Global SME direct lending continues to offer attractive risk-adjusted returns according to the recent Helsinki Private Credit Seminar 2019 entitled “Securing Value In A Maturing Asset Class”
HELSINKI – Arbour Partners and Certior Capital recently held a seminar in Helsinki for a group of local institutional investors including pension funds, banks, insurance companies, asset managers and family offices. The event brought together four of the most interesting niche SME direct lending funds from Central Europe (CVI), the Netherlands (Dexteritas Investment Management), Australia (Dinimus Capital) and Spain (Resilience Partners) for a morning of lively moderated discussion led by James Newsome from Arbour Partners and Dr. Gabriella Kindert, an independent market expert.
While many traditional lenders, such as banks, have drastically reduced their corporate lending activities in recent years, demand for private credit has remained strong. While significant capital has been raised focusing on the largest private equity sponsored deals potentially leading to lower returns for investors, SME direct lending (typically senior loans of EUR 5–25m) to sponsorless companies can still offer high cash yields, attractive all-in pricing, conservative capital structures and a large deal universe. Timo Hara, a partner at Certior Capital, underlined this point while presenting analysis from the firm’s own portfolio of 500+ European loans. “Based on current underwriting levels and recent credit losses, sponsorless loans to European SMEs seem to offer significantly better returns compared to PE sponsored loans to larger companies by around 400 bps+. However, transaction costs are substantially higher as sourcing and execution require more resources and loans are typically smaller so this decreases the return differential to 200 bps+ on a net level”, he added.
Adriana Oller, a partner and founder at Resilience Partners in Spain, was clear on the attractions of the Spanish market currently. “Companies are in the best condition they have been in since the global financial crisis. I have never seen so many good investment opportunities – and the banks have reduced capacity levels and are focusing on the short term for our market segment. We are able to target an 8–10% fixed return plus an equity kicker or variable return element and generally structure our loans to have 40% of the money back by year four. Taking one example, we recently invested in a company called Peris Costumes which was founded in 1856 and specialises in providing period costumes for theatre, films, TV and advertising. When a bank looks at a company like this it sees their five million garments and accessories as just inventory and therefore only offers short term debt. This is a highly profitable company owned by one individual which was recently highly valued by potential acquirers and has significant intrinsic value in its assets. We were able to structure a EUR 9m long term senior amortizing loan providing a very attractive return for our investors”.
“Private credit represents an attractive investment opportunity in Central Europe”, says Rafal Lis, the founder and Managing Partner of Warsaw-based CVI. “Due to regulatory and structuring reasons, bank driven solutions cannot fully meet the growing demand for SME financing. The funding gap is visible, with c. 70% of SMEs in Poland using their own equity to finance capex plans. Since 2012, we have invested more than EUR 2.1 billion in private debt transactions, establishing a very strong platform in the process. In our strategy we focus on companies with EUR 2-10m EBITDA, deploying between EUR 2-20m per investment. Our pipeline is solid with 800-1000 leads annually, so we can remain selective while maintaining strong covenant standards. This is evidenced by our deals. For example, we provided an equivalent of EUR 5m in a four-year, senior secured financing to one of the leading private hospital chains in Poland. In spite of being highly profitable and having EUR 60m of revenues, the deal was not suited for banks for several reasons, including the complex structure of the group and a temporarily challenging market sentiment in medical services at that time. We structured a financing that yielded almost 12.3% (majority of that in cash), had first lien security and strong covenants package with 2.5x Net debt / cash EBITDA.”
“While we have many years of investment experience both in private equity and private debt it is the fact that we are able to provide unique solutions tailored to every transaction that is the key to our business”, says Raphael Geys, a partner at Dexteritas Investment Management in The Hague. “Often entrepreneurs struggle to work with banks and many such companies are too early for private equity investment. One of our earlier deals is an interesting case study. The business was a profitable medium sized insurance broker in the Netherlands with a substantial client base and little churn in the SME sector that was seeking to execute a consolidation growth strategy. We led an investor group providing an initial EUR 22m financing to refinance bank debt and clean up outstanding insurance company payables as well as for acquisitions and a small secondary discounted share purchase. As the strategy has developed we have participated in an additional EUR 25.5m of acquisition facilities since the original transaction. We have a full security package with assets that are relatively easy to sell in the market (mostly client portfolios) and benefit from a tight covenant package and strong corporate governance including a board observer seat and frequent contact with management. The company is currently being courted by private equity funds and we anticipate a 15% IRR from any eventual exit. That will be a great result for a senior lender!”.
Meanwhile, Nicolas Politopoulos from Dinimus Capital based in Sydney is upfront about the attractions of Australian and New Zealand market. “We were the first mover in private credit. We thought at first it might be a temporary window of opportunity but that is proving not to be the case. Banks make around 60% of their income from non-risk activities like current accounts and this is where they clearly focus so if you are an entrepreneur looking for a A$ 10m senior loan, say, you really have very few options. It is not until around A$ 50m that larger international players become an option”, he comments. “One company in our portfolio is a challenger brand to the home-made flavoured soda drink and sparkling water market which is seeking to expand distribution in Australia and other markets. It is only 3 years old so is just not bankable even though it is growing fast with new contracts with groups such as Spotlight, Aldi, BigW and United Petrolum. For a bank it is still a start-up and the only alternative to us was an equity investment. In this case we put together a senior debt package with a 13% interest margin, a 4% establishment fee and additional equity upside”.
About Arbour Partners
Arbour Partners was founded in 2010 and has offices in London and Berlin. Its partners and consultants have advised and managed teams at the forefront of developments in the capital markets over several economic cycles. Arbour requires not only that its clients outperform investment benchmarks but also that they operate with the highest standards of integrity, transparency and responsiveness to the needs of investors. The firm is authorised and regulated by the Financial Conduct Authority. Arbour Partners was nominated as 2016 Placement Agent of the Year, Europe by Private Debt Investor Magazine and won 2015 Placement Agent of the Year, Europe by Private Debt Investor Magazine.
For further information please contact James Newsome, Arbour Partners, at james.newsome@arbourpartners.com
About Certior Capital
Certior Capital is a value-add focused private equity and private credit advisor and alternative investment fund manager supervised by the Finnish FSA. The firm’s core expertise is in European lower- and mid-market private equity and credit markets, where the team’s experience is one of the longest in Europe. The company’s latest fund, Certior Credit Opportunities Fund II, held a first close in August 2018 and focuses predominantly on the European SME direct lending segment, in particular in cornerstoning emerging managers. Certior also manages three other investment programs: Certior Credit Opportunities Fund invests in SME direct lending funds and makes investments directly into loans, Certior Credit Investments invests in European mid-market direct lending transactions and Certior Private Equity Fund I focuses on European small- and mid-market private equity opportunities, with an emphasis on backing emerging managers.
For further information please contact Ari Jauho, Certior Capital, at ari.jauho@certiorcapital.com or telephone +358 50 3378 282.
