Alcentra and BlueBay raise jumbo-sized ‘direct lending’ funds

Investor interest in lending to European businesses has risen significantly this year with asset managers including Alcentra and BlueBay raising jumbo-sized funds as the industry takes on the role traditionally held by banks.

Alcentra, the Bank of New York Mellon subsidiary, raised €5.5bn for its European-focused direct lending fund, nearly double its €3bn minimum target.

The company reported strong demand from investors including pension funds, life funds and sovereign wealth funds in Europe, the Middle East, the US and Asia.

European-focused direct lending funds raised $11.1bn in January-June 2019, according to Preqin, the data provider. This compares with $8.5bn in the same period last year. The first three months of 2019 were a record-breaking quarter.

Vijay Rajguru, chief investment officer at Alcentra, said the asset class was in its infancy in Europe compared with the US, where the market for non-bank lending is more developed.

“[Investors] like the story of lending into small and mid-capital business. It is taking advantage of the disintermediation that took place in 2012 and 2013,” he said.

He added that direct lending had grown in Europe after the financial crisis led banks to become wary about lending to small and medium-sized businesses.

Peter Glaser, co-head of European direct lending at Alcentra, said: “A lot of middle market companies have a growing need for this capital as the banks become less supportive.”

According to Preqin, only two Europe-focused direct lending funds have raised more money than Alcentra. These are a BlueBay strategy that closed in February after raising €6bn and an Ares Management strategy that closed a year ago after raising €6.5bn.

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Despite investor demand, there is concern that fund managers will struggle to deploy capital. Preqin figures show that European-focused direct lending funds have cash piles — or dry powder — of $47.6bn, the highest amount ever.

There is also worry over how a slowdown in economic growth could hurt direct lending funds. Central banks across the world have hinted at lower interest rates and more monetary easing, amid concerns about growth.

Christopher Redmond, head of manager research at Willis Towers Watson, the investment consultancy, said more businesses were likely to default on loans in a recession, which could hit direct lending funds.

Mr Redmond said: “For years, it hasn’t mattered how good your credit work was — but at some stage it will. At that stage, the skills of the asset manager to source the right deals will become more important.”

Graeme Delaney-Smith, co-head of European direct lending at Alcentra, said the group had been operating in this asset class for 15 years and had a record of deploying capital. “We are very selective and treat our capital as a sacred resource.” Alcentra said it had already deployed a quarter of the capital raised in its latest vehicle.

Anthony Fobel, managing partner and head of BlueBay’s private debt group, highlighted the divergence between groups that raise big funds and do large deals and smaller direct lenders. He said: “As the European direct lending market becomes more popular, investors need to focus on rigorous diligence and underwriting processes, as well as not compromising on credit quality.”

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Over the past six years, direct lenders have taken part in more than 1,750 deals across Europe. They have provided cash to businesses operating in sectors from technology to retail, said Deloitte, the consultancy.



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