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With Euro interest rates to remain low for the foreseeable future, activity in European private credit markets is burgeoning. Several European alternative mega-funds closed in 2014 and early 2015, joining an already busy pipeline. ICG amassed a second direct lending vehicle at 3bn in the first quarter of this year, while Ares Europe, BlueBay, Partners Group and Ardian have each closed large direct lending funds. At least another 21 managers are on the road seeking to raise up to EUR 20bn in European private credit funding.

However, this flood of money is smothering an ever-diminishing supply. Many so-called “direct lending” funds are still highly concentrated in what ACMV calls “private debt” strategies - lending to private equity firms to finance buyouts and refinancings. But deal pickings in this sector are slim. In the year to October 2014, less than 40 buyout deals were done in the part of the market the large credit funds would typically target - firms with enterprise values of 100-250mm and EBITDA of 25-100mm.

The supply and demand imbalance is leading managers to look for deals in the less well-served “lower middle market” or in direct corporate situations. It will be interesting to see whether these firms manage to balance the challenge of sourcing deals in unfamiliar tropics while retaining the quality deal flow upon which they depend for continued investor support.

market viewALTERNATIVE CAPITAL

THE MARKET CONTEXTPage 2

PRIVATE DEBT Page 3

DIRECT LENDINGPage 4

INVOICE FUNDINGPage 5

GROWTH CAPITALPage 6

ACMV TOP THEMEPage 7

REAL ESTATE FINANCING Page 9

FOCUS TRANSACTION0

A TAXONOMY OF PRIVATE CREDITPage 11

ALTERNATIVE FINANCE PARTICIPANTSPage 12

ALTERNATIVE CAPITAL A TO ZPage 13

Private Credit Boom H1, 2015

But will the new generation of direct lenders connect with the heart of corporate Europe?

ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015PAGE 2

ALTERNATIVE CAPITAL MARKET VIEW | H1, 2015 PAGE 2

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Moody's Global Spec. Grade LTM Default Rate

U.S. Federal Funds Rate

2nd Real Estate Crisis

Nikkei Crash

Asian Liquidity Crisis

Enron & Worldcom Fail

Continental Illinois Fails

Black Monday

LTCM Default

Drexel Fails

18% Fed Fund Rates

Basel I

Asset Class Correlations Intensify

Tech/ Telecom Bubble

S&L Crisis

Sovereign Debt Crisis

Brady Bonds

Credit Crunch

3rd Real Estate Crisis

Financial Crisis

Severe Recession

European “Periphery” Debt Crisis

Dow Closes above 17,000

Source: Arbour Partners

• US equity markets beat their all time highs and most analysts expect yet another positive year

• US Fed talk remains dovish, with any tightening expected in the second half of the year

• Bund yields hit zero before surging as Euro-zone future remains uncertain

• Downward pressure on oil price continues

• Global High Yield dips temporarily but remains well-bid

• Eurozone launches QE

Figure 1: Credit market timeline

Capital market highlights

Credit Markets: Low Defaults and Low Yields Persist For Now

The Market Context


P rivate debt is best described as the provision of credit by investors to private equity firms to finance buyouts – the balance sheet

complement to private “equity”. The private debt market has been a big beneficiary of continued low interest rates in H2 2014. Financial repression has left pension funds, insurance companies and sovereign wealth funds chasing an ever smaller supply of deals and hence yield. Floating rate loans and historically high recovery rates have also enticed some fixed income crossover investors to private debt funds.

One of the key features of recent quarters has been significant sums committed to private debt funds where unitranche is a core strategy. The

debt facility that combines features of senior and mezzanine loans without the need for inter-creditor agreements has been the focus of key players such as Ares Management and GE Capital. The multi-asset managers at Tikehau Capital have also structured and funded several European unitranche deals.

The immediate challenge to the private debt market is over-supply of capital. The return of the CLO market, renewed bank activity and an influx of freshly-raised funds has required managers to graze new pastures in the hunt for deals. But to do this may require new skill-sets, new relationships and even extra geographical reach. Specialist firms such as Beechbrook Capital, Metric and Kreos have strong private equity relationships in the lower middle market and growth capital sectors. It will be interesting to see if some of the larger private debt firms attempt to muscle in on this bespoke and high returning sector.

