LONDON, April 17 (LPC) - Private debt funds are building teams to boost their ability to syndicate loans as a flood of cash into the sector helps them to target bigger deals, drawing criticism from competing banks and peers, as well as regulators who see the shadow banking sector as a possible systemic risk.
Direct lenders filled the gap after banks pulled back from lending to small and medium-sized companies following the global financial crisis, but the influx of cash and bigger deals are encouraging them to syndicate more debt in the next step of development for the booming sector.
Private debt funds raised US$110bn in 2018 globally, after raising US$129bn in 2017, and direct lending funds focused on Europe raised €18.3bn in 2018, bringing the capital available for investment to US$44.8bn at year-end, according to research company Preqin.
Alternative lenders previously focused on deals of up to US$150m, but are now able to finance larger transactions of up to US$1bn or more. In 2018, 46% of deals had debt of £150m or more, compared to 24% in 2017, according to a report by law firm Proskauer Rose.
Direct lenders previously lent on a bilateral basis to small and mid-sized companies and have joined forces on small club deals as co-investors, but are now building teams to help syndicate bigger loans to other debt funds.
“The possibility of certain debt funds being able to do large deals has meant that they are now entering a further stage of their evolution which is to build out internal teams that can help sell-down parts of these large loans to other debt funds and banks once the deal has closed, a kind of bank syndication desk model if you will,” said Faisal Ramzan, a partner at Proskauer Rose.
In January 2019, Ares Management, one of the biggest players in private debt, acted as sole lender of over £1bn to UK software company Daisy Group in what is considered one of the largest-ever private credit financing deals for a European borrower. The transaction was also sold in the US.
Ares syndicated the deal to additional lenders after the transaction had closed, two sources said. The deal refinanced Daisy’s existing credit facilities and simplified its credit structure, as well as providing capital to support the company’s growth plans.
“Those very large deals we are currently seeing are not really direct lending anymore. Those include underwriting,” said Symon Drake-Brockman, managing partner at Pemberton Capital Advisors.
While Ares specialises in lending to private middle market companies, the credit arms of private equity firms are also boosting their ability to arrange and syndicate loans, further increasing liquidity in the space.
Private debt fund Blackstone’s credit division, GSO, also offered a €1.5bn unitranche loan in March to back Advent’s buyout of Evonik’s acrylic sheets business. The deal was ultimately arranged by banks, but highlighted the depth of liquidity available from direct lenders.
Direct lenders have been syndicating their commitments for some time. CVC-owned Wireless Logic’s £115m refinancing in February 2018 was one of the first stretched senior loans to be syndicated by direct lenders.
The loan was underwritten by SMBC as sole bookrunner and anchor investor Park Square Capital and SMBC JV loan fund. Ares, CVC Credit and HSBC joined as arrangers. The deal was part of a joint venture between Park Square Capital and SMBC.
Direct lenders are syndicating their commitments by inviting investors either immediately before or after deals close. The participants are not disclosed, which further adds to a lack of transparency that continues to attract regulatory attention as deal sizes and the sector grow.
By 2023 global private debt will hit US$1.4trn, which will make the asset class the third largest alternative investment after hedge funds and private equity, according to Deloitte’s Alternative Lender Deal Tracker report.
The Bank of England met direct lenders in early April to assess the industry’s resilience in an economic downturn. The risks of direct lending are less obvious as unregulated funds are reluctant to publish any figures relating to their balance sheets and investments.
Smaller direct lenders, who often work with banks either as co-investors or in joint ventures, are also critical of their bigger peers competing with banks, each other and even the high-yield bond market for a limited supply of deals after a dip in first quarter dealflow.
Bigger deals are forcing direct lenders to team up with co-investors and syndicate as the size of the deals is proportionally larger in relation to their balance sheets compared to banks.
Smaller funds agree that this could cause a systemic risk if they were unable to sell the loans.
“We consider those jumbo deals as a sign of weakness. The big lenders apparently struggle to deploy and that could lead to a systemic risk,” Patrick Marshall, head of private debt and CLOs at Hermes Investment said. (Editing by Tessa Walsh)