Direct Lending

Why invest in Direct Lending

• Source of attractive and less correlated income
• Protection from Rising Interest Rates
• Higher Seniority and Security
• Greater lender protections than syndicated loans
• Lower Potential Losses in a Default
• More Upside Potential
• More Control
• Lower Volatility
• Greater Diversification

What are the main risks of Direct Lending

• Credit Risk
• Portfolio Concentration
• Origination Volume
• Restructuring

What characterizes Direct Lending?

• Industry/Sector: Typically, generalist across all industries and sectors, though some managers have an industry/sector focus.
• Instruments: First Lien, Second Lien, or Unitranche term loans, which blend elements of senior and subordinated debt into a single loan with a unified interest rate.
• Maturity Profile: Generally, ranges between five and seven years although given refinancings, the average time outstanding typically falls within the three to four years. In contrast, fixed rate High Yield bonds usually have maturities exceeding seven years resulting in credit and duration risk.
• Credit Quality: Moderate/Higher risk. Borrowers typically have credit ratings that are below investment grade.
• Interest Rate risk: None (floating rates) / Moderate (floating/fixed rates). Typically, interest rates for these loans are priced as a spread above a floating rate reference rate. Up until mid-2023 in the US, this rate was the London Interbank Offering Rate (LIBOR) and today is Secured Overnight Financing Rate (SOFR).
• Borrower Size: Middle Market. Direct lending primarily involves providing senior debt to lower (EBITDA: $5mm-$25mm), middle (EBITDA: $25mm-$75mm) and upper (EBITDA: $75mm plus) middle-market borrowers. More recently, the upper end of the borrower size has increased, nearing the lower end of the syndicate loan market.
• Return Profile: Derived from contractual yield, arrangement fees, original issue discount (OID), prepayment and covenant- reach fees. Gross yields have historically been 100 to 200 basis points wider than broadly syndicated loans.
• ESG: Impact / Positive Screening / Negative Screening. Depends on the strategy though most managers will not lend to borrows in the weapons, munitions, sin, and energy sectors.

Question 1.  What is driving the evolution of the opportunity set in Direct Lending?

AlbaCore Capital Group

The market is evolving beyond its historic mid-market focus to become an important source of funding for larger corporates, an area of the market that the AlbaCore team have over twenty years’ experience lending to. In contrast to the syndicated market, private credit can provide sponsors with greater flexibility in terms and certainty of execution, making it a compelling alternative for sponsors. While M&A activity, the primary driver of the market, has been limited on the back of the economic backdrop last year, AlbaCore expects activity to pick up. Sponsors, according to S&P Global Market Intelligence, are sitting on a record level $2.59 trillion of dry powder and a record $2.8Tn in unsold investments. Banks continue to retreat and unless loan and bond market participation recovers to pre-Covid levels, there is likely to be a large funding gap that private lenders can capitalise on.  

Apax

The Direct Lending market continues to rapidly expand. Initially concentrated on the lower middle market, it has, over the past five years, steadily captured increasing market share in upper middle market focused global buyout financings. Private equity sponsors now increasingly choose a direct lending solution over syndicated debt to finance buyouts.  We should know - in Apax’s private equity transactions, almost 70% of buyout financings over the past three years have been funded with private debt, and we anticipate this trend to persist given that private debt provides several advantages including certainty of execution, speed, and flexibility, particularly to provide acquisition financing to upper middle market companies. At Apax Credit, our investment focus is completely aligned with this trend.

A core principle of our credit activity has always been to lend to businesses that Apax has closely tracked, often for decades. This long-term perspective, and deep industry and sector knowledge, enables us to make better informed, risk-adjusted investment decisions, considering the performance of both the company and the sector throughout economic cycles.  As direct lending continues to gain market share within Apax’s core focus - the upper middle market - we foresee sustained growth in opportunity sets for the Apax Credit funds.

