Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
  • Print
Breadcrumb
  1. Home
  2. MONEY MANAGEMENT
April 16, 2018 01:00 AM

Competition heating up in direct lending market

European banks joining fray after years of reticence, and the market is getting crowded

Sophie Baker
  • Tweet
  • Share
  • Share
  • Email
  • More
    Patrick Marshall is seeing more banks returning to the loan market after a long hiatus.

    Money managers are seeing a resurgence in European banks' appetite to provide loans in parts of the direct lending market, adding another layer of competition to an already crowded market.

    Sources said they have seen some European investment and commercial banks' appetites to lend normalize, following years of reticence as they labored to comply with regulations designed to stabilize and derisk the banking system after the financial crisis.

    While the trend varies by country and market segment, competition is particularly acute in the senior-secured part of the private debt market — an area in which sources said direct lending managers already faced hurdles because banks have advantages including existing relationships with borrowers. Sources also highlighted that direct lending is a highly competitive market just from the choice of strategies available from money managers. Data by Preqin Ltd. show that, at the start of April, there were 348 private debt strategies in the global market looking to raise $168 billion from investors. Direct lending strategies account for 170 of that total, targeting $74 billion in assets. On the banking side, the Association for Financial Markets in Europe's high-yield data report shows leveraged loan issuance totaled €195.3 billion ($233.9 billion) in 2017, up 37.9% year-over-year.

    "The bank retrenchment which was evident several years ago has now slowed or stopped as bank balance sheets have been repaired," said Patrick Marshall, head of private debt and collateralized loan obligations at Hermes Investment Management in London. "In fact, some banks which had exited the leveraged loan market or had mothballed their leveraged loan functions are now actively re-entering the market and taking share."

    The onset of rules after the global financial crisis, such as Basel III, saw banks pull back to their home countries.

    "That trend is ongoing but certain in the U.K.," said James Pearce, head of direct lending at M&G Investments in London. "And pre-crunch, banks typically held large, single-name positions; where a small number lost money was because of a high concentration in single names. Fast-forward to today and I think we've seen bank market appetite has ​ normalized. They are all looking to grow market share and position, but I wouldn't say their risk appetite has materially changed — it has normalized." After the crisis, he noted, banks had "overcorrected."

    Since the financial crisis there has been "€600 billion ($739.2 billion) of shrinkage of European banks' balance sheets," covering lending to non-financial corporates, said Fabian Chrobog, managing partner at North Wall Capital LLP in London.

    Banks had in recent years been concentrating on simpler, larger deals with key clients. But as the market normalizes, "banks are once again competing with direct lenders," Mr. Chrobog said.

    A resurgence in bank lending was identified as the biggest challenge to the direct lending market over the coming years by 24% of 80 respondents to a recent survey of private debt and private equity investors in the U.K., Europe, North America, Africa, Asia and the Middle East by fund trust and corporate services provider Intertrust Group BV, Amsterdam.

    "Our study shows that despite the rise of private debt funds, professional investors believe that traditional banks will continue to be a dominant force in lending," said Michael Johnson, St. Helier, Jersey-based director, head of funds-Channel Islands, at Intertrust.

    But there are regional variations, said Mr. Johnson and other sources, with Germany still dominated by the banks, which are "in a strong position to re-enter the market," Mr. Johnson said; while the U.K. market has been disintermediated by the private debt managers. "In contrast, U.K. banks that have retreated from traditional branch networks are much less likely to be able to regain this role for themselves, and so will need to turn to partnerships with private debt managers," Mr. Johnson added.

    Taking notice

    The resurgence of banks' appetite in Europe has not gone unnoticed across the pond. Jim Neumann, partner at Sussex Partners U.K. Ltd. in New York, said both investment and commercial banks have switched on "some of their lending desire. Part of that is driven by net interest margins getting higher as rates get higher," and while it has been a "slow process ... I've seen deals done where investment banks are now stepping back in."

    However, the funding gap that was left by banks' retrenchment led to a "structural change to the European midmarket," Hermes' Mr. Marshall added. He said there are now "two distinct competing product segments in the market, the larger being senior-secured loans," which is dominated by banks, and the smaller segment unitranche loans, where "fund lenders are prevalent" due to this part of the market being higher risk and too capital-intensive to attract banks.

    "Consequently, the structure of the midmarket has now settled with banks being very active and competitive with strong lending appetites in the larger senior-secured segment where (direct lending) funds have been less effective in gaining a foothold due to less ability to differentiate themselves," Mr. Marshall said.

    "The competitiveness of banks has strengthened significantly over the last three years as their balance sheets have improved and it is reasonable to assume that this newfound strength and competitiveness ... will remain a feature of the senior-secured loan market in the future," he added.

    Hermes executives believe banks will remain dominant in the senior-secured loan market because of a number of advantages they have over direct lenders: geographically dispersed origination teams, existing and long-term relationships with borrowers, and track records.

    And the implications of those changes are that "it will remain a challenge for fund lenders to access the senior-secured midmarket because of the structural advantages that banks have, combined with their increasing appetite to lend," Mr. Marshall said.

    That challenge has been addressed by Hermes' private debt unit through a formal partnership with banks "to provide us with senior-secured loan origination across Europe, rather than competing with these banks," Mr. Marshall said.

    For the middle market segment, M&G Investments works with The Royal Bank of Scotland PLC, which originates deals. "We are the same level of seniority in the structure and get paid the same," Mr. Pearce said.

    Another trend

    Intertrust's Mr. Johnson said another trend in partnerships within the direct lending market is "how banks are increasingly promoting bridging finance to private debt managers to allow them to provide working capital to the funds."

    This trend is interesting as they are enjoying the success of direct lending, albeit lending to the fund rather than "the street," Mr. Johnson added.

    And for those direct lenders that do not wish to partner, there are still areas where they will be the preferred counterparty.

    Banks "have become a bit more aggressive in terms of their leverage terms over the last years," said Kirsten Bode, co-head of Muzinich & Co.'s pan-European private debt fund, based in Zurich.

    "But if they provide the working capital funding there is still an opportunity for direct lending funds to provide (other facilities) or being faster and more flexible," she added.

    "There are still a huge number of situations that cannot be satisfied by the banks. The market just needs to be educated to some extent" on the options, she said.

    Related Articles
    Private credit strategies in stratosphere
    Managers targeting alternatives firms
    Everyone wants a piece of the action
    Everyone wants a piece of the action
    Lexington Retirement looking for senior direct lending strategy
    Commentary: Private debt — a source of returns in a low-return world?
    Commentary: What institutional investors need to know about CRE CLOs
    Recommended for You
    Badjie_Malick_2023_750-main_i.jpg
    Robeco chooses new global head of sales and marketing
    BlackRock_Artificial_Intelligence_1550_i.jpg
    BlackRock says it's building – not buying – new AI-powered tools to stay competitive
    state_street_logo_1550-main_i.jpg
    State Street planning to lay off 1,500 employees
    CITs Poised to Shine Across the DC Stage
    Sponsored Content: CITs Poised to Shine Across the DC Stage
    Sponsored
    White Papers
    What a Fed pivot and ‘higher for longer’ mean for emerging markets
    A Guide to Home Equity Investments: The Untapped Real Estate Asset Class
    How to Modernize a School District Retirement Plan
    Q4 2023 Credit Outlook: Price Is What You Pay, Value Is What You Get
    There's More Than One Way to Be a Climate Investor
    Exploring the Commercial Application of Artificial Intelligence
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    October 23, 2023 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
    • Print