The immediate challenge to the private debt market is over-supply of capital. Renewed bank activity, and the significant new funds raised, requires managers to look to new sources for deals

“


Table 1: Private debt (buyout) strategies – typical features and returns

Private Debt

Cash interest

4-8%Floating

9-12%Fixed

5-7%Floating

2.5-4%Floating

LARGE LBO

Return

12-15%

12-15%

6-8%

2.5-4%

7-9%6-8%Floating

Mezzanine financing – Europe

Mezzanine financing– US

Unitranche – Europe

Senior loan

Cash interest

4-8%Floating

12-14% Fixed

3-5%Floating

MIDDLE MARKET

Return

13-16%

13-17%

3-5%

PIK, OID

PE, Banks

Deal source

PE,Investment Banks

PE, Investment Banks

PE, Banks

FEATURES

Additional returns

PIK,Warrants

Warrants

OID


Table 2: Direct lending strategies – typical features and current returns


is whether a manager can enter into dialogue with enough companies and their advisors across Europe to build a diverse and robust portfolio.

There are key advantages and also specific risks to the true direct lending approach. When financing markets are tight, a well-capitalised and skilled direct lending group with a somewhat counter-cyclical strategy can provide credit with strong yields in a less crowded space. Asset managers with their own origination capability are less at risk of being outmuscled by other lenders. In a work-out situation, however, the absence of a well-capitalised sponsor with an incentive to inject more capital also means that the direct lender needs to select deals very carefully.

Key to the next phase for direct lending may be bank relationships as the banking sector starts to recover. Managers seeking to source deals away from private equity might need to provide capital alongside regional banks, rather than trying to compete.

Direct lending is the provision of credit directly to middle market companies for growth or acquisitions without the sponsorship of a

private equity firm. A credit constrained European SME market and attractive yields has seen direct lending become a big focus for investors over recent quarters. Several large UK pension funds as well as global sovereign funds have turned their attention to the sector, enticed by the favourable risk return profile from senior secured lending strategies.

Most credit managers are still combining their direct lending transactions with private debt deals. The skill-sets required are certainly complementary. However, originating deals in this space is more challenging. The question for investors

Direct Lending

Cash interest

4-8%Floating

10-15%Fixed

3-5%Floating

7-10%Fixed

SMEs

Return

14-18%

15-18%

3-5%

7-10%

N/A N/A N/A

N/A

Sponsorless mezzanine – Europe

Sponsorless mezzanine – US

Senior corporate loans

Private high yield bonds

Cash interest

4-8%

8-12%

7-10%

MIDDLE MARKET

Return

13-16%

13-16%

7-10%

Corporates,Advisors

Deal source

Corporates,Advisors

Corporates,Advisors

Corporates,Advisors

FEATURES

Additional returns

PIK,Warrants

Warrants

A credit constrained European SME market and attractive yields has seen direct lending become a big focus for investors over recent quarters.

“


Table 3: Invoice funding – typical features and returns


Supply Chain Financing (also known as Reverse Factoring) is the fastest-growing sector but the market also includes Factoring, Invoice Discounting, Dynamic Discounting and others. Invoice portfolios can be single-creditor or diversified and may or not be insured. However, most formats of Invoice Funding share some common characteristics:

• Typical lending facilities are in place for 12 to 36 months. The underlying invoices, on the other hand, routinely have 30 to 180-day payment terms - hence the exposure can be reduced quickly if needed

• Coupon varies widely, depending on the structure and underlying credit. As a benchmark, a lender can expect to receive between 1 and 2% above the obligor’s Senior Unsecured level (actual or estimated)

• Servicing and origination of individual invoices is usually the remit of a servicing platform. The platform is responsible for due diligence, underwriting and insurance of individual invoices/borrowers

I nvoice Financing is the funding of a buyer, or a supplier of goods or services, for the provision of those same goods or services. The lending is

collateralised by the invoice exchanged between these parties and is normally non-recourse, although insurance or credit guarantees often form part of the agreement.

The Invoice Financing market is mostly made up of private bilateral transactions and it is difficult to assess the size of the market. However, it is estimated that the Invoice Financing market in Europe alone is worth over €1 trillion (Source: “Demica Reports”, May-Oct 2012).