Cordet

CORDET’s focus on the Northern European lower mid-market presents a compelling opportunity for investors seeking superior risk-adjusted returns. This attractiveness is driven by:

• Less capital chasing more deals in the lower mid-market segment, resulting in better deployment opportunities compared to upper market segments;
• Increased bank regulation continues to push banks towards larger borrowers and shorter durations, leaving space for direct lending in the lower mid-market;
• Substantial dry powder in private equity to fuel growth in deployment opportunities;
• Healthy mix of borrowers within less cyclical and structurally growing niche markets, with need for growth capital and opportunities for consolidation;
• The lower mid-market offers superior risk-adjusted returns compared to broadly syndicated loans, high-yield bonds, and upper market direct lending segments.

This unique combination of factors positions the Northern European lower mid-market as an increasingly attractive segment for discerning investors seeking to outperform in the current market environment.

Corinthia

• Direct Lending has become a significant asset class in recent years, as it benefits both investors as well as borrowers. For borrowers, often private equity sponsors, direct lending has offered them an alternative source of financing at a time when the traditional lenders (the banks) were increasingly consolidating and being regulated away.  Although more expensive, it has delivered greater flexibility and certainty as well as long-term support.
• For investors, the asset class delivers an attractive combination of yield and relatively low losses through market cycles, making it a valuable component of a diversified asset allocation strategy. 
• The opportunity set has been supported by the growth of private equity.  This larger opportunity set, combined with rising investor allocations has driven growth and segmentation in the direct lending market.  Investors can now tailor their exposure by choosing between lower, middle, and upper middle markets, as well as sponsor-backed or non-sponsor-backed strategies. 

Audax

Investor demand for Direct Lending remains robust as the asset class has demonstrated strong performance and a yield premium compared to the broadly syndicated loan markets over the past decade-plus.  Since the global financial crisis, the opportunity set for direct lenders has grown as banks retrenched from lending to small and mid-sized businesses due to increased regulatory scrutiny and liquidity constraints. Another significant driver of the evolution and growth of Direct Lending has been the rise of unitranche debt. Historically, many middle market private equity firms financed leveraged buyouts with senior / junior structures, with senior secured debt having a priority claim over junior unsecured debt in the capital structure. Over the last decade-plus, the market for unitranche loans has continued to gain prominence as another key source of debt capital for private equity firms, driven by the efficiency of a streamlined process across one tranche of debt for sponsors and a simplified capital structure, as well as the ability to negotiate a single set of credit documents and financial covenants, often with one provider.  We believe middle market unitranche debt has superior structural and economic attributes when compared to high yield debt and broadly syndicated loans, including financial maintenance covenants and, often, more conservative leverage levels. 

The current market and investing environment has changed significantly over the past 24+ months due to several macroeconomic factors continuing to play out across the broader market. Over this period, persistent inflationary pressures have made the economic environment more complicated, resulting in rapidly increasing interest rates (beginning in March 2022) that have reached levels not seen in over a decade. Therefore, borrowers have experienced strain on cash flows and new financing opportunities are closing with lower leverage profiles, alongside typically better investor risk adjusted returns, to account for appropriate debt service and interest coverage ratios. In addition, the debt financing markets have also changed amid economic uncertainty and variability from banks, tighter lending standards, regional banking turbulence (March 2023), and expectations of further regulatory oversight – we believe, all to the benefit of private credit and direct lenders.

Invesco

Direct lending involves providing loans directly to middle-market corporate borrowers. In the U.S., it's a significant segment of the economy, offering a robust opportunity for investors. With a decrease in banking entities, direct lending has become a newer source of capital, particularly for stable middle-market companies. Private equity activity around these businesses has further enhanced this opportunity. Currently, direct lending in the U.S. offers compelling returns, with transactions underwritten to 11-12+% yields at ~50% loan-to-values. Given macro uncertainties, credit selection is crucial. Focusing on stable borrowers with non-discretionary products/services and flexible cost structures is a priority. The signaled rate cuts from the Federal Reserve are expected to ease debt burdens and potentially increase transactional volume. The forward curve suggests a higher 'normalized' rate environment, making direct lending an attractive means for long-term investors to generate high levels of income.

