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Private Credit 

Elena Dragulele

9Questions is our Q&A series featuring key decision-makers in leveraged finance and distressed debt — explore the full collection here.

Earlier this year, US private equity firm Clearlake Capital reached a deal to buy European asset manager MV Credit, in a move that will establish a footprint in the European private credit space.

The acquisition of MV Credit, owned by French asset manager Natixis IM, will take Clearlake’s assets under management to more than $90bn, expanding its $23bn credit business by an additional $5bn.

For MV Credit, the deal is “the right time to seek a partnership with someone more focused on private debt activity.”

9fin sat down with Frédéric Nadal, CEO, co-founder, and a managing partner at MV Credit to discuss the state of the private credit market, the deal with Clearlake and his allegiance to (Clearlake-backed) Chelsea FC.

1. What are the challenges and opportunities in private credit at the moment?

I think the challenges, are the same ones that the world is facing. Geopolitical risk is number one, I would say. No surprise here — it affects absolutely everything and everyone, including private debt. So, it's not specific to private debt, but this is creating uncertainties in several areas — for instance, the price of raw materials. The impact of those conflicts on certain businesses is something to take into consideration.

The challenge, and this ties to credit risk, is understanding to what extent these issues are going to affect the companies in which we are considering an investment. Our existing portfolio has been impacted by high interest rates. To what extent the visibility — or lack thereof — around how these conflicts will evolve and their impact on interest rates and how this will affect outcomes is hard to determine. We have various scenarios, as usual, but in this case, the uncertainty is pronounced.

For example, oil prices dropped, simply because people believed that Israeli retaliation was not as severe as expected in Iran. We are in a world where everything is interconnected.

But opportunities arise. First, there is the increased regulatory framework for the banking system, which places an additional burden on banks when it comes to lending. Banks are struggling to determine what they can and cannot do in terms of underwriting. The big opportunity — while not new — is one that, will remain the defining factor for the next few years: the fact that banks will continue to face challenges underwriting loans unless all the right boxes are ticked — right jurisdiction, right industry, right sponsor, and so forth. They need to strike a balance, which is very specific.

At the end of the day, banks will only underwrite loans that they feel comfortable with, leaving more space for private lenders to step in and finance deals that do not meet all the banks’ strict requirements.

This does not mean private lenders are simply taking on what banks reject. Not at all.

There is also a matter of size and other factors. For instance, questions have arisen regarding broadly syndicated loans. It is not that a deal unsuitable for a BSL transaction is inherently bad. The ability to sell a loan is a significant consideration. It is like the items you see prominently displayed in a supermarket — they need to move quickly because banks don’t want to hold loans on their balance sheets for long. As banks’ loan books continue to shrink, private lenders will have increasing opportunities to step in.

2. Is competition in the upper middle-market versus BSL back?

I think there’s going to be competition, but it’s going to be very tough for the banks and we’re not talking about the upper mid-market, we’re talking about the upper market. There are firms that have the capacity to underwrite bigger amounts than the banks — it's as simple as that. I find it hard to see how banks will compete.

Private credit has evolved significantly. Large firms, as big or bigger than certain banks, are now targeting high-value transactions.

The big advantage of private debt is deliverability. There’s a certainty with private debt providers that you don’t always have with banks, and that’s a huge plus. In terms of size, it’s no longer about hundreds of millions — it can now go up to one billion or more for some of the larger firms. But it is not a one-size-fits-all scenario. For privately sponsored deals, three things matter: deliverability, pricing, and with whom you are dealing.

As for pricing, it might not always be the most attractive, depending on market conditions, which can shift very quickly. So, it really depends on where we are at a given moment in time. The third element is something new: we’re seeing big firms competing against each other. All the large houses now have credit capabilities. For example, private equity firm A, lends to private equity firm B which in turn lends to A, A then lends to private equity firm C which also lends to A and so on.

But ideally, if I’m a sponsor, I’d prefer not to give business to my competitors. This isn’t even about conflicts of interest — it's about how these firms will react if things go sour. Without a Chinese wall in many firms, if a loan goes bad, these players might leverage their internal expertise to take over the company. This isn’t unusual; it’s just reality.

Banks still have a role to play — I genuinely believe that. In an ideal world, they can remain highly competitive if they can deliver and provide enough comfort to sponsors that they’ll follow through. In practice, what we’re seeing today is a mix. It’s not systematically private lenders versus banks, nor is it always about the upper mid-market.

For us, we mostly operate in the mid-market. What we see is both sides — private lenders and banks — competing for unitranche versus BSL deals. It’s competitive, and that’s a good thing. You can’t have only a handful of large private firms dominating the market; that would create issues. So, banks are still very much in the game.

3. Are there any specific industries that financed in the BSL market that you expect to face refinancing challenges — could they turn to direct lending?

Industrial companies are the ones that immediately come to mind because of all the aspects I’ve mentioned before. These companies often don’t “tick all the boxes” for banks. In this industry, particularly with industrial companies, you have markets characterised by cyclicality—even if only to a small extent. Additionally, raw material costs play a significant role.

What does "industrial" mean in this context? It encompasses a lot, from manufacturing to, say, electronic components. There may be other factors that make certain industrial companies attractive to banks. However, the same dynamics persist. It’s much easier to finance a healthcare company in Germany with €100m in EBITDA, backed by a well-known and capable sponsor, than a cyclical industrial company in southern Europe, for example.

