Alcentra takes keys to three PE-backed companies this year

But behind the scenes of negotiations between its former and new owner, Alcentra itself was busy executing a series of acquisitions with limited precedent. This year, Alcentra has taken the keys to at least three UK-based companies to which it was a lender, shifting its position in capital structures in a last-ditch effort to avoid losses on credits that breached covenants, Unquote's sister publication Dentwire reports.

This comes as Alcentra’s new owner is attempting to breathe fresh life into the alternative lender after last year’s failed attempt to fundraise, followed by an exodus of senior staff.

Alcentra’s owner Franklin Templeton, which backs Benefit Street Partners, declined to comment when contacted by Debtwire.

Alcentra’s lifeline to Lifetime
Alcentra’s most recent move to swap debt for equity in a portfolio company was revealed just weeks ago. In November, it was reported that Lifetime Training’s private equity backer Silverfleet Capital had handed over the keys to the business to Alcentra. The decision was made amid a regulatory probe into England’s largest apprenticeship-training provider after concerns were raised around over-claimed government funding, which could reportedly result in a GBP 13.7m clawback. Earlier in the year, Lifetime Training was downgraded by the UK’s education watchdog, whose report criticised the firm’s focus on financial performance over quality.

Lifetime Training was extended a GBP 76m unitranche facility by Alcentra in 2016, which part-funded Silverfleet’s leveraged buyout of the organisation. This deal carried relatively conservative leverage of around 5.5x, according to a source and a document seen by this news service. This implies that, at the time, Alcentra structured the deal off EBITDA in the region of GBP 13m – GBP 14m.

However, Lifetime Training breached covenant when its EBITDA – not including exceptional items – dipped as low as GBP 2m, which significantly increased leverage as a result, according to the source. This prompted Alcentra to take control of the business after its debt became impaired, this source added.

In its most recent accounts, for the year ended 31 July 2020, Lifetime Training recorded a 38% decline to its EBITDAE (the ‘E’ representing ‘exceptional items’) of GBP 10.7m against turnover of GBP 62.4m, which fell 15% year-over-year. The same filings show that Adrian Yurkwich, the Silverfleet partner who led its 2016 buyout of Lifetime Training, had his directorship of the company terminated in October.

Lifetime Training, a provider of training to workers in the hospitality, retail and leisure sectors, was heavily impacted by the COVID-19 pandemic, which hit these industries harder than others while simultaneously halting classroom-based learning. Alcentra’s move to acquire the equity of the business followed Silverfleet’s decision to call off the raise of its third fund earlier this year and proceed to wind down.

In an effort to recoup its investment in Lifetime Training, Alcentra could look to sell Lifetime Training. In April – before Alcentra took the keys to the business – it was reported that Lifetime Training would return to market in 1Q23 via a formal auction to be led by Houlihan Lokey, with a price tag in the region of GBP 250m. However, Houlihan Lokey had already attempted to find a buyer for Lifetime Training in 2020, as reported, but the process was pulled after bids reportedly failed to exceed GBP 120m just as the pandemic was unfolding.

Silverfleet Capital did not respond to a request for comment.

Running out of Optionis
Less than eight weeks ago, Optionis, the UK-based accountancy, tax and employment-services specialist, was reported by InsiderMedia to have been “acquired by Alcentra in a landmark deal”. While presented as a run-of-the-mill acquisition, this was, in fact, another example of Alcentra having taken control of a company whose leveraged buyout it financed.

In January 2017, Alcentra provided a GBP 120m unitranche to support Sovereign Capital Partners’ acquisition of Optionis, which the sponsor proceeded to combine with another portfolio company, Arkarius Group. The joined-up company, which went on to operate under the Optionis brand, claimed to be four-times larger than any of its UK-based peers, serving some 40,000 clients at the time of the deal.

Fast forward five years to January 2022, and Optionis was the victim of a cyber-attack that resulted in a major system outage, rendering the company unable to service its clients, according to its strategic report contained within public filings. In the year ended 31 October 2021, Optionis’ adjusted EBITDA decreased by 22% year-over-year to GBP 12.2m, the same filings show. Alcentra’s 2017 GBP 120m unitranche carried leverage of around 5x, according to a document seen by this news service, implying structuring EBITDA at the time of around GBP 24m. Based on these calculations, in the period for which its accounts are most recently available, Optionis could have ended up being levered at nearly 10x, thereby triggering a covenant breach.

