Money managers running direct lending strategies are turning their attention to Europe in an effort to capture new and developing opportunities.
Sources said there has been an explosion in recent years, not only in direct lending strategies, but in the number of players in the market — both on the money management side and on the institutional investor side. According to hires reported by Pensions & Investments, institutional investors have committed or invested around $2 billion of assets in direct-lending-focused strategies in the past six months.
Data from provider eVestment LLC's origination and financing universe show cumulative net inflows of $2.1 billion in 2015, following inflows of $672.4 million in 2014. This year through February, there were net outflows of $87.5 million.
Money managers have found enough interest to embark on multiple rounds of fundraising. And Schroders PLC this month acquired a 25% stake in Dutch direct lending firm NEOS Business Finance — an alternative debt financing platform for small and midsize enterprises in the Netherlands — to capitalize on the thirst from corporations for non-bank financing.
“Europe is still at a relatively early stage in its journey of structural change whereby less of the debt finance provided to midmarket companies comes from banks, and is increasingly provided by alternative lenders” said Anthony Fobel, a partner and head of private debt at BlueBay Asset Management LLP, in London. “However, this is set to grow quite dramatically over the next few years.” Mr. Fobel said there is about e50 billion ($57 billion) in assets under management in direct lending strategies in Europe — compared with “practically zero” in 2009-"10.
Sources put bank financing of the U.S. economy at around 20%, with the remainder coming from non-bank capital. That proportion is flipped in Europe, with about 80% coming from bank financing, and Mr. Fobel said midmarket companies in Europe are almost 100% financed by the banks.
In December, BlueBay announced it had completed the fundraising of its Direct Lending Fund II in less than one year, closing at e2 billion — its revised target. The investors were all institutional investors, with allocations from the U.K., U.S. and Asia.
“The opportunity had been U.S. — we now believe, over the next three years, the greater opportunity is in Europe,” said Declan Canavan, Europe, the Middle East and Africa head of alternatives at J.P. Morgan Asset Management in London.
The key is banking regulations in Europe, such as Basel III, which have been pushing banks to deleverage. “One opportunity we are looking at in detail is the leasing space — in Europe most leasing platforms are owned by banks,” Mr. Canavan said. While the sector is performing, there are questions over whether it is “performing enough (for banks) to offset the balance sheet exposure needed to run that business. As there becomes more pressure on banks' capacity to lend, it is interesting. And regulators are very, very happy and encouraging (of) more private capital participation in Europe.” He said there are opportunities in leasing across multiple sectors, from aircraft to office equipment.