Private Debt Investor is a global publication tracking the institutions, the funds and the transactions shaping the private debt markets. What's included? Seven things you need to know about Europe. How to avoid an over-reliance on the UK, using a pan-European approach. Blackrock's Stephen Caron on Europe's untapped prospects. A European roundtable revealing opportunities in specialisation, regulation and the growth of markets outside the UK.

1. PRIVATEDEBTINVESTOR.COM
HIGHLIGHTS
EUROPE REPORT

2. Private debt Investor1
ANALYSIS
Seven things you need
to know about Europe
The major themes emerging from this year’s report
OVERVIEW
1. Managers are looking
beyond the UK
Private debt activity in Europe has long
been dominated by the UK. While that
dominance is unlikely to disappear, it
is certainly likely to wane. Inevitably,
last year’s decision to exit the EU is
going to be a recurring topic of discussion
among the industry professionals on the
continent.
However, as the team at Pemberton
explain on p. 8, it’s not all about the UK.
The firm is one of several in the region
looking to expand their presence, tapping
into opportunities on the continent.
Much of this will be in France and
Germany, but southern Europe is also
yielding new possibilities.
2. Appetite for Germany
is on the rise
In terms of private debt dealflow,the Euro-
pean economic powerhouse plays third
fiddle to the UK and France, but industry
players are eyeing up the potential for more
deals emanating from the country’s small to
medium-sized businesses: the Mittelstand.
Global asset management giant BlackRock
has identified Germany as the region’s fastest
growing private debt market,with the head
of the firm’s European private debt platform,
Stephan Caron (p. 20), noting its “incred-
ible expansion” over the past 12 months.
The consensus in the market is that we can
expect to see more transactions resulting
from succession opportunities,restructur-
ings and non-sponsored deals. Data from
Deloitte Alternative Lender DealTracker show
a record 26 deals were completed in the 12
monthsto June 2017.
Fund name Vintage Disclosed size
to date ($bn)
Target size
($bn)
Sector
Apollo European Principal Finance Fund III 2016 2.78 3.50 Corporate
GSO European Senior Debt Fund 2014 1.94 3.00 Corporate
Avenue Europe Special Situations Fund III 2015 1.20 2.00 Corporate
AXA European Infra Senior I 2016 1.06 1.50 Infrastructure
Algebris NPL Fund II 2016 0.15 1.25 Real Estate
EQT Credit Opportunities III 2016 1.18 1.15 Corporate
AgFe Real Estate Senior Debt Fund II 2017 TBC 0.80 Real Estate
Rothschild Infra Debt Generation (BRIDGEII) 2016 0.17 0.80 Infrastructure
Brunswick Real Estate Capital II 2016 0.31 0.80 Real Estate
MCP Private Capital Fund III 2016 1.00 0.80 Corporate
IN THE PIPELINE
The 10 largest European private debt funds in market
Source: PDI

3. Europe Report Highlights 2
ANALYSIS
3. Competition
is heating up…
With greater interest in the region comes
greater competition, and this is very much
the case in Europe where, according to
Deloitte, dealmaking for the region in the
first half of 2017 is the highest it has ever
been for H1s since records began.Further-
more, private debt funds with a European
focus are currently targeting $57.4 billion
which,if raised,is a lot of dry powder.Much
of this competition is at the larger end of
the market and is having knock-on effects.
First,covenants are getting looser as manag-
ers compete for business from borrowers.
Second, larger firms are moving into the
mid-market in the search for new oppor-
tunities.
4 … but opportunities
remain untapped
For managers facing a crowded market,
the solution has been to specialise or
target those areas requiring greater levels
of local knowledge or sector expertise. In
the case of the former, BlackRock, along
with a handful of smaller players like
Patrimonium, have focused on the many
unexploited opportunities in the German
Mittelstand.
However, southern Europe (see p. 38)
has also seen a pickup in interest as manag-
ers with a strong track record have more
freedom to expand their European remit
and target markets like Spain and Italy.Then
there is the growth of private debt funds
focusing on niche sectors, particularly in
real estate and infrastructure.
5. Go big or go niche
It is a well-established trend in traditional
privateequitythatisincreasinglypronounced
in the private debt world: you are either a
massive generalist fund or a small-scale
specialist, without much in the middle. In a
European roundtable (p.24),Luke McDou-
gall,a partner at law firm Paul Hastings,talks
about the multiplier effect of track record,
geographiccoverageandresourcesthatmake
it so easy for big firms to raise cash.By com-
parison, smaller firms will struggle to com-
pete without scale, so they must specialise
to justify their place in the market.
6. The banks can
be partners
The withdrawal of European banks from
the lending space partly gave birth to the
private debt market in Europe as we know
it today. But while bank activity has been
diminished in the private debt space, it is
not gone altogether. European banks still
generate far more competition for dealflow
than their US counterparts – some are now
even looking to set up their own funds
(p.52).The question for many private debt
investors is whether they are a friend or foe?