HSBC Asset Management

2023 saw sponsors coming to terms with the cost of debt and adjustment to company valuation expectations, coupled with a slowdown in activity across the private equity deals market. As such, there has been a higher volume of add-on transactions, and a trend towards sponsors seeking out lower leveraged debt options for their transactions. Deal activity picked up slightly in Q4 both in terms of our immediate deal pipeline but also earlier stage discussions on deals likely to come to market during 2024. Based on conversation with sponsors, advisers, and our portfolio companies, we expect that 2024 will see higher levels of market activity with pent up demand for sponsor exits feeding through into deal pipelines.

Nxt Capital

The evolution of Direct Lending since the Great Financial Crisis has been a byproduct of managers’ desire to build and grow their platforms coupled with investors demanding more efficient fund structures to suit their needs.   When direct lending emerged as an institutional grade asset class 15 years ago, draw down funds and public BDCs were the primary fund structures offered by Direct Lending managers.  Managers’ tool kits can now include rated notes, non-traded private BDCs, evergreen funds, interval funds, among other fund structures, not to mention the limitless customization for funds of one.  The attractive risk return profile of direct lending continues to drive demand for the asset class, with investors and managers focused on fine-tuning fund technologies to optimize suitability for each investor type.  

Aside from fund technologies, the opportunity set in Direct Lending is evolving as new managers seek differentiated offerings to attract capital and existing managers settle into market segments best suited to their originations reach and capital bases.   This market segmentation allows investors to choose from a veritable menu of Direct Lending strategies with varying risk return profiles to customize their direct lending exposure.  LPs now have their pick of not only “core” direct lending strategies, but also a variety of specialty strategies including non-sponsored, lower middle market, opportunistic, mezzanine, ARR, and sector vertical strategies to achieve the risk return profile of their choosing.  Further, their choice of managers within each of those market niches now includes a variety of managers from which to choose.

ODDO BHF

The Fund operates in the private debt market, focusing on senior loans to small and mid-cap companies in the European Union and Switzerland. This market is characterized by non-bank lending to private companies that often have limited access to traditional financing, making it an attractive option for companies seeking flexible capital solutions.

Market characteristics :

• Niche focus on small and mid-cap companies: These companies are typically underserved by traditional banks due to their size, making private debt funds an important source of financing.
• Leveraged and unsponsored transactions: Leveraged loans, which include sponsor-backed and sponsorless deals, offer higher returns due to their complexity and risk. Sponsorless loans, in particular, appeal to companies without private equity backing and offer flexibility.
• Primary and secondary channels: The fund is active in both primary and secondary markets, allowing it to capitalize on new opportunities and take advantage of potentially undervalued loans in the secondary market.

Market Attractiveness :

• Attractive risk/return profile: Private debt offers higher yields than traditional fixed income instruments, making it attractive to investors seeking enhanced returns. Senior loans are less risky within the debt structure and offer protection through collateral.
• Diversification benefits: Investing in the private debt market offers investors diversification as returns are less correlated to public equity markets. This can be particularly attractive in times of public market volatility.
• Growing market demand: Demand for private debt has increased, driven by regulatory constraints on bank lending (such as Basel III) and a growing number of companies preferring non-dilutive financing options.
• European opportunities: The Fund's focus on the EU and Switzerland is attractive due to a large base of small and medium-sized enterprises (SMEs) seeking alternative funding. Additionally, ongoing market fragmentation in Europe offers opportunities for private lenders to step in where traditional banks may be hesitant.

Resiliency of an investment in the Fund :

The new macroeconomic paradigm can be described as follows: rising interest rates, inflation, recession risk, high market volatility, regulatory pressure and Covid19 recovery.

In addition, the geopolitical landscape is uncertain with rising tensions in Europe, trade wars and supply chain disruptions. However, we remain confident that the private asset class, and private debt in particular, represents an opportunity. Private debt funds being a reliable & flexible source of capital providing transaction security:

• Appealing financing conditions fueled by market disruptions.
• Limited financing supply and current market insecurity.
• Floating remuneration to benefit from high base rates.
• DACH region continues to gain traction: Rise in the number of deals: +14.5% CAGR 2012-2023  - Broader access to SMEs which opens up to credit funds.
• Democratized market acceptance of private debt by corporates & PE funds - Fragmentation of lower mid-market creates potential opportunities.

