Q1 2021
Fundraising analysis
Direct lending passed arduous 2020 test
Robin Armitage
Researcher Creditflux
Karis Hustad
Reporter Creditflux
Asset class’s burnished reputation stimulating demand
European direct lending fundraising started with two funds closed and €1.05 billion raised in Q1 2021. This comes off the back of 2020 fundraising figures being finalised, bringing the total raised last year to €22 billion, matching 2019’s figures. Was 2020 as disappointing for direct lending funds as initially predicted?
“When you look at the appetite of the asset class, there was a lot of demand pre-COVID,” says Stuart Hawkins, managing director at Ardian Private Debt. “That demand feels greater now and investors have seen that private credit is a resilient asset class with good risk-adjusted returns and running cash yield.”
Capitalising on this demand, Kartesia Senior Opportunities I was the largest fund to hold a final close in Q1 (at €1 billion) as the firm’s first dedicated direct lending fund to hit the market. Jaime Prieto, managing partner at Kartesia, says, “We saw both existing LPs and new LPs keen to enter the fund at the start of 2020; however, COVID-19 stalled this momentum. Then, through 2020 we saw the lower mid-market conditions improve and less competition in the space. By the end of Q3 and the market stabilisation, we converted those new relationships into meaningful investments. As the word of mouth spread, we saw new interest from larger LPs wanting to get in before close. In the end, new LPs accounted for around 70% of investors, mainly from France, DACH and the Nordics.”
Kartesia’s senior opportunities strategy provides senior debt to European small and medium-sized companies with ‘strong credit profiles’ and enterprise values between €30 million-€250 million (greater than €3 million EBITDA). Prieto says, “I believe there is lots of direct lending appetite going into 2021 and we could see strong deployment from current direct lenders, especially after increasing base rates pushed favour in direct lending opportunities.”
Antoine Josserand, head of business development at Pemberton, adds, “Despite the human tragedy, COVID was a good test for European direct lending and how it would react in a downturn. It provided an environment to make investors more comfortable with the reliability of the asset class.”
DunPort Capital Management also launched and closed its €50 million DunPort Recovery and Growth Fund in March. According to a press release, the fund will ‘provide tailored and flexible capital solutions to Irish small and medium-sized enterprises whose businesses have been directly impacted by the COVID-19 pandemic’. The Ireland Strategic Investment Fund backed the fund with a €50 million commitment to help provide such solutions.
A handful of first closes cropped up in Q1, as Tikehau, Pemberton, Investec and Anima Alternative all raised capital. With 2021 fundraising in full swing, it is becoming increasingly clear that ESG has moved to the top of LPs’ agendas when it comes to allocating investments, and direct lenders are having to address this in earnest. The extra attention being paid to ESG metrics is likely to exacerbate the bifurcation of the market as larger managers have the scale to devote resources to the effort, while LPs are continuing to favour established and predictable funds.
European direct lending fund activity in 2021 Q1
Select funds in the market
When M&A was hit hard in Q2 2020, portfolio work subsumed smaller firms and funds who took bets on trickier credits, while larger established funds were able to work through the strains quickly and get back to deploying by autumn. Not only were those funds building ESG into new deals, but there was also a sense that a focus on investing with these criteria could create a more resilient portfolio.

“ESG is not a luxury problem anymore, it’s a rating problem,” says a debt advisor. “The deterioration of credit quality was linked to how well companies could cope with ESG. We have seen tremendous focus on E and then across sectors on S & G.” Side letters have also been evolving to meet these demands, the source added. While not as developed as those in PE, ESG has become a standard in these agreements and allows direct lenders to have a larger say as a stakeholder in the company.
In February, Edinburgh-headquartered RM Funds launched its RM Impact Credit Fund. According to a press release, the fund will ‘provide crucial funding support to quality businesses across the UK that make positive contributions to ESG outcomes that are linked to specific SDGs’. The fund is also targeting a fundraise of up to £200 million.
Being able to demonstrate strong portfolio recovery helped in fundraising and, as work-from-home orders continued, investors became more comfortable investing remotely — at least with the teams with a proven track record and established relationships. The transition to video conferencing, allowing for back-to-back calls as opposed to business travel, has created some efficiencies for the time being, albeit primarily for those with pre-existing relationships that had already been established via face-to-face meetings.
“Would it be possible to raise a first-time-fund now?” asks a direct lender. “I don’t know, but it will be more difficult. I’m not going to say it wouldn’t work but I’m not going to say it would be a homerun.”
European direct lending fundraising
While there was a slight uptick in diversifying into distressed and special situations funds with the assumption that the future would bring opportunities to step in as the crisis continued, senior and unitranche funds comprised most strategies, as governments and private equity partners have been able to inject liquidity to tide over companies. Still, there is a sense that the opportunity could come for those who are patient.
“As an LP, when you have to make up your mind, do you want to invest in equity or in credit or alternative assets? What the performing direct lending market is giving you is a very stable return that is not impacted by the pandemic, if you choose the right GP,” says a second direct lender. “If you choose someone who does selective investments, looks at the underlying businesses, which are stable then you have quite a safe haven by investing in here and it still pays you between 7%-9% return.”
Either way, in 2020, fortune favoured the larger funds that were able to move quickly past the pitfalls of the pandemic. In 2021, their ability to focus on ramping up ESG could favour their fortunes even further.
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European Direct Lending Perspectives
Q1 2021
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