Despite clear areas where they could com-
pete for transactions, many in the industry
see banks as a potential partner. Banks still
place immense value in providing ancillary
services for transactions and it is for this
reason that they more likely to team up with
a fund than a rival bank.
7. Another crisis may
not be far off
While there is no consensus on whether we
are headed for a downturn,there are plenty
of good reasons that managers in Europe are
cautious.Most of the worries stem from the
loose deal terms becoming commonplace
in an overheated market. Cyril Tergiman
(p.24),a partner at EQT Credit,cautioned
in our roundtable that some companies are
“disconnecting from budgets and business
cases”. A recurring theme throughout this
report is the need for discipline in an envi-
ronment where leverage is being increas-
ingly used by investors. n

4. Amid extreme political uncertainty, having a pan-European approach is the way to avoid
over-reliance on the UK claim senior executives at Pemberton
Not all about the UK
Private Debt Investor3
FEATURE
MARKET TRENDS
W
e caught up with four senior
executives from fund man-
ager Pemberton – Symon
Drake-Brockman, Nicole Gates, Mark
Hickey and Ben Gulliver – to hear about
the firm’s expansion into Europe, the
importance of deep credit analysis and
the demand for flexible capital.
Q
What do you think are investors’ main
concerns regarding private debt and do
you share them?
Symon Drake-Brockman:There are
two main concerns:Is there too much dry
powder; and is credit quality weakening?
We’ve addressed the dry powder issue by
establishing offices across Europe.That
has allowed us to create a large pipeline
of opportunity and deploy capital in a
conservative and timely manner. Key for
investors is the scale of your platform and
whether origination capability is built in.
We have 35 people today dedicated to
our direct lending effort.
Nicole Gates: We have a very credit
risk-led approach. All our analysts have
got dual language skills and expertise in
different jurisdictions.
SDB: Investors are very selective around
which managers they want to work with
and a lot of their focus is on scale of origi-
nation and analytics capability.A number
of private debt fund managers are under-
scale in origination and end up focusing
on the more easily accessible markets.
We wanted to have an on-the-ground
approach,so we could access the broadest
pool of opportunities and reach the less
highly competitive parts of the market.
Q
Are there particular jurisdictions across
Europe you favour? What is the best
way to access deals in these areas?
Mark Hickey: We’ve always believed
there are highly attractive opportunities in
Germany,France,Italy and Spain,and we
have invested in six countries in Europe to
date.The best way to gain access is having
experienced people on the ground.We
source deals through private equity firms,
advisers and banks and it’s very hard to
form relationships with those counter-
parties if you’re flying from the UK. So,
we have a presence in France, Germany,
Italy and Spain.
A lot of debt funds can access deals in
the UK and France.We’ve been very suc-
cessful elsewhere, especially in Southern
Europe where there have been a lot of
negative stories but we think there are
a lot of good companies there – just as
strong and growth-focused as elsewhere
with global footprints and diversified rev-
enue streams.The challenge is to identify
them.
The legal frameworks in Southern
Europe have tended to be seen as less
creditor-friendly traditionally but the
governments in Italy and Spain have
recognised that and made a number
of improvements. As a result, the legal
From left: Symon
Drake-Brockman,
Ben Gulliver and
Mark Hickey

5. Europe Report Highlights 4
FEATURE
environment is more aligned with other
European jurisdictions.
Q
Your first strategy was focused on mid-
market senior debt. Will your second
strategy focus on senior debt as well?
MH:The investment thesis for the first
strategy was the deleveraging of the bank-
ing sector and a shortage of capital.That
still very much remains the case.We have
seen growth in the direct lending market
over the last few years and that will con-
tinue to be a core focus.We are nearly
fully invested on our first vehicle and will
launch a second one soon.
We have already closed on our ‘Stra-
tegic Credit’ strategy which is comple-
mentary as it focuses on second lien,mez-
zanine and providing senior debt to more
storied credits. It enables us to provide a
greater range of solutions to companies
and clients.
Q
You have attracted a significant amount
of insurance money for this strategy.
How much of this is due to the strategic invest-
ment in Pemberton from Legal General?
SDB: Eighty-five percent of the firm’s
capital comes from Europe and we have
been successful in penetrating the insur-
ance market. The LG investment was
a strong endorsement of our firm and
people. But what made the critical dif-
ference was the breadth of the platform,
the origination capability and transpar-
ency around risk.European investors are
more conservative than US ones and they
want granular detail when it comes to
risk.We have a dedicated credit depart-
ment and the ability to draw on the best
deals across Europe rather than being
UK-centric.
NG: We also do internal ratings on our
deals which helps to attract insurers.
