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Josie Shillito

This article is part of our forthcoming service, 9fin Private Credit. If you're interested in a free trial, contact subscriptions@9fin.com

There’s been noise this week, not from private credit funds making consolidation plays, but from banks announcing they are firmly in the private credit game. These broadcasts, whether on or off the record, were described by one banking source as “banks heavily threatened by direct lending”. 

What is important to examine, however, is the fine print. If a bank is fundraising, where is its target market and strategy? And if it’s taking the route of investing off balance sheet, how will it do that at scale?

Deutsche Bank announced this week it launched DB Investment Partners (DBIP), a new investment manager established to give institutional and high net worth clients access to private credit investment opportunities. Barclays was reported in the press to have arranged a tie up with asset manager AGL to create a business development corporation (BDC) fund and is finalising an anchor investment from the Abu Dhabi Investment Authority.

Incidentally, Barclays was also reported in the press to be setting aside its balance sheet cash for US private credit. 

Then ING announced this week it is engaged in a co-investment partnership with RiverRock, sourcing around 75% private credit issues, and the remaining quarter broadly syndicated loan (BSL) issues in a loan portfolio targeting €1bn.

Not to be left out, Societe Generale has partnered with Brookfield Asset Management to launch a €10bn private debt fund with €2.5bn of seed capital already in place. This one will “allow Societe Generale and Brookfield to significantly increase their footprint in financing the global economy over time by providing large scale commitments with differentiated forms of capital”, according to the press release.

However, a curious facet of the SocGen-Brookfield partnership is that it’s not strictly private credit in the corporate lending sense of the world. The partnership will target two strategies, the release reads, one for real assets credit across the power, renewables, data, midstream and transportation sectors, and another one for fund finance.

Bank presence in private credit is a well established. No one would dispute Goldman Sachs’s and JP Morgan’s reign in this area. Nor are fund-bank tie ups too unusual. Take, for example, Park Square and SMBC’s joint venture. As a private credit source put it, “Banks have always done sponsored lending. There’s nothing unusual in that.”

What’s important to identify is how they intend to invest and what they intend to invest in it from. With the exception of Barclays’ balance sheet cash, the announcements this week focus on banks investing LP capital into private credit, often in partnership with a fund manager.

This, according to the first banking source, gives the banks in theory an agility and perhaps an opportunity to scale they would not have were they investing off balance sheet. 

“Balance sheet investment is bound by the same rules banks would face if they were to underwrite with the balance sheet,” the banking source said.

“It’s possible to take regulatory capital and invest it in private credit,” the source conceded, “but when banks do this, they often do it in very small pieces and as part of their investment banking team.”

“[Regarding Barclays], they did and do invest in private credit off their balance sheet, but there has to be an investment bank mandate. It needs to generate business for an LBO or a refi.”

Operating as part of a fiduciary, like Goldman Sachs and fundraising, gives greater freedom. However, in order to truly operate at scale, banks need the fundraising clout, and then to find a niche in an overcrowded market.

Deutsche Bank was light on detail about the areas of private credit into which it would invest. ING and RiverRock borrowers featuring in RiverRock’s fund will have annual turnover of €500m and EBITDA of €100m, according to the announcement. Soc-Gen and Brookfield is very interesting, because it eschews the plain-vanilla corporate lending world altogether and is entering real estate and fund finance under the guise of private credit.

“This is a great sector, a very interesting sector, but not strictly private credit,” said the first banking source.

As reported by 9fin, those that invest in the plain-vanilla corporate lending end of private credit, with tickets of €50-250m, are entering an overcrowded market with huge competition. Also, as reported by 9fin, those who are new entrants in private credit, without the necessary track record, are the losers in the tough 2023 fundraising environment where household names and track record win out every time. 

Partnering with a fund is not always easy, pointed out the first source. 

“It’s hard to manage the culture and leadership between the two institutions,” they said. And it’s important to have the plumbing in place to manage conflict between the two institutions when it inevitably arises.

