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9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

As the last of the year’s deals draws to a close, Europe’s direct lending market is firmly fixated on the promise of renewed M&A activity in 2025.

Looking ahead to some of next year’s potential key trends, 9fin sat down with Paul Johnson, deputy managing partner and chairman of direct lending at Bridgepoint Credit, to gauge what to expect in the months ahead.

1. You have been at Bridgepoint Credit, and previously EQT Credit, since 2010 — what is the vision for the credit strategy today?

Today we are active across the whole scope of European corporate credit, but we started out over 15 years ago with our credit opportunities strategy. I joined in 2010 to help to establish the other end of the risk-return spectrum in our syndicated debt strategy, which we have now scaled through our CLO management business. For the last decade we have also been very active in the continent’s developing direct lending market.

Since our early days, we have wanted to be in a position where if we find what we see as a good risk-return in corporate credit, we have a home for it with one of our strategies. And I think we do that today.

Looking forward, we are still excited about growth opportunities, both organically and through potential acquisitions. In August, we finalised our partnership with infrastructure investor Energy Capital Partners (ECP), which will create numerous opportunities for expansion through complementary investment strategies and geographies.

2. The European core mid-market is competitive as ever, with lenders feeling the pressure to compete on pricing and risk. How is Bridgepoint differentiating itself in 2024?

Of course today it’s competitive, there hasn’t been a time when it’s not been competitive. If you are a mid-market private equity firm taking direct lending as your source of finance, you probably only need one lender. You may want two or three, but you probably only need one — and there has always been plenty out there.

So irrespective of market conditions, we hear consistently that the attributes sponsors are looking for when they are choosing a lender will not necessarily come down to the last 25bps, or a half-turn of leverage, but speed and deliverability.

That is where we try to differentiate. It’s critical as a lender to never take shortcuts on your due diligence, but if you have the opportunity to be more efficient, that is where you can differentiate.

As part of the wider Bridgepoint Group platform, we can tap into the years of institutional knowledge we have through owning, if not the same business, almost certainly we will have owned or do own a competitor, customer, or supplier of a similar business. If that case has worked well, it gives us conviction to lend and be deliverable to the sponsor. Importantly too, it also may give us reason to pause and step back from an opportunity, which ultimately is what our investors are looking for in us.

3. Do you think spreads will tighten in 2025, or is pricing going to reverse and start ticking up again?

Looking back on the year, I think spreads remained very stable throughout Q2 and Q3. Our average spread in 2024 is a fraction under 575bps. Today, I would say the market clearing price for a high quality European mid-market deal is around 550bps, which represents a healthy premium over the large-cap market.

At that spread, even with current base rates, new deals are still pricing to return over 9%. For senior secured risk, we have been lending at 32% loan-to-value this year. That level of return remains pretty compelling.

Looking forward, I expect pricing will be driven by deal volume. 2024 has seen a very welcome increase in deal activity as valuations become less volatile, inflation has begun to normalise, and rates have passed their peak. All of which is aggregating together to boost confidence in the private equity community to get back to deal making.

So if 2025 proves to be an active year, I don’t expect to see pressure on margins.

4. Where do you expect to see the best opportunities to deploy capital in 2025, with central banks starting to lower rates but plenty of geopolitical uncertainty about?

I see uncertainty as a constant. So when you say is it a little bit rainy, a little bit more, or less, it’s always there regardless. You can’t ever predict what it is, but you know it’s out there. As a credit platform, we are positioned so that when uncertainty does persist, we can take advantage, particularly through our credit opportunities strategy.

We normally invest in primary issuance, but can absolutely pivot and make investments in secondary markets if there is a dislocation or a sell-off as a result of new geopolitical uncertainties.

But even if secondary opportunities are absent, there are still plenty of good companies across Europe that will need bespoke solutions for their capital structure, whether we remain in a higher-for-longer rates environment or if they come closer to zero again.

Overall, we think that all of our strategies will have a good opportunity set in 2025.

5. Bridgepoint favours being the sole lender on deals — 9fin’s database shows this was the case on around 80% of the 22 deals you have completed this year — what’s the rationale for this?