Ben Gulliver: LP investors want
this level of transparency. We offer an
independent credit model and that’s
very important.We rate the company at
the beginning and continue to track it
through the life of the transaction.
Q
What do you think is the best way to
manage credit risk and downside pro-
tection in today’s environment?
NG: My team members have worked at
banks and at Moody’s.We have a rigor-
ous rating model and we can chart the
credits through cycles.A lot of the team
have worked through several cycles and
you learn all the time through those cycles.
I’ve personally worked through three of
them.We don’t do distressed investing but
we have that background and it helps us
to spot under-performance.
BG: Competing firms have come from
the CLO space and gone into direct lend-
ing.We’ve always been involved in direct
lending and we have a deep credit DNA.
SDB: You’ve got to be proactive and
engage with management early when
there are any issues relating to the busi-
ness plan or managing working capital.
We formalise that monitoring aspect and
that’s a big differentiator in a downturn.
Early intervention always improves max-
imising the recovery, if you’re facing a
challenging scenario.
Q
Pemberton launched its new credit
opportunities strategy. What was the
logic behind this and how do you define the
opportunities?
BG: The reason why it exists is the need
for more flexible capital.With the senior
strategy, we were getting reverse inquir-
ies for situations that we didn’t have the
capital for in the senior fund.So we knew
the demand existed and we wanted to
take advantage of that.We could see the
banks were under increasing regulatory
pressure from Basel III and there were
things they would once have done that
they were now unable to.
We offer flexible capital across the
structure which banks can offer to their
clients. The competitive unitranche
market has made the banks fight back and
they are using firms like us as partners.
There are also non-sponsored opportu-
nities where firms require non-dilutive
capital; they don’t want to dilute their
shareholding but they want flexible capital
for growth.
Q
Is Brexit something that you spend a lot
of time thinking about from an invest-
ment or credit perspective?
NG: We are pan-European so we look
at all economies but Brexit is front and
centre in our minds.There is an increasing
uncertainty in the UK, the Prime Minis-
ter is being challenged, there is sterling
depreciation and an overlay of changes in
the job market. So UK deals involve a lot
of stress testing.But we are still interested
in defensive sectors such as food,pharma-
ceuticals and healthcare.We are also seeing
growth in TV and media production. So
we are still seeing interesting opportuni-
ties in the UK and we need to be creative.
SDB:Seventy percent of our investments
are outside the UK so we can afford to
be very selective inside the UK.We have
found attractive opportunities but we also
think that cost inflation through wages and
materials will hit some businesses, so we
need to do deep analysis. n
“COMPETING FIRMS HAVE
COME FROM THE CLO
SPACE AND GONE INTO
DIRECT LENDING. WE’VE
ALWAYS BEEN INVOLVED
IN DIRECT LENDING AND
WE HAVE A DEEP CREDIT
DNA”
Ben Gulliver

6. Private Debt Investor5
KEYNOTE
MID-MARKET PRIVATE DEBT
Q
Within the European market,what juris-
dictions or sectors do you find the most
exciting?
SC:In our opinion the market has become
truly pan-European.The UK still repre-
sents roughly 40 to 50 percent of the
market, France is around 25 percent and
Germany nearly 17 percent. The rest is
made up of Benelux, Nordics, Italy and
Spain.We are encouraged by the recent
pick-upinactivityinacrossEurope,notably
in Spain and the Benelux countries.Spain,
though it might change with all the politi-
cal uncertainly, has certainly been a very
active market over the last two years as the
country has seen a 47 percent increase in
directlendingactivity.Interestingly,activity
in the Benelux countries has also increased
by over 47 percent over the last two years.
Nordics,meanwhile,have historically been
a little less active in terms of direct lend-
ing because the banks are very competitive
and less constrained in terms of hold size.
Putting that aside,I’d say we are seeing the
fastest growth in Germany.There has been
incredible expansion in this market over
the last 12 months,even more so in the last
three or four months.We have always had
a strong conviction that Germany would
be a big market for direct lending activity.
Q
What are the factors that have made
Germany such an attractive market for
private debt?
SC: There are several reasons. First, it’s
a market where there is a deep pool of
mid-market companies:the Mittelstands
generate circa 30 percent of GDP, and a
lot of these companies are family-owned
businesses that were created after the war
and have successions they must deal with.
So, invariably some of these companies
will either be looking to sell to private
equity to manage their succession issues
Three years after he took the lead of BlackRock’s European
private debt platform, Stephan Caron gives his take on the
region’s untapped prospects
The best is
yet to come
Stephan Caron

7. Europe Report Highlights 6
KEYNOTE
Typical EBITDA range for companies targeted for
private debt investments by BlackRock
or look for a financing solution where they
can retain control and pass it on to one of
their family members.
There is also a much better under-
standing and acceptance of private debt
financing solutions in Germany by the
local private equity and advisory com-
munity.
