Direct lending growth continues unabated - report

According to the Deloitte report, direct lending saw deal volume grow at a 29% compound annual growth rate between 2016-2018, compared to 12% for leveraged loans and 6% for high-yield bonds over the same period. This is mainly due to larger funds and increased ticket sizes allowing direct lenders to expand into areas and countries previously dominated by banks. An example of this was Permira's €320m unitranche backing Francisco Partners' acquisition of Denmark's EG Software, with the Danish lending market typically the preserve of local banks.

"Private debt managers typically extend buyout loans in the €30-150m range, but [the report's] data shows that larger funds have increased their ability to write tickets of up to €250m and even €1bn for some," said Floris Hovingh, head of alternative capital solutions at Deloitte. He added that, by providing ever larger loans, these funds are now involved in deals that would have traditionally been funded through syndicated loans or bonds arranged by investment banks.

A total of €22.6bn in alternative loan issuance was deployed across 178 deals in the first half of 2019 – 65 in the UK, 41 in France, 20 in Germany and 52 in other European countries. The number of deals marks a 3% drop in the number of transactions compared to the same time last year, though ticket sizes and total issuance compensated for the drop, according to the Deloitte report.

In the UK where direct lending is most embedded, the infrastructure and professional services sectors were the biggest users of private debt, followed by TMT. Overall, M&A is still a key driver of deals, and the unitranche product is the most popular, accounting for 59% of all deals in the UK and 41% of all European transactions. Subordinated debt only featured in 17% of all deals across the board.

Despite volatility in other asset classes, momentum in direct lending remained strong with a €13.6bn pipeline of issuance in August alone, following €9.1bn in July.

Insatiable appetite
The momentum is driven in large part by the seemingly insatiable appetite of direct lenders to accumulate ever more assets under management, with Alcentra the latest private debt manager to raise a bumper €5.5bn in its latest fundraise, and Pemberton also closing a €3.2bn fund in July.

The rate of deployment has kept in step with the number of bumper funds raised, though, with total issuance figures still on the rise: €16.7bn was deployed in 2016, with the figure increasing to €26.8bn in 2017 and €38.1bn in 2018. The current year is set to follow this pattern given the €22.6bn already issued in the first half of 2019.

New funds continue to appear on the horizon with US fund Golub Capital the latest to unveil plans to set up a base in London. Furthermore, some well-known managers have raised lower-yielding senior funds to deploy in the more liquid large-cap space, thus eating up traditional banks' market share.

The Deloitte report concludes that as an asset class, private debt should be watched as appetite is unlikely to abate over the next six months – especially should a downturn occur. Many could view it as a counter-cyclical credit as others withdraw from high-yield.

Chris Skinner, head of the debt advisory team at Deloitte, pointed out that the European direct lending market remains very attractive for borrowers from a pricing, leverage and documentation perspective. The firm expects borrowers to continue to take advantage for the rest of the year, even with economic deterioration potentially on the horizon.

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• Deloitte