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Taking the Credit—The many faces of private credit
Josie Shillito
•4 min read
Asset manager Kartesia’s majority stake this week in a fund manager specialising in sale-and-leaseback transactions is an example of how private credit funds are seeking to differentiate themselves and broaden their offering at a time when dry powder is at an all-time high.
Kartesia chose to form what it deemed a ‘strategic partnership’ with real-asset-financing fund manager Flexam, in order to provide its prospective borrowers with yet another avenue to financing — this time through asset-based lending. It follows a general trend in the private credit market towards niche strategies and what could be deemed as ‘platformisation’.
What comes onto the platform? Many, many things. We have of course seen ARR financing and ABL financing. But there others: pure debt and debt instruments, equity or quasi equity, impact funds, credit opportunities, special situations, stretched refinancings, venture debt and mezzanine, to name a few.
Casting the net a little wider, there’s classic private debt fund participation in infrastructure and real estate debt. Climbing up the structure you can reach fund finance, through net-asset-value financing in the suite of products that come under the private debt umbrella.
Is this a surprise? Not really. Essentially, as one market participant put it, “it’s the blank sheet of paper approach” to financing. Private debt is meant to be tailored and bespoke.
“The best players are those that can customise the most,” said a second source.
Right now, however, there’s a serious competitive advantage. According to Preqin’s most recent figures, there are unfortunate levels of dry powder in private debt.
A certain level of agility is necessary to put capital to work. Take, for example, the cash offer made this week by sponsor IK Partners for Medica Group. Taking a company private is another, highly niche, strategy in private debt. It requires a high degree of secrecy (under the UK takeover code, a potential offeror may only talk to a maximum of six parties ahead of making the announcement - given these include accountants and lawyers, there’s not much room for multiple financing parties) and supreme agility, because once the offer is made, it’s binding.
The offer has to be cash confirmed and with certain funds. Therefore, you need a fund with deep pockets of capital who can speak for all of the debt financing.
As reported, these kinds of funds can be few in number in Europe. But with public market valuations falling, bargains are to be had and it’s a great home for private debt capital.
LPs, too, are right behind niche strategies. “In terms of LP demand there is a lot of appetite to address the market as smartly as possible,” said the second source. You only need to look at the dismal aggregate capital raised (see Preqin again) to see how important it is to win that LP battle.
And you only need to the uptick (in pink) year on year of private debt investors’ targets to see distressed, mezzanine and special situations getting a special jump in mention.
So if you are platformising as a private credit fund, do you buy it - or do you create it in-house? Different funds do different things. Some, like the Hayfins of this world, have made their name in niche strategies. Others have built it up organically over time, in house.
But in a market ripe for consolidation, there are also huge opportunities for doing what Kartesia did, acquiring a stake in a fund with complimentary expertise and synergies. Particularly if you are a mid-market or lower mid-market fund.
“A customised approach, a local approach, is essential for the lower mid-market. With something like [Kartesia’s deal], you can create synergies all over Europe, and great opportunities for cross-fertilisation in deal sourcing as well,” said the first source.
The question of deal sourcing and strategy was naturally raised when news came this week that US investment bank Morgan Stanley was steaming ahead with its first European private credit fund.
“As developed as the market is, for a new entrant, what are you bringing?” said the second source. “Can you do a large take and hold? Sponsors like that.”