The other aspect is the fact that
German banks now have more stringent
balance sheet constraints.As a result,reg-
ulators have been more forceful with the
German banks, particularly around large
exposures.Banks are less flexible than they
were a couple years ago,so inevitably this
has opened a significant opportunity for
private debt funds to move in and fill up
that gap.That’s not to say the banks are
not active in Germany,they are,but they’re
less active than before.We will see increas-
ingly more private debt activity and I think
that is a trend that will continue.
Q
How long do you expect this to con-
tinue?
SC: Unlike the US,where there’s talk about
reducing regulation, in Europe new regu-
lations are still being implemented and I
think the European Central Bank (ECB)
has made its rationale clear.The European
banking system is still about three times the
size of the region’s GDP whereas it’s about
one to one in the US.Europe still has a long
way to go in terms of deleveraging, and
there are more and more banks looking to
sell assets.It’s a gradual process and regula-
tors are still very much focused on reducing
the systemic risk in the system, reducing
the size of the banks and making sure the
banks are not taking on too much risk.
The most recent example of how they’re
doing that is when the ECB introduced
its leveraged loan guidelines back in June.
I think it’s very healthy, as the European
banking system was too dependent on
the banks before the global financial crisis
and it’s healthy to have a diversified pool of
potential alternative lenders.The regulators
across Europe are gradually making it much
easier for alternative lenders to originate
private loans directly to companies.
Q
Why are direct lenders an attractive
alternative, how do you differentiate
yourself?
SC: First,we are flexible and can move fast.
Also, we are not as constrained in terms
of hold sizes, and it is easier to deal with
us because we are a small and agile invest-
ment team. Companies are dealing with
the same team throughout the life of the
loan, so there is continuity in the relation-
ship and that helps a company looking to
grow when they need to amend their debt
facilities over time.A lot of the finance that
we do in this space is event driven.It’s typi-
cally acquisition financing,leverage buyouts
ON THE RISE
Data from Deloitte’s Alternative Lender Deal Tracker show the
number of deals in Germany on a last-12-months basis has
increased compared with three years ago
n Q3 n Q4 n Q1 n Q2
Q2 14
LTM
No.ofdeals
35
30
25
20
15
10
5
0
Q2 16
LTM
Q2 15
LTM
Q2 17
LTM
€10m-€75m

8. Private Debt Investor7
KEYNOTE
MID-MARKET PRIVATE DEBT
and management buyouts, and therefore
we regularly work with private equity
sponsors.As a result, about two thirds of
the financing in the private debt market
is leverage buyout financing.We differen-
tiate ourselves from our peers by having
originators based in the local countries,
by leveraging the BlackRock network to
supplement our sourcing efforts, and we
benefit from being part of a large platform
and also robust risk management systems
and infrastructure.Borrowers also appreci-
ate the fact that we’re a well-known brand
with a focus on long term patient capi-
tal, who can support their business needs
throughout their lifecycle and across all
markets (private debt, high yield, public
debt, investment grade, public equity).
Q
How do you see the relationship
between banks and private debt inves-
tors evolving in the future?
SC: I think we are going to see more
partnerships between the banks and the
funds.We’ve started to see that in the UK
and we’ve seen more and more of that in
Germany. Our investment team has been
approached by many banks who would like
to partner with us.When you think about
it,we’re not a direct competitor of banks as
theyarenowmoreinterestedintheancillary
services.We’re not looking to take away that
side of the relationship,we just focus on the
investing.So quite often they’d rather part-
ner with us than another bank,for example,
where they would be competing for a small
share of ancillary services.We have many
on-going relationships with these banks and
therefore both sides value the opportunity
to engage in this sphere as well.
Q
How does your European platform com-
pare to your US private debt business?
SC:The US is a single market and we have a
larger team of around 20 people dedicated
to middle market private debt. In Europe
we are still growing, currently we have 10
people dedicated to private debt but we
will be looking to add early next year.We
have investment professionals in the local
countries,including Germany,France and
the UK and we have dedicated coverage
to the Benelux region, Italy and Spain. I
think it’s important to have local exper-
tise and this is consistent with BlackRock’s
approach overall.
Q
What is the average size of your invest-
ment? Can investments in smaller com-
panies be a challenge?
SC: There’s this misconception because
BlackRock is a big firm, with significant
assets under management, that we focus
only on large-cap deals, but we are quite
nimble on the private debt side with a focus
on middle market companies.The minimum
investment size is around €20 million and
our funds typically lend to companies that
have revenues between €50 million to €500
million,and an EBITDA between €7.5 mil-
lion and €75 million per annum. So, it’s
quite a broad range of companies across
all sectors, the funds we manage do small
deals and have the capacity to do larger
transactions as well. We enjoy working
with companies where we can support their
long-term growth needs regardless of size.