Question 2.  Given the rise in Private Credit funds and competition from major LPs like CPPIB and GIC in direct credit investments, along with reduced M&A activity from Private Equity, have you observed notable shifts in terms and pricing in your operating market?

Audax

Reduced M&A and LBO activity from private equity firms, coupled with strong demand from leveraged loan investors and private credit funds, has led to a more competitive lending environment characterized by tighter spreads, particularly in the large corporate and upper middle market.  In the core middle market, where Audax has focused since inception in 2000, we have observed less spread compression and tighter financing structures given the segment’s relative insulation from the broadly syndicated loan markets.  Absolute yields in the core middle market have remained attractive with a healthy yield premium compared to syndicated loans, and lender protections and loan structures have remained strong.  We have consistently evaluated new LBO deal activity and add-on acquisition opportunities as we believe there is less of a disconnect on valuation for smaller deals than deals in the larger, public markets. Looking ahead, there is optimism that M&A and LBO activity should pick up during 2H 2024, as motivated sponsors seek realizations and investor confidence around the overall economic outlook looks set to grow.  We view the desire of LPs to make direct investments as beneficial to our lending platform. Our LP co-investors help facilitate incremental capacity and continue to be important partners for us.  

Corinthia

• At Corinthia, we focus on the core middle market ($10m - $100m EBITDA), an area that can be more challenging for new entrants to access. Success in this market relies on long-term relationships and a strong reputation. 
• We believe the core middle market is somewhat insulated from the competitive pressures seen in the more transactional upper middle market. The significant capital raised by larger managers, combined with the return of the broadly syndicated loan markets, has led to tighter spreads and weaker terms in larger deals. While there has been some trickle-down effect, we continue to see attractive terms and wider spreads in the core middle market.
• While spreads in this asset class can cycle with supply and demand, the illiquidity premium and floating rate nature of these investments have historically delivered an attractive all-in yield — a trend we believe will continue. 

Cordet

Despite the rise in Private Credit funds and increased competition in the broader market, the lower mid-market in Northern Europe remains resilient and attractive. Reasons include:
•    LPs like CPPIB and GIC are not active in direct sole lender credit investments in our segment. This space requires specialized skills, local relationships and a different value proposition that large LPs doing direct investment typically do not possess;
•    Our deal flow is less cyclical than in larger segments, resulting in minimal pressure on terms and pricing. We consistently maintain key protections such as maintenance covenants and EBITDA adjustment caps;
•    In our market, sponsors prioritize capital availability and flexibility for growth over aggressive pricing or terms. This aligns well with our value proposition;
•    We offer a more flexible solution compared to traditional bank financing, which remains restrictive in this segment; and
•    We rather actively partner with our LPs, offering co-investment opportunities in larger deals, thus aligning interests and leveraging our expertise.
This unique combination of factors positions us to deliver superior risk-adjusted returns, even in a changing market landscape.

Apax

Spreads have declined from their 2023 highs to pre-2022 levels, a trend we generally view positively as it supports long-term growth in buyout activity. Currently, spreads for private credit range between 475-600bps, with the average spread underwritten for Apax Credit investments in 2024 year-to-date at 565bps as we continue to focus on harvesting alpha returns. As always, credit spreads will fluctuate and will increase again in the next market dislocation, which generally occurs every few years.

The substantial inflow of new credit capital into the space has, in our view, led to a decline in pricing discipline in credit.  At Apax Credit, we are increasingly focused on quality credit selection rather than deployment pace, unlike many of our peers who face deployment pressure. Year-to-date, along with spread compression we have seen an uptick in the number of market transactions compared to the same period in 2023. However, we have raised our investment standards, reducing the hit rate on our originated deals to only 3.5% this year.  At the same time, we have significantly increased ticket sizes for those deals who meet our high standards for investment.  We believe in times like these that fundamental credit analysis, portfolio construction, and most importantly patience will reward alpha focused credit investors like us in the long-term. This disciplined approach underscores our commitment to maintaining credit quality standards and the preservation of capital as we scale the next fund.