In September this year, Optionis’ parent company sold its “investment interest” – i.e. equity – in the group to Clareant Business Services Holdings 2 Limited, a holding company controlled by Alcentra, public filings show, confirming the lender had taken over the business. As part of a restructure, Optionis’ bank debt was reduced by GBP 70.9m and its unsecured loan notes totalling GBP 54m and interest of GBP 12.9m were written off, filings show. Optionis issued loan notes of GBP 4.6m to Sovereign Capital Partners in exchange for cash, increasing total loan notes issued to GBP 54m, filings show.

Nicolas Besson, executive director of Alcentra’s direct lending team, was appointed as a director of Optionis on 16 September 2022. Sovereign Capital Partners no longer lists Optionis on its website under current or realised investments.

Sovereign Capital Partners did not respond to a request for comment.

Equi-gone
In January this year, Alcentra was presented as a white knight in another press release published by Equiom. The Isle of Man-headquartered fiduciary services provider stated that it looked “forward to welcoming Alcentra as our new majority owner”.

Prior to this announcement, Alcentra had instead primarily been a lender to Equiom since June 2019, when – along with KKR, Investec, M&G, and a club of banks – it provided a term loan B that part-financed Värde Partners takeover of the firm from LDC. Under the deal, LDC retained a minority stake in Equiom, while Värde Partners took the reins.

Less than six months after Värde Partners’ acquisition of Equiom closed, the organisation announced that its long-standing global CEO, Sheila Dean, would transition to the role of Executive Chair as the company commenced a search for her replacement. Dean led the management buyout from Anglo Irish Bank that spawned Equiom in 2006.

Four months later, in April 2020, Equiom appointed Mark Porter, the former head of MUFG Investor Services, as its CEO. However, he lasted not even three years in the role. In October this year, Equiom announced that it had named Jonathan Jennings, the former Group Head of Institutional Client Services at London-listed fund-management services provider JTC, as CEO, marking the end of Porter’s short tenure. Earlier this year, Equiom also drafted in Farah Ballands, ex-CEO of Ocarina Group, as its new Chair.

Near-constant churn at the C-suite level of Equiom caused managerial headaches for Värde Partners, according to the first source, who was privy to its strategy. “When you speak to CEOs in that industry, they tell you that it’s hard to get it wrong – but this [Equiom] was badly managed,” this source continued.

Compounding instability at the board level was Equiom’s sporadic portfolio of subsidiaries, a third source familiar explained. When Värde Partners took over the business, it comprised an amalgamation of around two dozen separate companies stitched together in quick succession, which made for a challenging integration, this source continued.

At the time of Värde Partners’ buyout, Equiom was levered at roughly 5x EBITDA, the first and a second source explained. But its lenders began to worry last year when Equiom’s bottom line took a significant hit, causing leverage to increase to high single figures, both these sources continued. While Equiom never entered the red, its EBITDA fell to as low as GBP 10m, resulting in a breach of covenant, the first source said. This spurred Alcentra to take over the business from Värde Partners through a debt-for-equity swap, this source added.

While several people close to Alcentra maintain that the lender acted fairly and reasonably, Värde Partners was not given adequate runway to implement its turnaround strategy for Equiom, according to the third source. Alcentra moved “aggressively” to take the keys to Equiom before the business had a fair chance to recover under Värde Partners’ ownership, this source added.

Värde Partners was officially de-listed as Equiom’s majority shareholder in August, Companies House filings show. KKR remains a lender to Equiom, while Värde Partners and LDC have retained an “economic interest”, according to a company announcement in January. Sponsors that hand company keys to lenders are often granted “anti-embarrassment stakes” to give restructurings a better chance of going unnoticed by enabling PEs to continue listing holdings in their portfolios, a leveraged finance lawyer explained.

