Q3 2020
Q&A
“Sponsors are very active and have plenty of dry powder, so we are optimistic on deal flow.”
Laust Johnsen
Partner and Portfolio Manager,
Capital Four Management
Laust Johnsen, partner at Capital Four, speaks with EDLP about fundraising, the Nordic market, and the ongoing challenges of COVID-19
Q.
How active have direct lenders been in Q3?
A.
Our focus is on Northern Europe and more specifically the Nordic region. Looking at stock markets and GDP expectations, the region has fared quite well so far.
In terms of actual deals done, Q3 has not been that busy, but we have seen a strong increase in activity in our pipeline. There is certainly more willingness to do deals, partly due to pent-up transactions that did not proceed in H1, and also the region’s resilience.
With regards to new deal flow, there are a few industries, like technology and healthcare, that have picked up pace, but this is not unexpected given the strength of these sectors in the region.
Q.
What effect has COVID-19 had on your existing investments?
A.
We engaged very early on to see how we could support our portfolio companies. Overall, most have come through this quite well. There have been a few covenant breaches that we have been working on, but this has given us the opportunity to go back to the table with these companies to discuss how to proceed. None of our more than 35 active deals are on a default trajectory due to the COVID-19 situation.
Q.
How has fundraising been this year?
A.
Dealing with private debt funds means we have been somewhat insulated from the liquid markets and volatility to some extent, so we have had quite a positive experience.
We started thinking about our Private Debt III Senior fund, which held its first close in Q3 and has already received committed capital of €650 million out of our €1 billion fund target, relatively early in the year. This was pre-COVID-19, but many of our investors maintained their interest throughout. There were investors who naturally had to prioritise other issues in late Q1 and early Q2, but many reaffirmed their interest over the summer. Overall, COVID-19 probably only delayed the process by a few months. It was always our intention to launch our Private Debt IV fund once our previous flexible fund was about to be fully deployed.
As we deployed nearly all the capital within 18 months, we were ahead of our original plan. Our current LPs have reupped and we are ready to launch our next flexible fund this year as well. This way, we ensure we have dry powder to invest into attractive junior private debt opportunities, while at the same time being able to offer financing flexibility towards the sponsors and companies that we work with.
Q.
What can we expect going forward?
A.
Looking ahead, we expect Q4 to be very busy, with some of this continuing into 2021, as there is a healthy pipeline within both private debt and syndicated leveraged finance deals.
A major consideration is what impact a second wave of COVID-19 could have. Unlike at the start of the year when the pandemic was wholly unexpected and there was huge liquidity pressure, we now have some idea of what is coming, and businesses are better prepared. But there are still fundamental risks and there will be businesses that are impacted hard.
Private debt as an asset class is growing up and becoming more institutionalised and widely recognised by sponsors. In the Nordics, there is a growing interest in private debt as a replacement for typical bank debt.
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European Direct Lending Perspectives
Q3 2020
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