowing them to continue investing in non-traditional credit. “In Europe more than the US perhaps, and in Northern Europe in particular, pension funds and other institutions are being judged by their own investors who want ESG to be core to their investments,” says Terpstra. “Within investment-grade credit, that has been reasonably easy to achieve, but not in high yield. This is one of the first funds to have such a strong ESG focus within the high-yield space.”

In investment-grade credit, demand for green bonds has compressed yields, says CIFC. Green high-yield bonds not only offer enhanced returns but have lower-duration risk, which can help drive outperformance.

Growth: Taking venture debt to Europe

Backing the next generation of high-growth companies is one way that private debt funds can support post-covid economic recovery.

New fund manager Atempo Growth has hit the ground running with a European-focused venture debt fund.

The firm has held a $200 million first close on its debut vehicle, which will back innovators across Europe to build on momentum that exists in technology. It received commitments from the European Investment Bank and Banco Santander.

Atempo co-founder, Luca Colciago, says Europe badly needs more financing options for venture firms. “In the US, venture debt is a mainstream strategy and no longer needs to convince LPs it’s a great product, but in Europe we really need more funds offering this.”

The fund aims for a final close around $300 million in 2022 and will adopt a generalist approach with 50-60 deals. Based in London, fintech will be a major focus and software-as-a-service companies are likely to be favoured as strong recurring revenues offer important security.

However, backing these companies can be more challenging than conventional, mid-market direct lending. Atempo is looking for companies growing at 50 percent or more per year but have negative cashflows and weak balance sheets as they fund that rapid expansion. This requires a different approach, working closely with the business to understand revenues and develop structures that work for high-growth businesses.

The loans it provides are senior secured against the business and include intellectual property. Typically, the fund will provide multiple loans to each business in its portfolio. The loans feature no convenants, or very light ones only, reflecting the unique situation of companies that are experiencing rapid growth.

While Atempo will only back businesses with an equity sponsor, it does not always come onboard during a funding round, sometimes receiving approaches later as businesses seek more capital for the next growth stage.

Economic disruption always creates new opportunities and covid is causing major realignment. Funds and strategies that look to help existing businesses to recover or back the next big thing in tech are set to outperform in the next economic cycle. Doing all this while meeting higher ESG standards can ensure the economic recovery is greener and more ethical.