Well, your database is very accurate. Give or take one deal that might have signed but not been announced yet, that’s pretty much bang on.

Historically, we have seen sponsors wanting two or three lenders based on their own investment thesis for equity returns, which is predicated on buy-and-build strategies. So they expect to go back to lenders during their hold period to increase facilities, and the rationale is have two or three in case one lender is unable to front the cash.

For the vast majority of our deal flow however, we like to be the sole lender. We don’t feel like we need other lenders alongside us. We do our own due diligence and, more importantly, we like to have a one-on-one relationship with our portfolio companies.

It’s incredibly valuable having a direct line to call a CEO or CFO to discuss the business and the industry in times of volatility, which we saw a lot during the Covid-19 pandemic, for example. In my experience, management teams also value the inverse — having one lender they can pick up the phone to and talk with about future acquisitions directly.

Lastly, it’s influenced by a maturation of the direct lending market in Europe as sponsors now clearly understand their lenders better and feel more comfortable operating with just one.

6. As a credit shop that underwent a carve-out and change of ownership in 2020, what advice would you give to institutional players eyeing acquisition-based moves into private credit in 2024?

It certainly feels like a long time ago, the world has changed a lot since then. I would say you need to ensure you are committed to the asset class for the long-term.

Bridgepoint was already committed to developing a credit business prior to the acquisition. It had already established a team in the UK and France that was intended to grow organically. Of course, the acquisition provided an opportunity to accelerate that across Europe.

The obvious consideration is that we are a people business. Getting the people part right in any acquisition is imperative. That’s certainly what both parties were super focused on for us back in 2020, and given how stable our senior leadership has been ever since, it shows how that was appropriately considered.

7. European markets have felt scattered in terms of deal activity since the summer, where are you finding the most activity and where are you most optimistic for in 2025?

It has been a strange year in terms of activity, but then again no year has felt constant since 2020. We were very active in Q2 and that lasted well into Q3 all the way up to mid-August. Things took a while to pick back up post-summer but are back to being very busy now. Some of that is obviously the classic year-end activity boost, but I suspect it points to higher activity levels in 2025 too.

In terms of individual markets, we are locally present across five core Bridgepoint Credit offices throughout Europe and we have always seen periods where one market is particularly active and others less so. In recent months, the Benelux market has been more active than I have ever seen it before. However, it feels too early to say whether that is a temporary phenomenon or signifies a maturation of the market, given the region was later to direct lending than say the UK or France.

To some extent, we are different in that we look for the best deals across Europe. If there are very few in one market, that’s fine with us as we can pivot elsewhere.

8. We have reported on an uptick in dividend recaps and large PIK facilities at 9fin in recent months, are you being approached to provide these more and what is driving the increase?

We have not seen a material increase in the amount of dividend recaps in our portfolio, maybe two this year, but it doesn’t surprise me that you are seeing more. I think there are push and pull factors at play, so it’s not just sponsors asking for recaps, but there are also lenders offering them to lock in their incumbency and avoid being refinanced out.

Dividend recaps are linked to investor demands to see capital returned. So when we look at financing them, we ask ourselves is it genuinely that it’s too early for the sponsor to want to exit? Or, is it that it is too tough for them to exit?

Obviously we want to be lending to companies where others are out there wanting to own that business.

Separately looking at PIK, there will always be a place in the market for appropriately structured junior debt. That said, with rates higher than they have been for many years, it’s tough for that junior debt to be second lien and cash paid. So absolutely we have seen more PIK in recent years, but I don’t think we have seen as much as in 2023. I would attribute that to valuations coming down slightly this year and debt capacity being less constrained.

9. If you were not working in credit, what would you like to be doing?

My colleagues say they would be a food critic or a DJ, but honestly, I think it would be something more mundane for me. I can see myself as the kit manager for one of my two favourite sports teams — Liverpool FC or Warrington Wolves — mainly because I never had enough talent to be on the team or even a coach, but it would still get me close to elite level live sport, which is my passion!

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9Questions — Paul Johnson, Bridgepoint — Making moves in 2025’s mid-market

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