Lending used to be primarily the domain of commercial banks. Regulatory changes such as Basle 3 have made it less attractive to bankers. A new breed of peer-to-peer lenders (e.g. Funding Circle, Market Invoice) have targeted the smaller businesses and some of the larger corporations have set up their own programs to assist suppliers. However, much of the void left by the banks remains open to private lenders.

The Invoice Funding landscape encompasses a number of different categories and risk profiles:

Invoice Funding

12-24 months

N/A

6-15%

N/A

Up to 10

12-24months2-6% Up to 50

5-20

Up to 10Up to 5

Senior:80-90%

Mezzanine:0-20%

Equity:0-10%

12-36 months

N/A

4-6%

50-200m12-36 months4-8% N/A12-36

months1-2%

N/A

Tenor Size (US$ million)

Insured SMEs creditors

Return Tenor Size (US$ million)

Return Tenor Size (US$ million)

Return

Single creditor - High yeld Single creditor - Investment grade

Much of the [Invoice Funding] void left by the banks remains open to private lenders

“


Growth Capital

G rowth Capital transactions have long been a relatively small subset of the alternative capital markets. This is somewhat surprising

given the high returns available from the strategy and the mediocre performance of some buyout strategies in recent years. However in the past 12 months the volume of growth capital investments has reached a ten-year high in the technology sector alone, with 50 deals being completed in the first half of 2014. Meanwhile, GPs have been actively bringing more product to market with Harbert Management, IPF Partners and Kreos Capital all launching new funds in recent months.

From both a business owner and investor’s perspective, the rationale for growth capital is strong. Borrowers are typically second-stage firms expecting high growth. They possess a strong-selling product but lack cash to fund the next phase of the business. Each transaction can be tailored to meet the needs of the firm at that particular stage. To protect interest and principal, debt is secured against product revenue. Growth debt investments can benefit further by incorporating earnings participation or product royalty participation schemes into the financing.

Structured growth capital, a preferred equity product, is similarly versatile to growth debt. It tends to be offered to firms that need extra capital now to unlock latent growth potential. These investors are not there to take over the reins but to act more as a financing source or minority shareholder. Structured capital can be offered in various forms including preferred shares, convertible bonds or Tier 2 capital. The returns to structured capital tend to be similar to the higher end of growth debt investments but they can face more risk as they are lower down the capital structure.

Table 4: Growth capital – typical features and returns

Source: IPF Partners

Investment horizon

Structured growth capital 5-7 years €5-20m

Growth debt 3-7 years €5-20m

€1-10m

Varies (depending on fund size)

15-20%

9-15%

ReturnsInvestment size

Equity

Venture debt 1-3 years

3-5 years target

20%

20-30%

From both a business owner and investor’s perspective, the rationale for growth capital is strong

“


of awareness of the capital solution on offer from the fund management community. Private credit is well-suited in most respects to carrying the ball the banks have so dramatically dropped. Fund structures are invariably still in the locked-up GP-LP formats that favour pension funds and insurance. Therefore as a direct lender the GP is required to be both long-term and patient in the way it provides capital. Loan tenors are in the 4-10 year range. Moreover, lending funds are typically able to be more flexible in their terms than banks – using senior loan, mezzanine, unitranche or subordinated debt structures to varying degrees to match a borrower’s requirements. This is still not well-known outside the buyout sector or amongst firms which are not covered by specialist debt advisers.

As well as a knowledge deficit there are certainly cultural factors at play. Leaders of growing industrial companies, whether entrepreneurial managers or engineers, still feel disconnected from the alternative investment community ensconced in its offices in Europe’s most expensive capitals. All business leaders want their capital to come from people who “get them”. Both origination and credit teams in the lending funds will need to spend more time out in the world where middle market companies operate to build the required respect. Operational industry experience within lender teams as well as direct lending experience in banking will be a source of competitive advantage when trying to build out large borrower bases.

Looking at the market through the other end of the telescope, from the lending fund manager perspective, the lack of detailed information provided by smaller private companies or rating firms is the key hurdle. In private equity-sponsored situations

P rivate credit is now a dominant theme for global institutional investors. Several fund managers have had to upscale their direct

lending funds in recent quarters due to demand primarily from fixed income investors. ICG will follow its 1.75bn Direct Lending Fund I with a 3bn Fund II in 2015. BlueBay is readying a 1bn-1.5bn fund for market to follow its 2013-2014 fund of a similar size. GSO, Ares Management, Permira and Legal and General-backed Pemberton Capital Advisers are the most prominent group of 1bn funds now expected.

