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Private Credit 

Fin Strathern

Welcome to Taking the Credit, 9fin’s weekly observations on the issues affecting the European private credit market. Find out more about what we do for private credit.

Bags packed. Shoes tied. Cornflakes half-finished and rushes out of the door. Much like the new school term, September often feels like a fresh start for private markets. With plenty of the year’s earlier deals rounded out heading into summer, pipelines have been emptied and lenders are now back at their desks, eagerly awaiting the launch of new processes.

In the UK things seem positive. “We’ve had nine or 10 new inbounds this week for processes launching in the UK,” a mid-market lender told 9fin this week. “We're expecting a busy close to the year.” A managing director at a large-cap firm agreed with the positive mood: "There's a few big UK auctions getting prepped for Q4… Expect some P2P activity as well.”

Elsewhere in Europe however, things feel slower. The DACH region in particular is facing slower than expected deal flow, and lenders in the space are expecting a limited improvement heading into Q4. “M&A has been very quiet in Germany over the summer,” an advisor said. “Deals for the remainder of the year should be kicking off now in order to get over the line in time, but I’ve not seen much yet.”

But September is also a good time to learn something new. One technique direct lenders are turning to more frequently to win deals in the mid-market, especially in geographies like Germany and Italy where banks remain highly relevant, is latching on pari passu to bank club deals.

Lenders have been looking at this innovative way of arranging financing — hybrid club deals that come with separate terms for the private credit portion of the debt through a term loan C structure.

We’ve seen a number of so-called 'hybrid' deals over the years in the large-cap, syndicated space — take Envalioror Phenna Group, for example — but their presence in the mid-market has remained relatively elusive.

In recent months, mid-market private credit funds have been increasingly executing such deals in a bid to put dry powder to work in a competitive and deal-choked environment.

“We’ve done four or five TLC deals this year, having first completed one last year,” a mid-market lender in Germany said. “It’s a structure that works well for us and we plan to continue with.”

“It’s an innovative structure that lets banks with increased appetite to underwrite and direct lenders eager to deploy get more deals over the line,” another direct lender said.

A typical bank club deal could involve four banks each contributing a €40m clip to a €160m debt ticket. With pari passu private credit involvement, a direct lender may step in and provide an additional €80m through a TLC, adding another turn of leverage but with a separate higher margin and a slightly longer maturity.

“A lot of sponsors and management teams still want to work with banks, especially in the mid-market,” a lender said. “There’s still some lingering perceptions of uncertainty associated with direct lenders and, obviously, the pricing is better with banks too.”

A hybrid deal of this nature lets a borrower get more leverage than banks are able to offer, and at a blended price, which has proven attractive in 2024.

In Italy, the first deal of this kind was executed in May when Pemberton provided a TLC alongside a club of six banks for the financing of Ambienta’s Officine Maccaferri buyout.

Germany is further ahead, with banks and direct lenders having worked on a handful of hybrid club deals in 2023. Last November, Blackrock’s private credit unit went pari passu with German and Austrian banks for the refinancing of logistics business Life Couriers, as 9fin reported.

More recently, CVC’s acquisition of vitamin manufacturer Sunday Natural in January was funded with around €200m of debt. The financing came mostly from Deutsche Bank’s direct lending arm through a TLC, with banks UniCredit and UBS contributing the remainder, according to sources.

But lenders 9fin spoke to added that the TLC structure has its limits. Banks aren’t always super receptive to the idea, and such deals can often only get signed under specific circumstances.

“Deals like these need unique conditions,” the same lender said. “Most importantly, they need a sponsor that can enforce its will onto the banks and that has a strong relationship with its chosen private credit fund.”

“Sponsors often have a good case for wanting the larger quantum, but banks can get easily turned off by it,” they added.

Elsewhere in the market this week, Clearlake Capital’s deal to buy credit investor MV Credit marked the latest in a long line of US asset managers clamouring for a slice of Europe’s direct lending industry.

The acquisition will take Clearlake’s assets under management to more than $90bn, expanding its $23bn credit business by an additional $5bn, with the creation of a dedicated European private credit platform.

Most of Clearlake’s existing credit exposure sits within WhiteStar Asset Management, which it acquired in 2020. WhiteStar had $16.8bn of CLOs under management globally at the end of Q2, according to 9fin data. €2.7bn of that is in European CLOs.

Clearlake has made private credit investments over the years as part of its opportunity funds, the most recent of which, Clearlake Opportunities Partners III, closed in May 2022 at $2.5bn.

Also this week, Park Square Capital reached the final close of its European Loan Partners II fund, with €3.4bn of investable capital. The bulk of the capital comes from Park Square’s joint venture with SMBC, which made up €2.8bn of the fund’s total.

The two firms’ joint venture has been one of the longest running between a bank and a private credit fund in Europe, having made more than 50 transactions since launching in 2017.

Earlier this summer, Dan Matthews, head of EMEA leverage finance at SMBC, sat down with 9fin to discuss the partnership as well as SMBC’s inaugural €450m private credit fund.

“Park Square is our long standing joint venture partner and will remain so. Our inaugural private credit fund… will compliment this partnership,” Matthews said at the time.

The start of the school term has also brought with it a steady flow of deals.

9fin reported this week on Goldman Sachs providing around €400m of ARR financing for EQT’s buyout of Irish software provider AMCS.

Due to close soon is the debt raise for private school operator Dukes Education. The firm is looking to secure more than £250m of financing from lenders including Macquarie, CDPQ, and Deutsche Bank’s direct lending arm.

Meanwhile in Portugal, Partners Group is looking for a private debt package to finance its buyout of FairJourney Biologics.

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