2. 2
Summary
• Market Background – Direct lending fund-raising has increased dramatically, but remains focussed
almost exclusively on event-driven cashflow lending, generally in Unitranche format. Opportunities
in this format do not match the capital already raised.
• Opportunity – Put more “tools in the box” of the non-bank direct lender, by focussing on assets as
well as cashflow. Apply structured credit expertise to analyse risk more closely and derive returns
attractive to investor and issuer.
• Access – “Shoe leather” origination effort via PE, m&a mid-market specialists, and accounting/audit
firms, as well as bank lending, trading and structuring desks.
• Business Case – Direct lending has experienced unsustainable return expectations – attractive
risk-reward can now be achieved targeting a 6-8% unlevered return for structured investments.
Structured direct lending has a risk profile that lends itself to leverage.
3. 3
Market Background
• Bank deleveraging has been overestimated in Europe as a market dynamic, with many European
banks selectively seeking new assets. The more aggressive are already moving back into the
middle-market sector in search of assets, however this remains patchy.
• Direct lenders are consequently struggling to access sufficient new opportunities via bank
relationships and JV’s.
• Focus therefore remains principally event-driven in conjunction with PE, and there are too few of
these opportunities for the capital raised.
• Governmental and regulatory environment in Europe is keen to reduce middle-market reliance on
banks (c.85% vs.30% in US), and the middle market also has appetite for non-bank investment,
but not in a “one-size fits all” format.
• Few market participants have explored bringing structured credit to the middle market direct
lending market, as focus remains on an outdated paradigm.
4. 4
• Address the “one size fits all” problem by putting “more tools in the box”. This differentiated
approach means working closely with the corporate to bring more structuring expertise and
focussing on assets as well as cashflow.
• Limited/no recourse approaches to asset pools of trade receivables, leases, real estate etc. can
achieve attractive risk profiles for the investor, less asset “churn” as assets financings are more
“sticky”, and credit isolated and enhanced from that of the originator.
• This risk profile allows asset pricing that is attractive to the middle market and undercuts the
unsustainable expectations of much of the direct lending market, still targeting c.10%.
• Flexible approach still permits the ability to participate in traditional cashflow EBITDA multiple
lending where opportunity arises – i.e. as a return “kicker” rather than sole raison d’etre.
Market Opportunity
5. 5
Bank Loans
And Investment
Grade Credit
Direct Lending
Opportunity
High Yield Bonds
and Leveraged
Loans
Distressed
Cost of Capital
Special
Situations
0 1 2 43 765 98 1110
Volume
Funding Spreads %
Market Opportunity
• An opportunity exists to provide small and medium size European corporates with capital in private
debt/private placement/bilateral loan formats yielding in the region of 6-8%
6. 6
Access
• Expertise required to access and assess this market includes:
• Credibility with and knowledge of key relationships with PE, mid-market m&a, bank desks,
accountants/auditors, insurers etc. to develop partnerships to lend
• Expertise in credit markets and instruments such as secured loans, private placements, leasing, real estate,
hybrid debt, mezzanine, and securitisation
• Experience in working with mid-cap corporates
• Resources required to access this opportunity
• Dedicated long-term funds with return targets of 6-8% unlevered.
• Access to leverage providers.
• Dedicated individuals to identify, originate, execute and monitor business
7. 7
Business Case
• Lending spreads in 6-8% range
• Transaction sizes €10m - €50m
• (Potential for risk share on larger transactions with 1-2 similarly focused Alternative Direct
Lending funds should opportunities arise)
• Target corporates will have revenues €50m-€500m.
• P&L: €250m (50% leverage) invested initially at 6% return = €15m p.a. gross. Opportunity to grow
to [€500m] on successful track record
• €250m initial application across 6-10 opportunities
• Potential for additional income from structuring/arrangement fees (1-2 %) as part of origination
process to enhance yield
• Scalable business to €500m+ without significant increase in cost base