Q
Are you seeing an increase in non-spon-
sored deals too?
SC:About a third of what we do is spon-
sorless finance. I think that’s an area with
tremendous growth potential. These
opportunities are more difficult to identify
and take a little bit more time to analyse
as the level of the diligence isn’t quite the
same as when you are working with a pri-
vate equity sponsor. However, sponsorless
opportunities tend to come out with very
attractive terms,so I think that side of the
market probably has a lot more potential
to grow. It will take time, because a lot
of these companies have been dependent
on banks for many years and the level of
awareness and understanding of working
with alternative lenders is still quite low
across Europe.This type of financing is typ-
ically more expensive,however in exchange
for the premium they can work with a flex-
ible team who can act quickly.Sponsorless
finance requires more origination work,
alternative lenders need more investment
professionals and local resources. It also
helps that there are more debt advisors
serving this market and given the oppor-
tunity for our investors, we will continue
to invest in this area.
Q
Currently the UK is the largest private
debt market in Europe but will that
always be the case?
We think the UK still has a lot of potential
for private debt, it’s the most established
market with a large private equity com-
munity that has bought into the concept
of private debt.There is also a deep profes-
sional community: debt advisers and law-
yers that really understand private debt.
For these reasons, we believe the UK will
continue to be an important market for
private debt.In the short term,everybody’s
waiting to see what’s going to happen with
Brexit and subsequently the economy,and
we are starting to see signs of a slowdown
in consumer demand.When you’re look-
ing at the UK, you need to be in a posi-
tion that is a little bit more defensive.We
are still very interested in the UK, but I
think it makes more sense as part of a pan-
European diversified strategy. n
“WHEN YOU THINK ABOUT
IT, WE’RE NOT A DIRECT
COMPETITOR OF BANKS
AS THEY ARE NOW MORE
INTERESTED IN THE
ANCILLARY SERVICES.
WE’RE NOT LOOKING TO
TAKE AWAY THAT SIDE
OF THE RELATIONSHIP,
WE JUST FOCUS ON THE
INVESTING”

9. 88
ROUNDTABLE
EUROPE
Competition is tough and deal terms are raising eyebrows.
But Europe’s private debt professionals are also seeing
opportunity in specialisation, regulation and the growth of
markets outside the besieged UK. Andy Thomson reports
Riding
the bumps

10. December 2017 / January 2018 | PDI Europe Report 99
ROUNDTABLE

11. Private Debt Investor1010
EUROPE
ROUNDTABLE
I
t’s a sign of confidence in the private
debt market that, while PDI’s Euro-
pean roundtable discussion opens
with talk of competition,it quickly turns
to opportunity. Plenty of fund managers
are throwing their hats into the ring and
deal structures are becoming the subject
of much scrutiny.But players are still find-
ing enough niche areas and favourable
regulation to keep them happy.
Adrian Cloake,group chief investment
officer at London-based fund manager
LCM Partners,says multi-strategy hedge
funds have increasingly been seen on his
radar since 2010, especially in the Span-
ish and Italian markets. However: “Only
a certain number succeed.When you’re
buying loan portfolios you need a track
record and experience and it’s telling that
we’re now picking up secondaries from
them as some fail and retrench.”
Cyril Tergiman, a partner at EQT
Credit in London, says people need to
be careful about the highly competitive
sponsor-led direct lending market in
particular – especially with the politi-
cal turmoil currently enveloping the UK,
Europe’s largest private debt market.
“It’s not a mature market in Europe as
a whole, with the UK and France lead-
ing volumes,” notes Tergiman. “The UK
is a consumer-driven opportunity and,
because of Brexit, there is weakness in
that space. People should be worried
about having over-exposure to it.” But
Tergiman also notes pockets of value,
including in special situations.
Luke McDougall, a partner in the
finance and leveraged finance practices
at law firm Paul Hastings in London,cites
regulation as providing increased oppor-
tunity outside of the UK.
“The regulators are opening up to non-
bank lending and traditionally creditor-
unfriendly markets, such as France, are
becoming more benign,” he says. “The
outlook has changed and the demand for
lending opportunities in France is there
as well.”
NERVOUS BANKS
Christopher Bone, managing director
and head of private debt in Europe at pri-
vate markets firm Partners Group, also
acknowledges the potential for regula-
tory changes to bring benefits. “If there
is uncertainty, the banks get nervous and
price in more risk,” he says.
“In 2011 there was the trouble in Spain
and Greece and, when the market is like
that, we tend to find the most interest-
ing opportunities, with a good example
being the Securitas Direct mezzanine deal.
However,while there is quite a lot of politi-
cal and regulatory uncertainty these days,
things haven’t frozen as much as we’d like.”
