Fundraising for private debt firms has moved at a healthy pace in recent months, and that momentum looks set to carry into 2015 as a growing number of investors get comfortable with the asset class, and the low-interest-rate environment fuels their search for yield.

2014 is poised to be a record year for the industry in Europe in terms of fundraising. The year-to-date total of €9 billion raised by Europe-based managers is already the highest volume on record, according to data provider Preqin, outstripping the €8.6 billion raised in 2013, though the 23 funds raised so far in 2014 lags the 27 seen last year.

A degree of delineation has occurred within the European market, with large established private debt fund managers on the one hand, and a swathe of generally smaller, newer entrants on the other.

The former group tends to be able to raise large amounts of capital quickly, thanks to demonstrable track records and resources dedicated to fundraising. The challenge for new entrants is to carve out their track records from previous employers and then provide proof of concept to potential investors through early deals. This isn’t possible until a fund has held a first close, which creates a catch-22 situation for managers.

Some have sought to circumvent this difficulty by initially transacting on a deal-by-deal basis to demonstrate the team’s ability to originate deals, before switching to a fund-based model once sufficient traction has been gained with investors.

In terms of investment strategy, many managers have structured their funds with a degree of flexibility. ICG, for example, has stretched the definition of traditional mezzanine to the extent that its latest flagship fund – ICG Europe V, which closed in 2013 – has the ability, on select deals, to invest up and down the capital structure, from senior loans to heavily-warranted mezzanine and even junior equity. The investment objective it will be measured against is squarely in mezzanine territory, but the fund’s managers have a degree of flexibility on individual deals to allow them to achieve that across the whole of the fund’s portfolio. Its latest fund in this series, ICG Europe Fund VI, will have a similar structure.

There is clearly a trend of broadening a fund’s strategy to allow a range of investments, although there is debate about whether this is a good or bad sign. Critics argue the development is evidence of private debt fund managers struggling to source deals and meet return targets in the face of slimmer-than-hoped deal flow, and lively competition from their peers, and in some cases banks. Managers however counter they are simply playing to their strengths – namely nimbleness and flexibility compared to traditional lenders such as banks.

New and seasoned

Earlier this month, 3i Debt Management held a first close for its first mid-market-focused direct lending fund. The firm – which has already established a burgeoning CLO practice – has raised roughly €250 million for the fund, which will invest in senior secured European mid-market corporate loans. It is targeting returns of E+500-700, and will have a three-year investment period.

In October, Permira Debt Managers held a first close for Permira Credit Solutions II (PCS II) at €400 million, having won commitments from 15 LPs. The largest single commitment was €50 million. Its forbear, PCS I, was essentially a vehicle for investing capital provided solely by the firm’s private equity parent, Permira, into European LBO debt, and therefore differs markedly from its direct-lending-focused successor.

Elsewhere, CVC Credit Partners has recently begun marketing its own direct lending fund, which has a target of €600 million. CVC already oversees a €300 million managed account focused on direct lending opportunities.

Looking ahead, more managers are poised to follow suit, including some major names.

Blackrock, for example, is new to alternative lending in Europe and is in the preliminary stages of launching a European direct lending strategy, having appointed Stephan Caron from GE Capital to the newly created role of head of European corporate finance. Caron is in the process of building out his team, and finalising plans for the strategy.

Sankaty Advisors – the credit arm of buyout firm Bain Capital – is also in market with a global direct lending fund that will focus exclusively on senior secured loans to mid-market companies in North America, Europe, and Australasia. The fund has a $700 million to $1 billion target, according to market sources.

ICG is currently pre-marketing two new vehicles: ICG Europe Fund VI and ICG Senior Debt Partners II. The former is the latest in the group’s flagship mezzanine fund series and has a probable target of €2 billion with a hard cap of €2.5 billion, sources said. The latter is a follow-up to ICG’s first European direct lending fund, which raised €1.7 billion by its final close earlier this year having sailed past its initial target of €1 billion – proof that investors have bought into the direct lending opportunity. Its successor is likely to be larger in size, sources suggested.

Paris-headquartered Tikehau Investment Management last month closed its senior leveraged loan fund, Tikehau Corporate Leveraged Loan Fund (TCLLF), on €230 million. The fund is targeting returns of E+400 over a 5- to 7-year horizon. Amundi Asset Management acquired a stake in Tikehau earlier this year, and sources say the presence of a high profile global institutional backer has paid dividends from a fundraising perspective, providing access to a much broader range of investors as Tikehau looks to raise capital.

Another French firm, Idinvest, has been in the market with both a senior and a junior debt fund this year. Idinvest Private Debt III held a first close on €235 million in September after six months on the road, with a final close expected before year-end. Idinvest Dette Senior II is also in the market, with a €300 million target and €350 million hard cap.

Trending upwards

In 2009, 12 Europe-focused funds (including those investing in Europe but managed by firms outside the region) raised an aggregate total of €4.02 billion, according to Private Debt Investor’s Research & Analytics division. This total rose sharply to €16.2 billion from 32 funds in 2012, before falling to €15.67 billion last year (although the number of funds increased to 34). This year, however, looks set to be a record one with €15.62 billion raised already in the first three quarters, from 28 funds.

Equally indicative is the number and size of funds currently in market. There are currently 93 Europe-focused funds in the market, according to PDI, compared to 148 focused on North America, and 30 with a global remit. In terms of target commitments the gap is narrower, with European funds targeting $40.84 billion, versus the $42.78 billion sought by North American vehicles, and $27.09 billion for global funds. – Oliver Smiddy

S&P Capital IQ LCD
McGRAW HILL FINANCIAL
November 24, 2014