These direct lending funds are now increasingly looking to source their lending opportunities in the European corporate middle market. This is because the supply of credit opportunities from large buyouts has not even come close to keeping up with this new investor demand. The Standard and Poors LCD data service reports a run rate of only 60-70 European middle market buyouts requiring private debt finance in Europe per year. By comparison, direct unsponsored (non buyout) deals financing growth situations, acquisitions and refinancings of middle market companies with earnings between 25m and 1bn are running at 300-400 per year according to LCD. This is just the tip of the iceberg. The unserved European middle market which fund managers now intend to finance could see deals done running at many multiples of this amount.

But before the direct lending asset class can reach its huge potential there are still significant challenges to overcome at the point of interface with corporate Europe. Not least, asset managers seeking to serve SMEs face lingering suspicion of the asset management sector amongst CEOs and CFOs of medium sized firms. This stems in most part from a simple lack

ACMV Top Theme

Can the new ‘direct lenders’ serve SMEs?


the acquirer will have done its own detailed due diligence. This does require recalibrating from a debt perspective, but at least it’s there. There are moves afoot to help fund managers to overcome this hurdle. Standard and Poors is rolling out its own 1-8 rating scale for smaller firms and reports strong take-up among fund managers. Some fund managers such as Pemberton are investing significant resources to utilise credit analytics and externally-validated rating processes, encouraged by their insurance company investors. If portfolios come under stress there will need to be considerable workout experience in lending teams to be able to use this information effectively even where it exists.

After navigating these headwinds managers then face a whole series of practical issues in the establishment of lending processes for smaller firms. The first of these is simply establishing positive contact with sufficient numbers of firms that will satisfy credit criteria and require capital – “origination”. There are three main ‘routes to market’ typically relied on by asset managers: direct relationships with borrowers, deals sourced through “advisors” - local lawyers and accountancy firms, and deals done alongside banks. Only a handful of asset managers have extensive relationships with corporate borrowers on a pan-European basis. These are typically former bank teams fused together on lending platforms. GE Capital and Ares Management are two examples of well-established lenders. However, these firms operate extensively in the larger buyout spaces. More common are smaller local groups which specialise in a country or region or on an industry sector. These groups are more likely to have the social relationships within business networks and to be able to generate referrals for investment opportunities. Oquendo in Spain, Tikehau in France and Beechbrook in the UK are examples of groups which are very well-placed to build direct lending operations.

From here, managers move into “due diligence” mode with scarce data and in some cases relatively-short operating histories. In credit, where

good returns to investors are based on faultless performance, there is little room for error. Monitoring a portfolio company after investment may not be challenging in good times, but becomes rapidly so if problems arise in a credit. Managers fighting fires with more than one or two portfolio companies are going to need strong workout experience and a critical mass of people to work on more than one situation. In the case of a full bankruptcy the lender group will have to spend considerable time in a court process without other lenders or sponsors to share the burden of time and of negotiating power.

Typical investment periods for direct lending funds are set at three years, with some as short as two years. The average size of a new direct lending fund is 1bn Euros. This level of throughput of loans requires a large number of deals to put through monthly due diligence if a lending group’s “look to book” ratio is not to be dangerously tight at this stage in the credit cycle. Successful deployment of funds in the next two years is going to be make or break for some asset managers.

These challenges are certainly surmountable. But there needs to be rapid progress if the private credit market is to continue its healthy growth.

The prize on offer is enormous. If the fund management community can connect properly with corporate Europe and channel the demand from global investors, it will be one of the key factors in Europe’s recovery.


Table 5: Real estate financing – typical features and returns

I n 2014, the pace of real-estate-backed lending activity increased considerably, with credit margins on all levels of debt falling (Cushman &

Wakefield have reported all-in cost of debt for prime lending in the UK at its lowest level since 2000), with particular declines in core lending. In addition, the legacy of the bad loans from the previous cycle have continued to decrease – most notably in the UK with the continental lenders lagging behind.

Much as in other private credit sectors, bank retrenchment is being driven by capital considerations and regulatory burdens. This has meant the surge in real estate financing is increasingly being supplied by debt funds and alternative lenders – which now make up around half of all European lenders. Liability-driven investors are drawn to the benefits of the long -duration loans that are on offer.