While competition is acknowledged to
be at a high level in many areas of the asset
class, it is also clear that new entrants are
still keen to try to grab a slice for them-
selves.“WehaveseeninterestfromUSfund
managerstryingtobreakintoEurope,”says
Diala Minott, a partner and colleague of
McDougall in the corporate department
at Paul Hastings.
“There are more options for fund struc-
tures now,it’s not as constrained as it used
to be.It used to take a long time to set up
private debt funds as the track record was
not there but regulatory change has made
things easier. US firms in Europe are less
nervous than they used to be.”
Inanassetclasswheretherearesomany
differentstrategies,witharangeofriskand
return profiles,the ability to be flexible is
cited as a key differentiator.
“We use our flexibility to address the
best opportunities at each point in the
CHRISTOPHER BONE
ADRIAN CLOAKE
Group chief investment officer, LCM Partners
• Based in London and a member of the firm’s private debt
investment committee
• Has been with Partners Group since 2010 and has 17
years of industry experience
• Previously with AlpInvest Partners, RBS,
PricewaterhouseCoopers and Ernst Young
• Partners Group has over $12bn AUM in private debt and
has invested over $18bn globally in credits since 2003
• A British national based in London, Cloake has 20 years of
industry experience
• He was previously at Arthur Andersen Corporate Finance
• LCM invests in performing, rescheduled and non-
performing loans
• The firm’s loan servicer, Link Financial Outsourcing, has
over 550 staff across 10 European offices
“IF THERE IS UNCERTAINTY, THE BANKS GET NERVOUS
AND PRICE IN MORE RISK”
“INVESTORS ARE ALSO LOOKING CLOSELY AT THE
TEAM AND INCENTIVISATION LEVELS, NOT JUST FOR
THE SENIOR MANAGERS BUT ACROSS THE BOARD”
Managing director and head of European private debt
business, Partners Group

12. Private Debt Investor1111
EUROPE
ROUNDTABLE
cycle,”says Jaime Prieto,managing partner
at pan-European fund manager Kartesia.
“We invest across Europe, targeting dif-
ferent markets that are at the right point
in the credit cycle and when we see less
competition.We lend directly to compa-
nies with growth plans and also buy loans
from lenders exiting companies and mar-
kets when they move away from the origi-
nal lender’s standard loan parameters.” By
doing so, Kartesia aims for a 15 percent
target return.
A NON-STARTER
Prieto adds that the non-sponsored market
is another area where Kartesia sees oppor-
tunity at the current time. “The develop-
ment of the non-sponsored market will
take time as you have to establish credible
relationships,”he says.“Around 30 percent
of our portfolio is now non-sponsored and
over the next 10 years it will continue to
be a significant part of our portfolio.”
But while Kartesia’s focus is on the
medium and smaller end of the market
in terms of deal size, Partners Group is
looking for larger tickets. “We put a pre-
mium on size and think bigger companies
are generally higher quality,”says Bone.“It’s
more aggressive on deal terms at that end
but we like repeat dealflow and if we can
be seen as a solution provider for sponsors
we know they will work with us again.”
All those around the table acknowledge
the strength of the fundraising market,
with Bone making the point that increas-
ing interest in Europe fromAsian sources
of capital has added even more momen-
tum.The concern is whether there is the
demand to meet the supply of capital
coming into the asset class.
“There is not a direct correlation
between capital raised and investment
opportunity,”suggestsTergiman.“In 2008
the investment opportunity was great
but you couldn’t get capital from inves-
tors. Now you can get the capital, but
can you spend it wisely?You need to stay
disciplined and rigorous on sourcing, stay
disciplined on risk and relative value, and
fight for the deals you believe in. I sense
there is a degree of discipline slippage in
risk management.”
Conscious of that need to maintain dis-
cipline and not get drawn into scrapping
furiously for every deal that comes along,
fund managers appear to be looking for
ways to buy themselves more time. “We
have seen a spate of investment periods
being extended for firms that have strug-
gled to get the money away,” says Minott.
“Investors have pushed back but ultimately
conceded as they want quality deals.”
She adds that extensions are typically
18 months but sometimes as much as two
years on top of original investment periods
of between three and five years.
STUCK IN THE MIDDLE WITH WHO?
There is a sense that some funds may be
finding themselves stuck in the middle of
the larger players and niche boutiques and
are struggling to justify their place in the
market.
“In direct lending, there is an emerg-
ing split,” says McDougall.“There are the
dealflow players such asAres,Alcentra and
ICG which have the geographic coverage,
track record and resources which act as a
multiplier effect, and they can easily raise
money and deploy it.Then you have the
boutiques which can only operate in cer-
tain sectors such as technology and soft-
ware, where they have an advantage over
the dealflow players.
