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.
Here are some key points from the discussion that followed.
Are we near the top of the market? You can read their views here.
To read about how they saw banks and direct lenders competing and co-operating click here.
Interest rate rises hold no particular fears
"Interest rates are not going to make much of a difference and most of the deals that we see are hedged to a certain extent," said one corporate banker. "They won't make a good business suddenly turn bad."
"Most businesses could withstand some form of rate hike," said one direct lender. "In our experience, what kills these businesses isn't an increase in interest rates; it is usually a dynamic within the industry."
Relationships matter, say the private equity sponsors
The private equity sponsors said that they wanted to build relationships with debt providers rather than shopping for the best terms on a deal-by-deal basis. That said, one private equity sponsor did recognise that their last UK deal had benefitted from exceptional pricing.
"Relationships definitely matter. With any portfolio of investments, there will always be those who hit bumps in the road," said one GP. "At that point, we want to know that the debt provider will behave as a partner. It was acknowledged that, given the number of new players in the marketplace, it would be impossible for any private equity sponsor to establish such relationships with them all. Debt Advisors help us with that."
"We are working with a couple of debt funds at the moment and it is a partnership that can work reasonably well," said another private equity sponsor. "They are a welcome addition to the market."
"Innovation within the funding market can only be good for us," added another.
As does the risk appetite of the entrepreneur
"The amount of leverage does depend on what the entrepreneur is shopping for" noted one private equity sponsor. "Some entrepreneurs are more comfortable with leverage and take the least dilutive option; others want a safe balance sheet and prefer an equity-type investment. It's horses for courses."
It will take time before some US structures reach Europe
It's been thought that the US business development companies (BDCs) - that are, effectively, listed direct lending funds - are likely to appear in Europe in the future. However, one direct lender was dubious. "It's possible but a lot of regulatory change would need to occur. As they are public vehicles, BDCs need to report about the underlying portfolio companies. In the US, sponsors are less concerned about such public disclosure of performance; in Europe, the whole point of a private debt fund is to keep it private. So never say never - but it will be a long time before we see a BDC vehicle in Europe."
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