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Private Credit 

Sayed Kadiri

Private credit doesn’t necessarily mean vanilla corporate credit lending. Some borrowers, that are otherwise performing well, will have a pressing need for liquidity, which will not fit neatly into a classic direct lending play.

Enter opportunistic credit funds (or special sit funds, or capital solution funds if you prefer). Whatever the name, these strategies are intended to plug a liquidity gap — often with bespoke financing.

NorthWall Capital describes itself as a firm which delivers private capital solutions to companies across western Europe and in June it announced a final close of NorthWall European Opportunities Fund II (and related vehicles) at over €640m.

In conversation with 9fin, NorthWall founder and chief investment officer Fabian Chrobog described the strategy as operating in a space with fewer competitors — but that doesn’t mean it should be considered niche.

1. You are operating at the intersection of distressed and private credit — how do you explain your strategy to investors?

We refer to our strategy as opportunistic credit investing. Essentially, we provide private credit capital solutions to western European borrowers experiencing a form of situational complexity — i.e. complexity around the circumstance of the fundraising rather than complexity due to operational stress, or distress.

Usually, we provide capital when a refinancing, acquisition financing, or other form of gap financing is needed urgently, and where the complexity and urgency of the situation rules out traditional lenders such as banks and direct lenders.

Due to our cost of capital, we are never going to be anyone’s first call, but we strive to be everyone’s second call. Once borrowers have explored other avenues, they rely on us to deliver creative and flexible funding solutions.

We also provide liquidity to other market participants by acquiring stressed and distressed loans and bonds, and we invest in unsecured and secured consumer loan portfolios via our asset-backed strategy. Finally, we have a thriving legal assets business that applies the same credit underwriting rigour and focuses on providing loans to law firms.

2. How does the opportunity set in credit compare to previous eras?

The opportunities today have similar return expectations to other credit cycles, i.e. achieving double-digit returns in the credit markets that NorthWall operates in could be achievable.

However, even though the return potential is exciting, there is a lot less uncertainty today than existed even last year. Previously we were facing major issues such as a banking crisis, a eurozone crisis, and uncharted territory following the pandemic. Today we are arguing about the “softness” of the landing — so I think it is looking pretty good, especially considering where rates are today.

This will not last forever. We’ve seen before that when rates go higher, credit spreads do compress and opportunities to generate outsized returns can quickly evaporate. There has been some evidence of that, for instance, in plain vanilla US mid-market direct lending. But the lag effect means that our type of bespoke financing spreads will feel that compression later.

3. Where are the greatest opportunities in European credit markets now?

There are two areas we are looking at. First, we want to be a provider of capital when private equity sponsors need solutions. For instance, in refinancings that are harder to execute, we can create better structures with lower leverage. We have been more active in sponsor-backed financing of late, and this has led to a substantial increase in volume in the last 18 months.

We also find a lot of deal flow in asset-backed opportunities. In particular, we have invested in non-performing and reperforming consumer loan portfolios via outright portfolio purchases and risk transfer transactions.

4. How do you go about sourcing opportunities for your fund?

We have three typical routes: network, thematic, and recurring.

The traditional method is to stay in touch with your network across private equity funds, law firms, advisors, etc., to make sure you get the call. A very important part of this is to be proactive in systematically reaching out to counterparties via email, and by maintaining our brand awareness through social media, the press, and conference attendance.

Secondly, we apply a thematic approach to origination where we seek deal flow within a thematic vertical that we find attractive, and where we have identified a dislocation driving a capital requirement. I like this approach because you take an active role in portfolio construction — seeking what to invest in, rather than waiting to be sold something.

Finally, we try to be a good lender or buyer so that our partners keep coming back to us for capital. Repeat business with partners we trust is the most effective method to scale our business.

5. Although your focus is on relatively niche situations, have you found larger-cap situations compelling this year?

We don’t love the word “niche” because it implies a lack of scalability. We want to target less competitive markets — yes —, but we are laser-focused on deploying at scale. The reason we don’t love large deals is that they inevitably tend to be well-banked; a €150m EBITDA credit, for example, will have access to broader capital markets — and the opportunity to be a transformational source of capital will be more limited.

In a company with €20m EBITDA, for example, we can structure a first or second lien loan, deploying a €50m-€100m cheque with a more solid security package than what might be available in the liquid markets.

That being said, yes, we have found some value in large-cap deals, but it is rare because they are more competitive.

6. We’ve got an election heavy calendar — how do you expect this macro pressure to affect credit markets?

What happens to rates is far more important than what happens in elections, though obviously these factors could be linked in the case of Trump. We’re not trying to predict Trump versus Harris; we seek opportunities that will perform regardless of the outcome – that is what credit investing is all about.

On the other hand, if the focus turns to guessing what will happen if this person wins or where copper prices will land in six months, we would be in speculative territory. That’s just not how we invest.

When it comes to rates, we are pretty well hedged in this respect because most of our portfolio consists of floating rate exposure that we hold to maturity.

7. What has been the best investment you’ve ever made?

The best personal investment I made was to support a friend when he launched a new idea in 2013. I invested in the seed and series A stages of his company, also taking advantage of the generous tax benefits of the SEIS and EIS schemes. Everyone now knows this business – Deliveroo – and I was incredibly fortunate to generate spectacular returns while also watching a good friend succeed.

8. Can you provide an example of a bespoke financing solution you provided to a borrower, which would otherwise have struggled to access capital markets?

As discussed, we also provide financings secured by legal assets. One of the best outcomes for NorthWall LPs involved lending nearly €200m to a law firm and getting refinanced, as was announced, at 2.2x 15 months later, with potential upside to 3.5x in the coming years.

This deal is also a good example of the misconception that Europe does not present a scalable credit investment universe. In Europe to be big, you often have to start small. This deal, for example, started off small, but grew quickly. The first tranche was only €5m, which we then upsized by £50m and finally another £100m.

Importantly, though this transaction also presented very compelling risk/reward: we understood the collateral pool well and out of a portfolio of 20 cases, the firm only needed 1-2 to win for the investment to deliver. It was also helpful that this law firm focused on cases with an ESG angle.

9. Is there a fact about yourself that perhaps people in the market might not know?

I’d love to be able to say something mundane, like that I am a stamp collector. But back in 2005, when Yemen was a tourist destination which it clearly is not today, I was on a holiday with my parents and brothers, which took a turn for the worse. We were abducted by a tribe involved in a feud with another tribe, at gunpoint, to affect a prisoner release. My father is a retired German diplomat, and my mother an Arab speaker, so we were treated well and thankfully released soon after.

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