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Earlier this morning, SMBC Group announced its inaugural private credit fund with €450m of investable capital. The European Middle Market Credit Fund will focus on direct, senior secured loans to mid-market, sponsor-backed European businesses.

The Japanese bank is no stranger to private credit markets, however. SMBC has run a balance sheet-driven direct lending business for several years, as well as a successful joint venture programme with private credit firm Park Square Capital.

“The fund is an important step in the development of our private credit business in Europe,” said Dan Matthews, head of EMEA leveraged finance at SMBC Group, who joined us recently to discuss the new fund, SMBC’s operations in Europe, and his love of cycling!

“It complements well the range of financing solutions we can offer private equity backed companies in the middle market,” he added.

The fund was established through a secondary purchase, led by Pantheon Ventures, of a strip of loans held on SMBC’s balance sheet. It was then complimented by additional primary capital commitments.

1. Given SMBC’s involvement on both sides, what are your thoughts on the overlap between syndicated and private credit markets as they compete over deals?

It’s a really good time to be a large-cap company looking for a choice of financing options, that’s for sure. Syndicated loan and bond markets are in great health compared to where they have been in recent years, and now we’re seeing a private credit market that’s grown to establish itself in the large-cap space.

In practice, what this means for borrowers is that they have a greater range of options to cater to different needs and situations. It also allows for more flexibility in navigating different market conditions. If one market is particularly hot, or not, then there are other alternatives — which I think is a positive development.

For us at SMBC, we took the view several years ago that it was important to have strong but complementary offerings for both the syndicated and the private credit side. Fast forward to 2024 and sponsors routinely ask us on larger transactions for both options, which we feel we are in a unique position to effectively offer.

Another development we’re seeing more and more of are hybrid debt structures that blend bank and private credit capital, and we expect that to continue as borrowers look to migrate between the range of available financing options.

2. June finally brought Europe’s first €1bn+ private-credit backed LBO of 2024 — what do private credit funds need to bring to the table to steal large deals away from public markets at the moment?

Private credit continued to make huge gains in 2022 and 2023. The return of syndicated markets has meant some of that has been undone, with a number of direct lending transactions repricing in the TLB market.

That’s sustained by demand exceeding supply in the BSL market, due to healthy CLO formation, as well as a lack of new issuance coming up for syndication. For private credit to remain relevant under such conditions, relative pricing is a large factor, and that’s clearly tightened in both markets this year.

But that’s only part of the story. While public markets are the natural home for many large borrowers, there will always be some that are more suited to private credit. In situations with particularly high leverage, investors and rating agencies won’t tolerate above a certain threshold. It’s not just about opening leverage, it also depends on the financial policies of the borrower and its intentions to delever. Some situations require more bespoke terms or structuring, like large undrawn facilities, which can be more cost effective and easier to accommodate for in private credit.

There are also practical considerations. There are some currencies where both the pricing advantage and the depth of liquidity aren’t there in syndicated markets.

Lastly, in terms of execution, financing with a known group of private credit funds can remove the uncertainty around pricing and flex risk you get with syndication.

3. How is SMBC’s direct lending joint venture with Park Square going this year?

It has been a really successful partnership and we intend to keep building on it as the cornerstone of our private credit strategy. Just to set the scene, we started our joint venture partnership with Park Square in 2017 and are now deploying from our second programme. In total, we’ve done more than 50 transactions together, making it one of the most successful partnerships between a bank and a private credit fund in Europe.

4. Do you have any future collaborative plans in private credit, or plans to expand the operation with Park Square?

Park Square is our long standing joint venture partner and will remain so. Our inaugural private credit fund we announced today will compliment this partnership, having been raised from a range of investors across Europe, the Middle East, and the Asia Pacific region.

For us, this is the next step in broadening and strengthening our private credit strategy, combining our balance sheet with partnerships and third party capital.

5. SMBC is far from the only bank tapping into direct lending opportunities. Is there enough space for every bank to compete?

Banks are increasingly looking to play a larger role in direct lending and we expect banks and funds to continue to co-exist in this market. Banks benefit from having large balance sheets and the ability to leverage the products, services, and relationships across their wider organisations.

So there are clear advantages, but we see banks taking a variety of different approaches. At SMBC, we have a large leveraged finance origination team of more than 60 people in Europe and an incumbency benefit from our portfolio of over 170 private equity-backed borrowers. We can also offer sponsors not just financing for their private equity strategies, but also in areas like infrastructure, real estate, derivatives, and fund financing.

The challenge for many banks is to provide a range of financing solutions in a coordinated way. Getting the right setup is important and the approach we’ve taken is to give our originators access to the full product suite so we can offer the most complete solution for our private equity sponsor relationships. Banks that are able to coordinate effectively across products, blending bank lending with private credit capital, will have an interesting role to play.

6. What’s the appetite like for bank club deals in Europe this year? Are you seeing more or less than previous years?

Bank clubs are definitely less common than they used to be a few years ago. We do still provide them but they’re not our major focus — I’d say less than 20% of our deal activity is in bank clubs.

That said, they are a good way of building new borrower relationships that can start off small but grow and evolve through our product set over time.

We are seeing a similar number this year compared to 2023. I wouldn’t say there has been any major changes on that front. They are often most useful in situations where leverage isn’t maximised. There’s also regional variation, so some of the continental European markets are more favourable to clubs.

7. What impact will upcoming global elections and geopolitical risk have on our markets this year?

Looking back over the last four years, we’ve had a lot to navigate — from the pandemic to Russia’s invasion of Ukraine, and a whole host of other political and economic events.

For credit markets, that is always going to be a challenge and it’s hard to know what could be around the corner. But for lenders that have remained open throughout, there’s been some great lending opportunities within the turmoil.

For us, the most relevant concern on this front is M&A volume, which will of course be impacted by the outlook on elections and geopolitics. That said, we’re cautiously optimistic that M&A activity will continue to recover in the second half of 2024.

8. Having worked in leveraged finance since 1999, what’s a key lesson from your first five years in the business you think will be critical for your next five years?

Thinking back to the first five years of my career, there were so many global shocks — the Dot-com bubble, 9/11, the Iraq War — and that’s before even considering the global financial crisis. So it’s really interesting to reflect on how markets reacted to those events and how companies performed in those difficult times.

I consider that to be a huge learning experience. So now, looking forward, we expect markets to evolve and for macro events to shake things up, but what is critical is to remain focused on the fundamental risk analysis we do on the companies we lend to. For us, that involves maintaining good credit selection and being disciplined in our underwriting — which is crucial irrespective of latest trends or market developments.

9. We heard you’re something of a keen cyclist outside the office?

I like to test myself with a range of different sporting challenges and have got stuck into a fair few things over the years… some more enjoyable than others.

But yes, earlier this year I entered a road cycling event in Belgium with a few friends. It was super cold, wet, and after a few hours we even managed to get pelted by hailstones. Next year I’ll be looking for an event with a bit more sunshine!

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