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HIGHLIGHTS:

NEW WAYS TO ACCESS POCKETS OF VALUE

November 2019 

 

As the private credit market deepens and expands, large investors are striking new alliances and building new ways to gain access

Insurers Innovate for the Lower Middle-Market

 

Several signature transactions have seen European insurers increasing their commitment to SME and lower middle market direct lending.  Some have taken stakes in direct lenders and seeded a series of new funds. Others have directly commissioned specialist credit GPs to source middle market assets.

Several separately managed accounts (SMAs) of up to $/EUR 1bn have been established. Ofthers have sourced assets direct, ‘commissioning’ private credit platforms as originators. This comes as leading investors seek diversification from the large buyout sector amid concerns about pricing and asset concentration.

 

 

Credit Funds of Funds Buck the Trend

 

Funds of funds, a declining sector in other alternative asset classes, have continued to grow in private credit. In Germany alone, Yielco, Golding and HSBC now together manage over EUR3bn in private credit for small institutions and family offices. These groups, similarly to Certior in Finland and LFPI in France, tend to carry out highly detailed due diligence and focus on diverse regional managers in the lower mid market.

 

 

SME Platforms Bring LP Funds

 

Turning away from their original P2P roots, several leading SME credit platforms are now offering institutional investors traditional LP-GP funds. Market leaders Funding Circle as well as October, CreditShelf and Credit.fr are offering LP funds that will together lend to thousands of smaller European SMEs. Returns are similar to the traditional middle market private debt funds, but some will contain over 1000 SME credit positions. Platforms tend to be sole lender to SMEs and private equity ownership is rare. Platforms invest equity capital at the corporate level into building extensive data modelling and underwriting capability. Platforms meanwhile typically generate revenue by charging SME borrowers for sourcing them credit rather than investors through the platform.   

Market drivers

Research shows that private credit funds stabilise markets and promote 'economic resilience' ...

ESMA warns that “40% of European high yield bond funds could suffer liquidity shortfall” in the event of a market dislocation ...

More than half of global banks are generating insufficient returns to survive a downturn - McKinsey ...