Perhaps a silver lining for Alcentra, in the case of Equiom, is that it knows the sector within which the company operates. Alcentra financed the 2020 leveraged buyout by Corsair Capital of peer ZEDRA Group and is also a lender to IQ-EQ, the first source pointed out.

Värde Partners declined to comment. LDC did not respond to a request for comment.

Potential problem children
Market participants familiar with Alcentra’s holdings suggest that there could be additional problem children within its portfolio. One name that crops up in conversation time over is The Fertility Partnership.

The UK-based fertility-services provider was acquired in March 2019 by Impilo, which tapped a unitranche worth roughly GBP 60m from Alcentra to part-finance its buyout. At the time of the takeover, the company was levered at roughly 5.5x, implying structuring EBITDA of around GBP 11m. According to its most recently available public filings, The Fertility Partnership booked EBITDA of just GBP 3.9m in the year ended 31 March 2021. The previous year, its EBITDA was underwater, at negative GBP 6.3m, the same filings show.

Although Alcentra has not taken the keys to The Fertility Partnership, Companies House filings indicate, the company’s leverage has hit “high single digits” at certain points throughout Impilo’s holding period, according to the first source.

“While there have been COVID-related effects over the past few years, and the turnaround of the old VivaNeo units [has been] slower than planned, the business is in a much better shape now, especially in the UK,” a fourth source, who is close to the company, said.

Impilo declined to comment.

Alcentra’s not the only one
Alcentra is not the only direct lender to have taken the keys to UK-based companies that breached covenant at nadirs in market cycles in recent years.

For instance, Inspiring Learning’s former private equity backer Bridgepoint ceded control of the UK-based educational experience provider to its lenders, Barings and Crescent Capital, at the height of the COVID-19 pandemic in 2020. In September this year, Barings and Crescent hired Rothschild to explore a sale of the business, which is poised to launch within the next 12 months.

In 2019, Arcmont (then BlueBay Asset Management) took the keys to UK-based data-management provider EDM Group from its former sponsor LDC.

The road ahead
Taking the keys to private equity-owned companies should be – and typically is – an option of last resort for direct lenders. In many cases, alternative compromises can be reached. For instance, sponsors sometimes inject additional cash into flailing companies under what is known as an equity cure, in a bid to stave off covenant breaches and avoid the worst-case scenario: a default.

And with defaults set to rise as the heady era of cheap money and fool-proof deals draws to a close, all direct lenders will increasingly be confronted with difficult decisions over how to handle soured private credits. According to data compiled by Proskauer, which tracks senior secured and unitranche loan facilities, default rates in 3Q22 reached 1.56%, up from 1.18% in the previous quarter. The law firm described this shift – which represents a 32% rise quarter-on-quarter – as “the first noticeable increase [in defaults] over the past 18 months”.

Several sources close to Alcentra suggest it had little option but to take the keys to Lifetime Training, Optionis and Equiom, claiming that their former sponsor-owners were tapped out, unable to commit additional capital, resulting in consensual handovers. Others, however, paint a different picture of the lender’s approach.

“Alcentra has adopted a more aggressive restructuring approach, it’s fair to say,” said the first source. Echoing this sentiment, the third source described an “aggressive approach from Alcentra” towards Värde Partners in relation to its dealings on Equiom.

Regardless of its perception in the market, there is nothing to say that Alcentra will fail to make a return on its investments in each asset, should the lender succeed in selling them on.

Nevertheless, the timing of Alcentra’s key-taking is far from ideal. Between January and November, when Franklin Templeton completed its acquisition of Alcentra, the latter saw its assets under management fall from more than USD 42bn to USD 35bn – a 17% decrease in the space of just 10 months.

One way for Alcentra to recoup recent outflows would be to raise another European direct lending vehicle. Alcentra’s most recent European Direct Lending Fund III, which held a final close in 2019, netted EUR 5.5bn, almost double its initial target of EUR 3bn.

But to emulate this success in an increasingly challenging and competitive fundraising climate could prove difficult.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Refinancing
• Credit/Special Situations
• UK / Ireland
• Silverfleet Capital
• LDC
• Sovereign Capital