The changing structure of the real estate financing market has precipitated two further trends. Firstly, the high risk tolerance of the institutional investors in debt funds has led to a rise in leverage. Secondly, the rise in appetite for good quality long

dated paper has triggered a fall in long duration deals secured by prime properties.

A key market trend to watch out for in 2015 is the continued Southern migration of European real estate capital. Spain, Italy and Greece doubled their share of tracked lending in 2014, with an 80% increase in volumes. Prime lending now comfortably sits in the 55-70% LTV range for most countries across Europe and the whole loan market has grown and is expected to continue to do so, with whole loans being secured at 70-80% LTV.

Real Estate Financing


Liability-driven investors are drawn to the benefits of the long duration loans that are on offer

“

Cash interest

3-5% 4-6%

5.5-8%

5.5-8%

UK

Return

4-6%

6.5-9%

9-12%

Deal fees

2.5-4.5%

3-5%

2.5– 4.5% N/A N/A

Deal fees

Deal fees

Deal fees

Deal fees,Capital

Deal fees, Capital

Deal fees, Capital11-15%

Senior:0-60% LTV

Whole loan:0-75% LTV

Stretched senior:60-75% LTV

Mezzanine:75-85% LTV

Cash interest

Core Europe

Return Cash interest

Additionalreturn

Additionalreturn

Additionalreturn

Southern Europe

Return

2-4% 2-4%

6-10%

6-9%

5-8%

6-8%

7-10%

5-7%

N/A

Deal fees

Deal fees

12-16%

4-6% 4-6%

8-11% 7-10%


Focus Transaction – Healthcare Growth Debt

T he medical and pharmaceutical sector has seen renewed activity from investors, with EMEA healthcare transactions totalling $34.9

billion since the start of 2014, up 52.7% on the same period last year. Med-tech and bio-tech products at the commercial stage often have the right financial profile for growth debt investments. Strong revenue projections arising from an often healthy order book provides prospective cash flows to service debt.

Table 6 shows a MedTech case study. Bone Cement Company is a bone void filler specialist. The product is used to treat crushed limbs with multiple fractures and other serious conditions. Bone Cement currently has products registered with the FDA and distribution partnerships in North America. The US

Bone Cement Company (CC)

Sector

Products

MedTech – Orthopedics/Bone void fillers sector

• PRODUCT BVF: a synthetic bone void filler, has utility in orthopedic procedures in which a bone void must be filled, such as traumatic fractures, reconstruction, and bone cyst removal. • PRODUCT G: an antibiotic-releasing version of PRODUCT BVF targeted at infected bone.

Growth debt will be used to accelerate sales in the US, replicate this uptake in Europe and finance further expansion into other treatment indications and areas.

€5 million growth debt financing

Financing split into 2 tranches:• Tr1: Margin: EURIBOR+13.5% plus 5.0% exit fees • Tr2: Margin: EURIBOR+13.5% (ratchet down to 8% once LTM revenues >€4m) plus 5.0% exit fees

• Pledge over key IPs registered in US and EU• Share pledge over the main operating company which holds all key assets/IP • Pledge over escrow cash account (lock-box mechanism) and €0.5m of receivables

• The neat corporate and transaction structure would allow the business to operate and be sold as a going concern in the event of enforcement • Covenant package with quarterly testing including Interest Coverage (ICR) and Debt Service Coverage Ratios (DSCR)

17%

Deal size

Collateral

Downside protection

IRR returns

Deal structurehighlight

Use of proceeds

bone filler market is lucrative, with an estimated market size of over $500m.

The deal structure shows the innovative financing solutions that growth debt capital can provide. The deal is structured into two tranches: the first tranche is issued upfront at a fixed return plus Euribor, the second tranche is subsequently issued contingent on whether the firm hits its revenue projections. The growth debt provider mitigates downside risk through the use of bespoke covenants, as well as securing collateral from the firm in the form of IP and access to the firm’s receivables.

Table 6: Recent healthcare growth transaction – features and returns


A Taxonomy of Private Credit

After a flood of publicity, excitement and money, the private credit market has become awash with a horde of new strategies, instruments and funds. But speak to more than a handful of market participants and it soon becomes clear that one man’s private debt may well contain elements of another’s direct lending. Here at ACMV, we have decided to try to introduce order into this disordered menagerie and taxonomise the various flora and fauna that inhabit the wonderful world of private credit.