“The conflict management process needs to be rigorous, transparent, with strict rules on engagement. There also needs to be a referee in place, a conflict resolution group whose decision is final,” said the source. 

The banks that have the greatest success already have this plumbing in place, as well as relationships across the relevant teams — levfin, M&A, financial sponsor coverage — “that internal trust,” as one source put it.

And, if investing off balance sheet, which Deutsche Bank will continue to do (”Deutsche Bank will retain its existing balance sheet-driven private credit business”, says the press release), and the majority of banks do, the challenge will be competing on agility. 

Speaking of one bank not mentioned here but rumoured to be entering the area, the private credit source did not hold back. 

“They are the least commercial, most bureaucratic, illogical entity you can imagine. Imagine a sponsor dealing with them. They can’t move fast, they’re not communicative.” 

The source added: “If the bank is just entering private credit using its balance sheet then it’s just a rebranding exercise.”

IRIS Software is circled by a handful of private equity firms as it mulls its sale. These include EQT, KKR, Nordic Capital, Thoma Bravo, and Vista Equity Partners. Of note, none of these are sponsors necessarily associated with a strong desire for the capital markets, which leaves the way open to direct lenders. 

The carve-out of consumer insights company WGSN from Ascential is back on after a summer lull, according to two sources. Initial deal pricing had placed WGSN at a £45-50m EBITDA valuation with a 6x leverage, but talks had supposedly hit a standstill over valuation issues. JP Morgan is advising on the deal. 

Harvest, a French wealth manager, is readying for sale at €25m EBITDA via Rothschild Five Arrows, as reported by 9fin. 

Sogelink, a tech asset through Raymond James, is marketed at €50m EBITDA, as reported by 9fin. 

Eurazeo has put its portfolio company, the Dutch Ophthalmic Research Center (DORC) up for sale through Rothschild at €50m EBITDA, according to 9fin sources.

Eurazeo declined to comment and Rothschild did not respond to requests for comment.

Nordic Capital-owned Swedish fire and gas safety business Consilium is up for sale, marketed off €50m EBITDA, according to 9fin sources. 

Nordic Capital did not respond to a request for comment. 

Pure Cremation, a no-frills UK cremation chain, may still have up to £80m debt put into the business after sponsor Epiris made the acquisition as an all-equity buyout, as reported by 9fin. 

Options Technology rumbles on, marketed off close to €70m EBITDA. As reported by 9fin, private equity sponsors are readying debt packages of around $200m as they compete to bid for the UK IT services provider. The Abry Partners’-owned business has attracted interest from Cinven and Permira.

Private equity giant CVC has shown an interest in buying UK software business Civica, setting it up to also receive the £1bn covenant-lite portable debt package put in place in the summer and held by a club of direct lenders. 

Barings and Arcmont have provided about €110m unitranche financing to finance TA Associate’s acquisition of independent financial adviser platform Valoria. The private equity sponsor bought Valoria from Eurazeo in a pre-emptive deal. The debt was calculated off €20m adjusted EBITDA at 5.5x and priced at 650bps.

VetPartners’ initial refi terms involve owner BC Partners putting in £256.9m of equity, with £185m of debt being repaid, bringing leverage down to 7.86x from 8.79x. Additional terms of the refi include financing providers committing a £175m super senior TL at 400bps, a £695m unitranche paying 675bps and a £522m PIK loan paying 950bps — giving 7.9x total net leverage and 4.9x net secured leverage.

Meanwhile, AlbaCore is fundraising a €2bn direct lending fund focused on first lien investments, as reported by 9fin. 

Pictet Asset Management’s European direct lending strategy has provided debt financing to support the acquisition of Liciel Environnement by Enersweet, an investment holding company dedicated to the energy transition, according to a press release. Liciel is a provider of software solutions for property diagnosticians.

Taking (back) the Credit — Banks stage an insurgency

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