HSBC Asset Management

The increasing scale of fundraising for Private Credit funds, and the level of AUM managed by major LPs seeking to participate in direct credit investments, has driven an upward shift in target deal sizes for most of these competitors, given their need to deploy larger and larger funds. These funds also typically focus on unitranche strategies targeting higher leverage. This has resulted in competitors deprioritising deal sizes below €100m. At the same time, local banks are retrenching from sponsor financing due to regulatory pressure. These factors have together created a gap in the market which we are seeking to address, targeting deal sizes in the underserved €30-100m space for which there is a scarcity of financial solutions. This provides a high degree of pricing defensibility, and we see pricing holding firm or trending up as competition in this market segment decreases.

Invesco

In our segment of the market, which we call the ‘Core Middle Market’ in the U.S. (i.e. companies with EBITDA typically between $20-50m at entry), pricing tends to be fairly stable.  The reduction in transactional activity has not led to significant spread change in our deployment.  If anything, we have observed spread expansion for much of the last 2 years along with the ability to structure the transactions with lower debt leverage, lower loan-to-value and stronger creditor protections.  Volume has certainly been lower across the market as private equity transactional activity reduced in the context of higher interest rate burdens.  Nonetheless, within our pipeline, we observed a quality bias amongst transactions completed as stronger borrowers have been best positioned for new loans.  Thus, the opportunity to lend at higher rates to strong borrowers with lower amounts of leverage remains quite attractive.

AlbaCore Capital Group

The team have observed pricing adjustments in private credit, as funds have grown and major LPs have entered the market. Reduced M&A activity and lukewarm IPO markets have also impacted market dynamics. However, AlbaCore takes a partnership approach to lending. AlbaCore’s senior investment team developed our strategy while at CPPIB, and we see LPs as partners rather than competitors and have placed over $2.8 billion in co-invest.

While pricing adjustments have been noted in larger private credit deals, the majority of the market remain focused on the mid-market. Currently we see pricing for regular senior secured direct lending for larger corporates commanding a E + 575 to E + 625bps coupon. Given the defensive features of larger corporates, we believe this represents attractive risk adjusted returns but remain highly selective, focusing on company fundamentals alongside pricing.

NXT Capital

NXT focuses exclusively on lending to Private Equity backed businesses in the lower middle market, which we define as companies generating between $5 million to $50 million of EBITDA.  This segment of the market remains unimpacted by major LPs pursuing direct credit investments given their focus on partnering with multi-billion dollar PE funds and lending to upper middle market and larger issuers to efficiently deploy large sums of capital.  The lower middle market is also isolated from the saturation of managers and capital characterizing the core and large middle market direct lending segments.  For this reason, debt structures, lending terms and pricing in NXT’s target market remain disciplined.  Lower competition allows NXT to focus on situations where we always retain financial maintenance covenants, usually obtain 30-day financial reporting and negotiate loan documents with customary protections we have received since our inception 15 years ago.  Credit spreads and transaction fees ebb and flow with market forces and have moderated since peaking in 2H23.  However, current loan level yields remain attractive by historical standards due to elevated SOFR and a disciplined approach to economic terms in the lower middle market.  Further to this point, the lower middle market is insulated from the pervasive use of PIK interest, covenant lite structures, loose EBITDA definitions and documents that allow asset diversion and cash leakage away from borrowers which have become emblematic of fiercely competitive core and upper middle market transactions.  

ODDO BHF

• Illiquidity and complexity premia protect pricing stability: the lower-mid market benefits from structural protections in pricing, driven by factors like illiquidity, deal complexity, and smaller deal sizes, which mitigate excessive pricing volatility compared to larger market segments.
• Stable and attractive senior pricing: senior debt pricing in the lower-mid market has remained steady, with average spreads of 450 bps since FY23 in our portfolio, compared to 375 bps between FY19 and FY22, reflecting consistent risk-adjusted returns despite macroeconomic shifts.
• Disciplined unitranche pricing strategy: while unitranche pricing may fluctuate based on competition and asset quality, we maintain discipline by rejecting financing terms that do not adequately compensate for assessed credit risks, ensuring alignment with due diligence findings.
• The team’s ability to tilt the investment playing field enables to remain very competitive: the team focuses on underserved small and mid-market segments, especially in its core German market. By focusing on this niche, the advisory team can develop a deep understanding of market dynamics and uncover high potential opportunities that are often overlooked by larger institutional investors. This specialised approach allows the advisory team to operate in a less competitive environment and secure favourable deals with attractive risk-adjusted returns. The advisor benefits from exclusive access to proprietary deal flow through well-established industry relationships. Many small and medium sized companies prefer to work with trusted, specialist partners, giving the adviser access to opportunities that may not be widely marketed. This direct access gives the adviser a competitive advantage by securing unique investments before they reach the wider market. The advisor's ability to provide bespoke financial solutions tailored to the specific needs of smaller companies further strengthens its position. Many companies in this segment have unique funding requirements that don't fit traditional financing models, and the adviser's flexibility in structuring bespoke deals enables them to unlock value in ways that more rigid models cannot.