P rivate credit is the universe of all non-public debt transactions that are not financed by banks. It includes debt investment strategies

with a range of risk profiles, backed by an array of securities. Private credit has been the key beneficiary of the post crisis retrenchment of European banks. We broadly classify private credit into 6 separate sub-categories.

As discussed earlier, private debt funds invest in assets that are originated by private equity transactions. As supply is heavily influenced by the health of the M&A market, typical deals include leverage loans, mezzanine loans and other instruments of leveraged finance.

Direct lending covers corporate lending to small to middle market firms. Debts are often senior in the capital structure with unitranche being another widely-used instrument.

Growth capital describes a number of different strategies targeted at providing capital to finance company growth. Deals can be highly-bespoke with a number of equity-like features and tailored protections that ensure both parties end up with the ideal risk return profile.

Real estate and infrastructure funds are characterised by the underlying security of the loans. Many funds further specialise according to their position on the balance sheet. Senior investments in both sectors can be very low risk but high in duration – attractive to investors with long dated liabilities.

Distressed debt investments are made in firms that are bankrupt or have a high probability of being bankrupt. Investments are characterised by the solvency of the company, rather than the position in the capital structure or the business of the borrower.

STRA

TEGI

ES

INST

RUM

ENTS

Private Debt

Private credit assets arising from a sponsored transaction

Lev. Loans,Syndicated Loans,Mezz,PIKs ,Warrants

Senior,Unitranche,Mezz,High Yield

PIKs,Warrants,Minor Equity,Struc. Equity

Senior (0-65 LTV),Mezz (65-85 LTV),Equity (85+ LTV)

Senior,Junior,Equity

Senior,Mezz,Convertibles,Equity writedowns

Direct Lending

Sponsorless originated corporate lending to mid market firms

Growth Capital

Corporate issued hybrid debt used to finance growth

Real Estate

Private credit assets secured by real estate (o�en commercial real estate)

Infrastructure

Capital used to fund infrastructure investments

Distressed Debt

Credits of defaulted companies or highly distressed companies

PRIVATE CREDIT


Alternative Finance Participants

Sources of capitalAsset focus

Private debt: senior and mezzanine,Direct lending,Special situations

Pensions, insurance, SWFs

IPO,Trade sale

Pensions, insurance, SWFs,Parent co-investment,CLOs

Acquisitions,Organic scale-up

Pensions, insurance, SWFs,Parent capital

Pensions, insurance, SWFs

Further listings,Credit facilities

Listed equity,Bank facilities

Organic scale-up

Scale-up,Acquisitions

Further listings

Private debt: senior and mezzanine,Direct lending,Special situations

Private debt: senior and mezzanine

Acquisitions,Organic scale-up

Private debt: senior and mezzanine

Private debt: senior and mezzanine,Direct lending

Whole loans,Senior debt,Mezzanine

Private debt: senior,Syndicated loans

Primary LBO loans

Pensions, insurance, SWFs,Parent backing

Issuing more vehicles Organic scale-up,Acquisitions

Alcentra,CIFC,Lyxor

Balance sheet

Organic scale-up,IPO

Acquisitions

Private debt: senior

Independent lenders

Alternative investment groups

Fund of funds credit sections

Asset manager credit sections

Publicly listed financiers

Business development companies (BDCs)

Real estate lenders

CLOs

Balance sheet lenders

Beechbrook,Tikehau,Monroe,Pemberton,CORDET

Blackstone/GSO,Partners Group,KKR,Bain/Sankaty

Pinebridge,AXA,Portfolio Advisors,SVG

Oaktree,Babson,John Hancock,TCW

CIT,ICG,SVG,American Capital

Ares,Apollo,Golub,ACAS

Pension funds,Funds of funds,Family o�ices

Organic scale-up,Trade sale

Structured equity,Preferred shares,Convertible loans,Minority equity

Growth capital funds

Monroe,Summitt,IPF,PrefEquity

Venn,DRC,Green Oak,Longbow

Private debt: mezzanine,Minority equity,Private debt: senior

Pensions, insurance, SWFs,CLOs

IPO,Organic scale-up,Acquisitions

Mezzaninehouses

ICG,MezzVest,Park Square,Indigo

GE Capital

Ownerstrategy Examples

Table 7: Principal alternative capital providers, US and Europe



Alternative Capital A to Z

The additional yield paid to compensate investors for the illiquidity of an asset, irrespective of its credit quality