“But if you have no particular way of
providing a better offering and you don’t
have scale,then it’s tough.Managers should
be mindful of this emerging split.Those
who want to be Ares simply can’t be, and
DIALA MINOTT
LUKE McDOUGALL
Partner, corporate department, Paul Hastings
Partner, corporate department, Paul Hastings
• A corporate partner based in London
• Specialises in structured finance transactions including
CLOs, CDOs and bespoke hybrid mid-market CLO type
funds
• Her practice covers debt and credit funds with a particular
focus on direct lending, CLO equity and risk retention funds
• Covers regulated and unregulated funds, both onshore and
offshore, with a particular expertise in Luxembourg funds
• Based in London, a partner in the firm’s finance and
leveraged finance practices
• Practice focused on UK and cross-border acquisition
finance and restructuring
• Experience in acting for senior lenders, junior lenders and
borrowers on capital structures, portfolio acquisitions and
specialist financing transactions
“THERE ARE MORE OPTIONS FOR FUND STRUCTURES
NOW, IT’S NOT AS CONSTRAINED AS IT USED TO BE”
“THOSE WHO WANT TO BE ARES SIMPLY CAN’T BE,
AND YOU CAN’T BE A BOUTIQUE UNLESS YOU’RE VERY
SMART IN A PARTICULAR SECTOR”

13. Private Debt Investor1212
EUROPE
ROUNDTABLE
you can’t be a boutique unless you’re very
smart in a particular sector.”
There is a view that, in the direct lend-
ing market,you would expect firms to nat-
urally gravitate to the larger end.However,
Prieto questions how effectively you can
maintain relationships with advisors and
borrowers as you move up the deal size
spectrum.“It’s easier to do a €100 million-
plus deal and get fees at the beginning, I
understand that,”he says.“But we want to
focus on the smaller end and we think that
will pay off in the end. In debt, when you
go too large, you end up competing with
other instruments.”
As competition at the larger end heats
up,movement from sponsors is tending to
be in the opposite direction as many larger
players dive down into the mid-market.
What they do not seem to be changing as
they migrate down the deal size ladder is
their attitude to deal structuring.
“Sponsors are going down to the small
end of the mid-market and imposing the
same terms you’d find at the larger end,”
says Bone.
“Some of the terms in the mid-market
are more aggressive than at the large end,”
adds McDougall. “The ability to say what
is market standard is less clear than it used
to be because there are so many sponsors
andsomanystrategies.Plus,therearesome
very aggressive lawyers and they are push-
ing at an open door.
“Where does that leave private debt
funds today? There are barriers to entry
on anything competitive.Terms are more
aggressive than they ought to be for the
size of deal, and there is more aggression
in the mid-market in Europe than there
is in the US.”
THERE MAY BE TROUBLE AHEAD
Tergiman sees warning signs.“Some com-
panies are disconnecting from budgets
and business cases.We see some that may
encounter cash issues early next year –
and those cash issues will be seen before
covenant problems given how loose the
covenants are. I think there is some risk
amnesia around.”
However, while there are obvious wor-
ries around deal terms,there is also a view
thatmitigatingfactorsshouldbetakeninto
account.“It’s sometimes made to look like
a gloomy picture but equity cushions are
substantial and put the sponsors on the
hook,” Bone points out.
McDougall adds that “leverage has not
stretched very high.You see deals being
done at around 5.5-6 times EBITDA com-
pared with the 7.5 times we were regularly
seeing in 2007.So there is some discipline
in that, even though I’m concerned that
discipline is being tested in other areas.”
At the fund level,leverage is now being
increasingly used by providers of credit.
“We are seeing more and more leverage
in funds,” says Minottt. “It used to be a
dirty word, but in the last 18 months we
have seen leverage pre-consents being built
into documentation. European investors
arestillfairlynervouswhereasUSinvestors
are not. Nonetheless, we are seeing inves-
tors getting more and more comfortable
withAIFMD because they feel thatAIFMD
provides a lot of investor rights and protec-
tions that will ultimately get them more
comfortable with leverage.”
“Investors are comfortable with leverage
as long as it’s properly used,” adds Cloake.
“So we do not think that the leveraging of
non-performing loans is appropriate, for
example.”
With so much talk – whether justified
or not – about the‘end of the cycle’, how
are those around the table planning for dif-
ferent circumstances?“You need to be very
JAIME PRIETO
CYRIL TERGIMAN
Co-founder and managing partner, Kartesia
Partner, EQT Credit
• Based in London, was a founder of the firm in 2013
• Previously worked at French private equity firm LBO
France and ICG
• Also had spells at McKinsey Co and Lucent Technologies
• Kartesia recently closed its fourth fund on its hard cap of
€870m, raising 70% more capital than its predecessor
• Joined EQT in 2008 and is a partner based in London
• Member of EQT’s Credit Partners Investment Committee
• Previously worked in the leveraged finance teams at Citi
and BNP Paribas in London
• Has experience in structuring and negotiating financing
for leveraged buyouts, levered corporates and
restructurings
“THE DEVELOPMENT OF THE NON-SPONSORED
MARKET WILL TAKE TIME AS YOU HAVE TO ESTABLISH
CREDIBLE RELATIONSHIPS”
“THERE IS NOT A DIRECT CORRELATION BETWEEN
CAPITAL RAISED AND INVESTMENT OPPORTUNITY”

14. Europe Report Highlights 1313
ROUNDTABLE
close to management so you don’t need shock therapy when
things turn down,”says Prieto.