Question 3.  How does your team approach deal structures and collaboration in sponsor-backed vs. non-sponsor-backed transactions? Are there specific considerations or challenges with private equity sponsors compared to non-sponsored deals, and how does this impact your decision-making in structuring loan agreements?

Invesco

Our strategy focuses on lending to sponsor-backed transactions.  We believe this is an important risk mitigation tool in our conservative approach to lending.  By partnering with sponsors with whom we have worked for decades, we develop an understanding of their operational expertise, their behaviours in the unlikely event a company becomes challenged, and their ability to support a business which might require incremental liquidity.  This approach has continued to lead to favourable outcomes for our team across their multiple decades of experience lending to middle market businesses.

Apax

While non-sponsor-backed transactions may offer additional basis points in spread and potentially less borrower-friendly documentation—often due to a lack of sophistication on the borrower’s side—they frequently suffer from limited oversight and weaker corporate governance. At Apax Credit, our focus is exclusively on companies and capital structures that are well-known to the firm, which, in most cases, means sponsor-backed transactions.

By concentrating where we have deep familiarity, we ensure strong relationships with counterparties. This familiarity is further enhanced by our experience partnering with private equity competitors on joint investments, allowing us to observe how they manage adversity. This insight informs our investment decisions, particularly regarding which partners we trust in shared capital structures.

On occasion, we have declined opportunities to invest in fundamentally sound businesses due to discomfort with a specific team at a particular investment manager. This caution stems from concerns over how they might utilize the flexibility provided under the documentation. Our nuanced understanding of the key players in the industry provides Apax Credit with a distinct edge over other private debt funds who are not integrated into a private equity business.

Corinthia

• The vast majority of deals we do are sponsor backed.  We believe that the long-term partnership between PE sponsors and their lenders can lead to good outcomes.
• There are three main reasons for this: 
  • Resources – Private equity sponsors bring valuable resources, both human and financial, which support upfront due diligence and are helpful during challenging times.  
  • Governance – PE sponsors offer significant experience and strong governance structures. 
  • Access to deals – Sponsor-backed deals are relationship-driven, granting us access to a broad range of opportunities through established networks. Additionally, the active PE market, with frequent buying and selling of assets, creates further opportunities. 

AlbaCore Capital Group

AlbaCore focuses on large-cap sponsor-backed companies as we believe these offer investors better relative value versus non-sponsor deals. These companies are typically market leading with diverse revenue streams, have strong management teams and governance process and with access to capital markets have greater financial flexibility. As such all else being equal, the pricing differential on non-sponsor transactions may not be sufficient to compensate for the additional underlying risk.

The European market is relationship led, with sponsors partnering with just a small group of trusted lenders. AlbaCore’s experience and deep relationships in the market has given the team a strong understanding of sponsor behaviour and preferences. The team utilises this to create bespoke solutions that fit a sponsor’s requirements while also providing strong downside protection and potential upside.

HSBC Asset Management

The team utilises a well-established screening criteria across all its investments, and focuses on businesses led by strong management teams operating in what we believe to be attractive sectors, with consistent financial performance, growth momentum, sustainable cash flow and strong downside protection. Sponsor-backed transactions are the focus of the strategy, given the ability of well-funded, professional equity investors to drive growth and protect value, and with whom we can leverage longstanding relationships to achieve the best outcomes for our investors. Sponsor deals also involve significant amounts of structured third-party due diligence which support our credit analysis. For non-sponsored deals, which are not core to the strategy, the focus is on larger opportunities at lower levels of leverage relative to sponsor transactions, with a more hands-on approach to the scoping of due diligence.

