Private debt funds expand market share in Germany

Private debt funds have expanded their market share in the German mid-cap LBO market significantly in 2017. This development has been driven in large part by the widespread use of first-out, second-out unitranche structures that allow banks to work together with debt funds to finance a wider range of deals.

Global M&A adviser GCA Altium compiled data on European financings in 2017 and found that private debt funds expanded their share of deals in the German mid-market from 16% in 2016 to 32% in 2017. Johannes Schmittat, managing director of the debt advisory and restructuring business in Frankfurt, explained this development to Unquote for its Annual Buyout Review:
"The main development that's allowed them to do this [expand market share] is widespread use of unitranche with first-out, second-out structure where cheaper bank debt is used to lower the average margin."

Whenever you have a new instrument in the debt market it tends to drive up prices and valuations as well" - Hugo De Bruin, Gilde Healthcare

BlueBay was the most active fund providing unitranche in Germany last year, completing seven financings for seven different GPs but working with German bank Berenberg for the senior debt element on three occasions. The second most active, Alcentra, completed five financings but mostly underwrote the whole package itself, using Berenberg only once and HSBC on one other occasion.

Across Europe, GCA recorded 179 unitranche financings in 2017, up from 102 in 2016. Germany saw the largest market growth of 166% compared to 2016, while the UK market grew 71%, France 68% and Benelux 50%. "You see a lot more unitranche in both Benelux and DACH," says Gilde Healthcare's Hugo De Bruin, also speaking to Unquote as part of the Annual Buyout Review. "Whenever you have a new instrument in the debt market it tends to drive up prices and valuations as well."

Tailored financing
However, it is not always simply a case of offering more leverage. GCA’s Schmittat says debt funds also like to finance deals that banks would not normally be able to: "Two or three years ago, debt funds were doing mostly high-quality deals and offering one extra turn of leverage compared to banks to get the deal. In Germany now, they are looking at the trickier deals that banks wouldn't finance and so they are also expanding their market share by expanding the market [itself]."

IK Investment Partners’ Anders Petersson says that, although they are readily available, IK only makes use of these instruments when the structure makes sense for the investment: "There are a large number of debt and credit funds in the German market now. We see it more and more. However, we only use it when it fits. Of the three deals we've done this year, two were all-senior structures and only Studienkreis used private debt," he says, referring to the GP’s acquisition of the private tutoring service from turnaround firm Aurelius Equity Opportunities. IK secured unitranche from EQT Credit for the deal, with super senior term debt provided by Berenberg.

GCA’s Schmittat says banks are coming to terms with working with funds more, and highlights Berenberg as one of the earliest movers. "At first banks were resistant to working with debt funds to provide these structures," he says. "But they have now decided it's better to keep the relationship and be in the deal than not be in the deal. Berenberg was one of the first, but now Commerzbank and others are doing it as well."

Finally, Schmittat predicts this trend will continue throughout 2018: "I would expect that debt funds will continue increasing their market share into 2018. It's possible that there's a weak quarter where deals slip into the next one. But it's an interesting product they're offering and PE funds will need the extra leverage to pay the high multiples that are now market standard."

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