Regions under the spotlight: DACH and Benelux
The DACH region and Germany in particular, were a little slower than the UK in embracing direct lending, but have quickly caught up. 'We advised on some of the first unitranche financings in the London market, which was ahead of the curve, and we introduced the instrument to a number of German banks. They said it would never take off," says Wolfram Distler, a partner in DLA Piper's Frankfurt finance practice. 'That was six or seven years ago. Now, around half of the mid-cap leveraged financing market here is controlled by direct lenders."
Last year, Debtwire canvassed direct lenders to find out where they viewed the greatest growth potential in the European market. They had a firm eye on the German-speaking region, with the UK and Ireland falling out of favour with the prospect of managing Brexit's many challenges.
Almost one-third (29%) identified DACH as offering the greatest opportunity for growth in 2021, putting it ahead of any other part of the continent. There is some evidence that Germany, the third-largest national market in Europe after the UK and France respectively, is gradually taking market share.
A look at Deloitte's Alternative Lender Deal Tracker shows that the country accounted for 15% of all direct loan provision in the first half of 2021, a marginal but notable increase on the 12% claim of all European deals dating back to 2012.
Banks get busy
The rapid advance over recent years has elicited a pushback from banks. "Some traditional lenders have been quite successful in winning back market share because many of them are now accepting looser terms than they did three or four years ago," says Distler. "And at the same time, they are obviously still cheaper than the debt funds. Over the past couple of years, sponsors have been talking to both debt funds and the banks to understand what the most suitable arrangement would be for their particular deal."
There is also some evidence that traditional lenders are becoming more open to collaborating with the competition by participating in unitranches, especially on assets they know and like.
In May last year, Ardian Private Debt clubbed together with Bank of Ireland and NIBC Bank on the refinancing of nursing home operator EMVIA Living, a portfolio company of PE firm Chequers Capital, the facility also providing acquisition financing for future bolt-ons. It seems that in Germany's burgeoning market there is room for both banks and funds, even on the same deals.
If the UK was the first market in Europe to open its doors to direct lenders, the Netherlands was not far behind. 'Taking a step back, if the US is T, then the UK is T minus one. Then you have the Netherlands and Germany at T minus two or three, and Belgium after that, in terms of chronological development," says Max Mayer, a partner in DLA Piper's Amsterdam debt finance practice.
This steady ascent was already well under way before 2020; however, the pandemic saw direct lenders step up a gear. Mayer notes that sponsors have been chasing COVID-19-resilient businesses and this has pushed up average asset prices resulting in a greater sponsor population considering the private credit fund driven financing offerings.
Accordingly, "the private debt just followed and that trend seems to be continuing," he says. "Traditional financial institutions active in the Netherlands have (self-imposed) ticket size limitations. So, once you run into a certain leverage multiple and therefore debt quantum, you end up needing four or five lenders to facilitate your bid."
Clearly, from a sponsor's perspective, that's not very time efficient and is more prone to execution risk. And this is where the direct lending market provides a different approach and product which is being increasingly embraced by the Dutch private equity space.
Size-wise the deal flow has developed a substantial range: in addition to the more traditional double-digit EBITDA deals, assets traditionally considered "too small" (EUR 4-6m EBITDA) are now attracting private credit fund interest. Admittedly each space features its specific target audience however, with the obvious overlap aside, sponsors and intermediaries ensure that all spaces are busy and competitive.
'When you move up into larger deals and open up bandwidth for buy-and-builds, the deployment opportunity is there and you then tend to see more of a feeding frenzy, provided obviously the asset is good and meets the necessary credit and investments requirements," says Mayer. "That's when the TLB -style terms start popping up, where the documentation convergence occurs and documentary engineering from that space migrates into the direct lending space - the product of a competitive landscape."
This convergence of leveraged financing markets is becoming a more common sight in the Netherlands, a sign of its relative development and maturity.
"Taking a step back, if the US is T, then the UK is T minus one. Then you have the Netherlands and Germany at T minus two or three, and Belgium after that, in terms of chronological development."
- Max Mayer, DLA Piper Partner, Amsterdam