4. What about pricing? Has there been any recent movement there?

Now, the market is at a reasonable level. It’s not excessively cheap, nor is it prohibitively expensive. We’re in an environment where there’s a lot of supply, but also many transactions taking place. Pricing reflects this balance. There’s no such thing as "perfect pricing," but it doesn’t seem extreme in either direction. This equilibrium is positive.

Remember, we invest over a span of several years for a single fund. There will inevitably be periods when things are tighter than usual. The critical issue for private lenders, and something people often overlook, is default rates. The real risk is losing money.

Yes, higher prices are better. But realistically, a shift of 25 or even 50bps won’t dramatically affect our returns. What would have an impact is a significant increase in defaults leading to losses. The loss rate is what truly matters, as it has a much greater impact on fund returns than slight changes in pricing over a three-to-four-year investment period.

5. With the growth and demand for direct lending over the last few years, is there too much money chasing too few deals?

That was the case, I think, until recently. But there have been fewer primary transactions. In fact, firms like us are really focused on two main areas. First, senior loans, generally speaking — this includes unitranche and TLBs. Second, subordinated debt.

For subordinated debt, these are mostly off-market transactions where there’s no real competition. These are tailor-made transactions, where competition isn’t the primary concern. The challenge for us on the subordinated side is whether we can convince the sponsor to include subordinated debt in those deals.

A significant amount of money has been raised for private debt, and the market has restarted. Over the past six months, we’ve seen much more activity, and it continues to grow — which is great. However, I wouldn’t say there’s an oversupply of capital, but there’s certainly ample liquidity in the private debt space.

Looking ahead, I don’t think this situation will persist indefinitely. Unless a major economic issue arises — linked to geopolitical factors, which is always a possibility — I believe we’ll see the primary market continue to grow, with new transactions coming through. M&A activity is the best proxy for gauging how the LBO market is performing. The M&A market has improved significantly, and I think this will translate into more primary transactions, more secondary deals, and, as a result, less pressure on pricing.

6. Have you observed shifts in investor appetite for direct lending?

It’s interesting that everywhere we go, we see strong interest from investors in private debt products.

We believe there will be substantial demand from the retail market for private debt products. This makes sense, particularly for non-subordinated products or senior loans. There is more appetite for private debt today than ever before, even compared to private equity.

When I attend conferences and hear discussions, many people are actively structuring products to address this market [retail], including high-net-worth individuals. There’s a wide range of product packaging aimed at meeting this demand. For traditional institutional investors, I believe there’s still interest. From our own fundraising efforts and direct feedback, we know that appetite remains strong.

The big problem, however, has been — and still is — a lack of liquidity. Traditional private equity and private debt investors have received limited dividends over the past four years. Over the last 12 months we’ve experienced significant redemptions, which is positive — this is part of the cycle and what we aim for. At some point, we want to retain good assets as long as possible. But now we’re seeing those good assets being sold or refinanced, which is healthy. This leads to healthy distributions for our investors.

That said, we’re not yet in ‘cruise mode’. There’s still a lot of distribution that needs to happen for some investors to restart their usual allocation.

For institutional investors, allocations are typically a fixed percentage of their portfolio assigned to a specific asset class. Even if that percentage hasn’t changed, the absolute amount allocated has shifted significantly — largely because they’ve received very few dividends over the past four years.

While things are improving — markedly so over the past six months, as we’ve distributed a lot of assets — we’re still hearing from traditional investors that they are far behind the amounts they’ve received in previous years. So, this remains a significant challenge.

7. Clearlake Capital is set to acquire MV Credit from Natixis Investment Managers — how did the deal come about?

Clearlake, which has a strong presence in private equity and one of the largest CLO platforms globally through WhiteStar, lacked a direct lending arm. They wanted to build that capability, and we felt they would be the ideal partner for this next phase. While I can’t go into too many details, that’s essentially the rationale behind the decision.

About 18 months ago, we began discussions and determined it was the right time to seek a partnership with someone more focused on private debt activity.

Under Natixis ownership, we more than doubled our AUM. Our portfolio is in excellent shape, and everything is operating as it should. So, clearly, it has been a success.

8. And does this mean that you will move into new regions?

No, in the short to medium term, what is now MV Credit will remain dedicated to the western European market, as we have been for nearly 25 years. I think that’s one of the aspects Clearlake appreciated about us — our strong focus, reputation, and track record in this region.

Europe is where our expertise lies. We know markets like northern Europe, DACH, France, the UK, Spain, and Italy very well. While we are also familiar with the US market, if we were to enter it someday, we would require local talent and expertise, including senior leadership. This is something we have discussed with our shareholders, but that’s a separate consideration for the future.

For now, our immediate focus is clear: we will continue doing what we do best. Under Clearlake, we aim to grow to better address the needs of our private equity partners and investors.

9. Speaking of Clearlake, are you a football fan?

I'm a big supporter of Chelsea FC [which is co-owned by Clearlake], of course. I will be cheering for Chelsea, which might be tough for some of my team members who are hardcore fans of other UK teams. So, that's going to be a tricky one!

PS — have you read our latest 9Questions interview? We speak to Tina De Baere at Polus Capital about the role of ESG in the CLO market. Find out more here.

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