Illiquidity premium

An agreement between one or more creditors in a particular borrowerInter-creditor agreement

The financing of a buyer or a supplier of goods or services for the provision of those same goods or services. The lending is collateralised by the invoice exchanged and is normally non-recourse but may include insurance or credit guarantees

Invoice funding

An investor in a fund partnership who is not responsible for the management of the fund

Limited partner (LP)

The member of a fund partnership with fiduciary responsibility for the investment management of the fund on behalf of its limited partners (LPs)

General partner (GP)

The rate applied to one or more future payments so that these payments have a net present value of 100% of the invested amount. Thereby, a measure of the return expected from the investment

Internal rate of return (IRR)

Financing for relatively mature companies to expand operations or to enter new markets while they retain control ownership of the business

Growth capital

Mezzanine finance(European corporate)

Credit finance for companies that are not majority-owned by a private equity fund and where negotiation is with owner-management

Direct lending

An investment strategy that attempts to match future asset payments with future liability payments. It is commonly used in the portfolios of life insurance companies and defined benefit pension funds

Asset liability management (ALM)

The provision of finance to a supplier of goods for closing the cash flow gap between the issue of an invoicing and payment of that invoice. Factoring is the more traditional form of Invoice Funding

Factoring

The ratio of credit provided in proportion to the purchasing price of the assetLoan to value (LTV)

Shorter-term debt finance for small to medium-sized growing companies which is repaid relatively quickly as revenue grows

Growth debt

A measure of the difficulty in trading an asset, typically indicated by the difference between bid and offer prices

Illiquidity

A secured loan, typically floating rate, which contracts for additional equity-like exposure including PIK and warrants


An umbrella term for the universe of all non-public debt transactions not financed by banks

Private credit

An unsecured corporate credit investment typically with a high fixed-interest rate and often with an attached warrant to purchase equity

Mezzanine finance(US corporate)

The provision of credit by investors to private equity firms to finance buyoutsPrivate debt

A credit contract that does not involve transfer of cash flows from borrower to lender between drawdown date and maturity. PIK interest accrues until maturity or refinancing

Payment in kind (PIK)

A bond or loan that is issued at below its face valueOriginal issue discount(OID)

A lower-ranked loan backed by real estate up to typical loan value levels of 85%, with a correspondingly-high interest rate

Mezzanine finance(Real estate)

A derivative security that gives the holder the right to purchase interests (usually equity) from the issuer at a specific price within a certain time frame

Warrant

Mezzanine finance for companies that are not owned by private equity fundsSponsorless mezzanine finance

A debt facility that combines features of both senior corporate loans and mezzanine loans

Unitranche loan

Loans that retain the first claim on all interest and principal repayments from the company or property or project

Senior loan

A highest-ranking loan that lends up to a slightly higher loan-to-value ratio than a typical senior loan and charges a higher interest rate

Stretched senior loan

The provision of finance to a buyer of goods, commonly employed in accelerating payments to its suppliers in exchange for better trading terms. SCF is often called Reverse Factoring. To compound confusion, the term Supply Chain Finance or its acronym are often used to refer to the entire Invoice Funding space

Supply chain finance (SCF)


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DisclosuresCertain information contained in this paper constitutes “forward-looking statements”, which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors should pay close attention to the assumptions underlying the analyses and forecasts contained in this paper. The analyses and forecasts contained in this paper are based on assumptions believed to be reasonable in light of the information presently available. Such assumptions (and the resulting analyses and forecasts) may require modification as additional information becomes available and as economic and market developments warrant. Any such modification could be either favorable or adverse. Nothing contained in this paper may be relied upon as a guarantee, promise, assurance or a representation as to the future. Certain information contained herein has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used herein, Arbour Partners LLP and its affiliates assume no responsibility for the accuracy or completeness of such information. Historical information is not indicative of future results, and the historical information in this paper should not be viewed as an indicator of any future performance that may be achieved as a result of implementing an investment strategy substantially identical or similar to that described in this paper.

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