Private debt moves onto the radar screen of CFOs

Germany is tradi­tio­nally a stron­gly bank-driven market. In the past four years, around three quar­ters of credit tran­sac­tions were hand­led by banks, and last year this figure even rose to over 80 percent. In the first half of 2017, howe­ver, loan funds were able to increase their market share (measu­red by the number of deals) back to 30 percent. In addi­tion, we are seeing a signi­fi­cant shift from mezza­nine to unitran­che finan­cing in the private debt area. These are curr­ently at record levels. This shows that small and medium-sized enter­pri­ses are incre­asingly reco­gni­zing the advan­ta­ges of private debt finan­cing for them­sel­ves. Germany has a unique land­scape of such compa­nies world­wide. At the same time, in the low inte­rest rate envi­ron­ment, insti­tu­tio­nal inves­tors are looking for alter­na­tive invest­ments with regu­lar income and a solid risk/return profile. 

Idin­vest Part­ners has provi­ded finan­cing to more than 4,000 SMEs across Europe over the past 20 years. We ther­e­fore see an inte­res­t­ing market from seve­ral points of view that fits our DNA and ther­e­fore expect corre­spon­ding growth poten­tial. In addi­tion to our tradi­tio­nal debt solu­ti­ons, we will also tap into this market with product inno­va­tions that the Euro­pean market has not yet seen: our new fund offers highly inno­va­tive finan­cing solu­ti­ons for asset finance, i.e. the finan­cing of produc­tion faci­li­ties in invest­ment-inten­sive industries.

The German private debt market is still rather under­de­ve­lo­ped by Euro­pean stan­dards, espe­ci­ally compared to the UK and France. This is due, among other things, to the afore­men­tio­ned loyalty of SMEs to tradi­tio­nal banks. Howe­ver, regu­la­tory requi­re­ments — espe­ci­ally Basel III — and stric­ter lending condi­ti­ons are curr­ently chan­ging this, and banks are beco­ming more reluc­tant to lend. At the same time, Germany is going through a very successful econo­mic phase, which is largely driven by small and medium-sized enter­pri­ses. These compa­nies are asking them­sel­ves how they are to finance growth and inter­na­tio­nal expan­sion — the keyword being “hidden cham­pi­ons,” of which Germany has a parti­cu­larly large number. In addi­tion, German SMEs conti­nue to show a certain reluc­tance towards private equity firms, which have so far been the “main buyers” for unitran­che finan­cing in the course of LBOs and MBOs. Among SMEs, howe­ver, the realiza­tion is slowly gaining ground that private debt is an inte­res­t­ing finan­cing method even without a PE spon­sor, espe­ci­ally for growth financing.

There are three main advan­ta­ges: Speed, flexi­bi­lity and the lack of alter­na­ti­ves to bank credit. Private debt finan­cing can be concluded within five to eight weeks because only one nego­tia­ting part­ner is invol­ved, there is only one single loan agree­ment for unitran­che finan­cing and — keyword flexi­bi­lity — it is a tailor-made and custom-fit solu­tion for the company and its situa­tion. This is also what distin­gu­is­hes private debt from bank loans: private debt repres­ents an alter­na­tive for situa­tions in which banks cannot or do not want to get invol­ved, either because of regu­la­tory condi­ti­ons or because they cannot delve deeply enough into the complex situa­tion of a fast-growing company. In addi­tion, loan funds have the flexi­bi­lity to provide smal­ler volu­mes than, say, a high-yield bond.
In addi­tion, there is another decisive “soft” factor: for us as a lender, close coope­ra­tion with manage­ment is a top prio­rity. We do not invest in “assets”, but in compa­nies. Trust in manage­ment plays just as big a role as perfor­mance metrics. We share the entre­pre­neu­rial philo­so­phy and are active part­ners of the borro­wers. This coope­ra­tion is at the same time part of our risk moni­to­ring and mini­miza­tion for lenders.