Q4 2020
Fundraising analysis
Direct lending has demonstrated its resilience
Robin Armitage
Researcher Creditflux
Michelle D’Souza
Reporter Creditflux
Pent-up demand portends rapid reversal of 2020 misfortunes
European direct lending volumes plunged to €16 billion in 2020, down 56% year on year, according to Debtwire Funds Data. But despite the slowdown, market participants are confident fundraising will pick up in 2021 by virtue of supply and demand.
Oquendo and Sixth Street gave figures a slight boost in Q4. The latter closed its second European direct lending fund, Sixth Street Specialty Lending Europe II, at its €1 billion hard cap, while Spanish direct lender Oquendo closed Oquendo Senior at €172 million, above its €150 million hard cap.
“2020 was the first time European direct lending was tested through market stress … perhaps investors who had outlined deployments were waiting to see what happened and how resilient the asset class was,” says Trevor Castledine, investment consultant at bfinance.
“The good news is that direct lending has proven to be very resilient. If that were a reason why people were holding back, it could be a complete reversal this year with the pent-up demand,” he says. Moreover, investors must deploy throughout the years to maintain vintage diversification among their portfolios.
Another factor that caused figures to dip in 2020 was LPs focusing on their own portfolios in times of volatility, as well as uncertainty over virtual due diligence and willingness to invest virtually.
Peter Martenson, partner and head of global distribution at placement agent Eaton Partners, says LPs are slowly becoming more comfortable with virtual meetings – but the number of touch points the firm took with investors to close a fund commitment increased significantly.
“Pre-COVID, it took about 27 points of contact with investors to close a commitment, whether that was through conference calls, meetings, emails – either with just us or the manager. During COVID, that increased to 42,” Martenson says.
“The good thing is that the virtual aspect has allowed us to organise these more efficiently, as we used to be able to meet two or three times physically before you close a commitment. At the same time, there is a lot more handholding with investors.”
Public capital markets and their performance continue to drive LPs towards private market investments, with investors facing increased volatility across their equity portfolios and reduced yields in their fixed income allocations. Private credit provides diversification, stable income and higher yields.
Christine Farquhar, managing director and global head of the credit investment group at Cambridge Associates, says she is seeing growing demand for senior direct lending, particularly from European investors.
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On the supply side, 2021 looks set to be a great vintage for direct lenders, with a plethora of deals and slightly better documentation and deal terms.
“European pension schemes are less likely to be derisking than in the UK and want to enhance their projected returns,” she says. “In the UK, there are other factors such as maturing final salary schemes, rebalancing, derisking and cash withdrawals. There has been some demand, but less freedom to move in that direction.”
Castledine says some of the firm’s biggest mandates last year were from insurance firms, largely towards the more conservative end of the senior corporate direct lending funds.
On the supply side, 2021 looks set to be a great vintage for direct lenders, with a plethora of deals and slightly better documentation and deal terms. There will also be many opportunities for refinancings from the record 2017 year.
Performance continues to be the biggest driver for new fund selection, investors have highlighted. In 2020, investors flocked to quality, established managers, considering them safer bets.
COVID-19 has placed a magnifying glass on direct lenders. LPs acknowledge that the pandemic has underlined differences between managers in terms of deal origination, documentation and risk management capabilities – though the full impact on this won’t be fully visible for another two or three years.
Private debt fundraising seems well placed for 2021. Figures will be greatly enhanced by larger managers such as Ares Management, which raised €9 billion for its latest European direct lending fund (as of 31 December), and Hayfin Capital Management, which exceeded and ultimately scrapped its €5.5 billion hard cap. Both have yet to hold a final close.
Despite optimism surrounding the distribution of COVID-19 vaccines, there remains cause for concern in the light of emerging coronavirus variants and recurrent lockdowns. Fundraising looks certain to increase – the question is when?
European direct lending funds holding final closes in 2020
European direct lending highest 2020 commitments
European direct lending fundraising
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European Direct Lending Perspectives
Q4 2020
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