Audax

Throughout its 24-year history, Audax Private Debt has focused on sponsor-backed middle market companies owned and controlled by private equity sponsors with a proven track record of adding value to the portfolio companies they acquire. We believe it is advantageous to have a single sophisticated controlling shareholder that has: (i) meaningful capital invested / alignment with our objectives, (ii) capital available for follow-on investments to support accretive opportunities or to solve problems, (iii) the ability to hire and fire management, (iv) the right to sell the company, and (v) the same target investment horizon as us.  Audax Private Debt’s investment platform provides our private equity sponsor clients with multiple financing solutions which has allowed us to develop long-term partnerships throughout the middle market. On an inception to date basis through Q1 2024, we have provided financing to over 280 private equity sponsors across more than 1,100 middle market transactions.

ODDO BHF

The fund targets leveraged and sponsorless senior loans in the small and mid-cap market within the European Union and Switzerland, through primary or secondary channels. There is no percentage limit on sponsorless investments, although 79% of the current deal flow, based on a pipeline of 1,021 transactions, involved sponsor-backed deals. Also, sponsored companies are preferable from the bank’s perspectives given the more professional process run by PE clients. Sponsorless are envisaged and represent around 20% of the deal flow but the current market conditions includes decreasing margins are not supportive of such deal. Given that the team has successfully conducted equity and sponsorless debt investments in the past and the ODDO BHF group is well anchored in the SME landscape we are expecting a rising share of sponsorless transactions going forward.

NXT Capital

NXT Capital does not finance founder- or pledge fund-owned businesses; our firm exclusively finances businesses owned by established private equity firms with dedicated funds.  NXT’s focus on minimizing losses and downside protection revolves around lending to high quality businesses with stable cash flows in sectors without binary risk, questionable macros or high cyclicality. Partnering with established private equity funds provides NXT with further credit enhancement through institutional quality transaction diligence, ongoing capital support and operational expertise and resources, including in many cases, sector expert operating partners investing alongside the PE firms.  

While we believe partnering with private equity firms is an efficient originations channel and provides our portfolio companies with support often not afforded by founders or fundless sponsors, NXT’s primary focus is on credit selection and active portfolio management above private equity relationships.  The firm’s guiding principle is building quality portfolios and delivering consistent returns to our LPs.  We achieve this by structuring transactions and negotiating loan agreements with prudent protections for a lender in a 1st lien senior secured position.  Private equity firms are often better informed and more sophisticated than most founders or pledge funds, not to mention represented by leading law firms, so negotiations are well matched.  However, NXT has closed transactions with over 210 private equity firms in the last 15 years, including many repeat transactions with those firms, establishing precedents that are often applied making negotiations more efficient.  NXT also maintains relationships with nearly 500 private equity firms, many dating back 20-25 years, allowing the firm to originate numerous discreet opportunities in any given year and the freedom to walk away if structural or documentation considerations warrant it.

Cordet

At CORDET, we maintain a consistent focus on business quality across all investments, regardless of ownership structure. Our approach balances the strengths of both sponsor-backed and non-sponsor-backed transactions:

• Sponsor-Backed Transactions
  • Our portfolio favors sponsor-backed deals due to:
    1.    High private equity penetration in Northern Europe
    2.    Emphasis on cash equity commitment
    3.    Access to additional capital support if needed
  • We cultivate long-term relationships with key sponsors, accessing repeat deal opportunities in attractive niche strategies.
• Non-Sponsor-Backed Transactions
  • While deal flow is limited, we capitalize on highly attractive situations.
  • Our thorough due diligence and bespoke structuring enable  +100-400bps return upside compared to similar sponsor-backed credit risks.
  • Key Focus Areas:
    1.    Strong downside protection
    2.    Low structural risk
    3.    Comprehensive due diligence
    4.    Tailored structuring, often with alignment in equity upside

This balanced strategy allows us to leverage the strengths of both transaction types, ensuring optimal risk-adjusted returns across our portfolio.