The outlook for leveraged finance in the mid-market, Part 1
Bill Troup, Managing Director, Debt Advisory at Arrowpoint Advisory, chaired a recent roundtable hosted by Arrowpoint Advisory and the law firm Reed Smith, where we gathered together senior figures from banks, direct lending funds and private equity investors to assess the current environment for leveraged finance.
It's a fascinating time in the market. Since 2008, we have seen the return of the clearing banks. But there has also been a steep increase in the number of alternative lenders, who have raised significant firepower from yield-hungry investors. So as the clearing banks become more aggressive in their structures, the alternative lenders have both the propensity and capability to lend at higher multiples.
In the first of three posts exploring the themes discussed on the day, we look at the pressure funds are under to put money to work:
We are not at the top of the market, but there are concerns
Generally, the mood was confident but some concerns were raised about “a wall of money chasing far too few opportunities.”
The most bearish view came from one banker: “whether you are an equity or a debt investor, there is too much money chasing too few deals and it feels like a bit of a bubble,” he said. This is more the case at the upper end of the market, he believed, where some of the terms were “back to 2007.” However, he acknowledged there was one material difference - that, because of the amount of equity liquidity in the market, the size of the equity cheque was holding up.
Others were less convinced. “We have a long way to go before we get back to 2007 levels,” said one private equity GP, “as the economic environment and investor base is very different.”
“We are not at 2007,” said one direct lender, “but maybe we're at late 2005 or early 2006. It's a bit toppy.”
“Leverage levels are creeping up slightly but they are dependent on both sector and credit,” said one direct lender.
There's a pressure to put money to work
“The banks clearly want to put their money to work because they are under pressure with portfolios running off,” said one debt fund manager. “Many new debt funds are under pressure to deploy. Those who were fortunate and who raised their funds earlier are under pressure to keep on the pace. We are all working harder to get the money deployed.”
Further posts will explore how the attendees saw banks and direct lenders competing and co-operating, and views on interest rate hikes and private equity's relationships with direct lenders.
Our thanks to our guests for their contributions to the discussion:
David Wilmot, Joint Head of Mezzanine and Private Equity, Babson Capital Management
Jonathan Seal, Partner, Covenant Capital
Christine Vanden Beukel, Managing Director, Crescent Credit Europe
Chris Fowler, Managing Director, CVC Credit partners
Eleanor Blagborough, Investment Director, ECI Partners
Esteban Abad, Director, Generation Investment Management
Paul Moravek, Partner, Hayfin Capital Management
Alastair Mills, Principal, H.I.G Capital
Ian Crompton, Senior Director and Deputy Head, HSBC Mid-Market Leverage Finance
Stuart Robinson, Partner, Inflexion Private Equity Partners
Anthony Sills, Partner, Langholm Capital
Paul Figgins, Investment Director, LDC
Luke Jones, Partner, MML Capital Partners
Alec Parkinson, Partner, Primary Capital
Richard Roach, Head of Financial Sponsors UK, RBS
Tommy Seddon, Vice President, Origination UK & Ireland, Riverside Europe Partners