“You also need tools to help the company whether that’s addi-
tional capital, extra equity, buying out one or two creditors or
corporate governance – and you need to stay put for three to
five years to see things through to recovery.
“I don’t think there will be a crash like 2012-13 but we will
have some underperformance.Some lenders have not built the
technical solutions that would allow them to help companies.”
McDougall ponders whether a downturn would precipitate
a division of responsibilities within fund management groups.
“We saw a huge internal reorganisation of the banks after the
crisis.You can’t sweat existing assets at the same time as finding
new deals because it sucks up all your time.The banks ended up
with separate teams.Will credit funds do the same?”
Tergiman thinks investing in special situations requires an
increasingly broad skill-set. “To identify attractive opportuni-
ties and execute on them you need a broad sourcing network
and be able to operate across the capital structure – you could
propose creative financings to solve cash needs and ease com-
panies through difficult periods for example, or in the case of
restructurings be able to think beyond the legal aspects and
execute on value creation plans.”
LPs ON THE LOOKOUT
While they undoubtedly are watching like hawks for signs of
a downturn, investor support for private debt appears to be
stronger today than it has ever been.But what key messages are
those present picking up from the LP community?
“The appetite for private debt remains strong but one LP told
me he had had around 300 pitches from private debt managers,”
reflects Cloake.“Therefore, they have to be discerning and are
looking for track record through the last downturn.Transpar-
ency is a big issue as are quality of client service and reporting.
“Investors are also looking closely at the team and incentivisa-
tion levels,not just for the senior managers but across the board,
including support functions.They want to see alignment with
the objectives of the fund across the whole firm.”
“The way credit funds are incentivised is very important,”
agrees Bone.“If the incentivisation is not aligned as it should be,
in a downturn scenario you could see some unusual behaviour
which might lead to some consolidation in the industry.”
But while the next downturn could see some major rami-
fications for the asset class, there is a danger in allowing it to
dominate your thoughts.It was economist Paul Samuelson who
came up with the quote aboutWall Street predicting nine of the
last five recessions.The cycle will surely turn, but it still might
take a while yet. n
WHATEVER NEXT?
The roundtable identifies trends to look out for
RATINGS FOR INSURERS
“A LOT OF INVESTORS SUBJECT TO SOLVENCY II
REQUIRE PORTFOLIOS TO BE RATED FOR OPTIMAL
REGULATORY CAPITAL TREATMENT. CONSEQUENTLY,
WE ARE SEEING THE CREATION OF QUITE DIVERSE
MIXED POOLS OF ASSETS. IT MAKES FOR SOME
INTERESTING STRUCTURES AND GIVES THEM THE
RATING THEY REQUIRE.”
Minott
MORE NICHE FIRMS
“THERE ARE NOT YET AS MANY NICHE OPERATORS IN
EUROPE AS IN THE US.THERE ARE SOME HEALTHCARE
AND PHARMACEUTICALS-FOCUSED STRATEGIES,
WHICH WILL WORK IN SOME MARKETS BUT NOT
IN OTHERS. NO DOUBT THERE IS MORE ROOM FOR
GROWTH.”
McDougall
THE CHARGE OF TECHNOLOGY (BUT BANKS MAY LEAD IT)
“AT THE SMALLER END OF THE MARKET THERE ARE
A MYRIAD OF NEW TECHNOLOGIES EMERGING AND
NEW WAYS OF LOOKING AT FINANCIAL SERVICES
THAT COULD FEED INTO PRIVATE DEBT. BUT PEER-TO-
PEER LENDING, FOR INSTANCE, IS STILL A DOT ON
THE LANDSCAPE AND THE BANKS, WHICH ARE ALSO
INCUBATING THE NEW TECHNOLOGIES, WILL PROVIDE
FORMIDABLE COMPETITION.”
Cloake
DEALS UP DOWN UNDER
“WE’LL SEE FURTHER GLOBALISATION OF THE PRIVATE
DEBT MARKET.THE AUSTRALIAN MARKET IS ON OUR
MINDS – HAVING RECENTLY DONE A UNITRANCHE
DEAL THERE WITH KKR – AND WE THINK IT’S QUITE
UNTAPPED. CONSOLIDATION COULD ALSO BE A THEME
AND THEN THERE’S THE START OF THE DISTRESSED
CYCLE, WHENEVER THAT MAY BE.”
Bone