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Whose loan is it anyway?

Direct lenders might be eating their own investors' lunch

Stealing french fries. Image shot 06/2017. Exact date unknown.

Private lenders have shown themselves to be more adept at deploying capital in times of crisis than banks in the leveraged finance markets.

The leaner teams and business set-ups at direct lenders mean that getting credit approval for a deal is quick and the system of raising a blind pool of funds means that investor approval is already guaranteed.

This has allowed direct lenders to offer competitive terms across a range of market segments. Of late they have been circling Partners Group’s acquisition of Fortino, offering covenant-light financing packages up to seven times Ebitda in a bracket where underwriting banks would normally compete but are not because of market volatility.

One executive at a large European direct lending fund told GlobalCapital this week that he was licking his lips at the prospects of more deals headed his way.

Certainly there is plenty of cash to be put to work. Just this week Axa IM Alts revealed a record fundraise — €18bn — of which more than €8bn was earmarked for private debt and alternative credit.

However, from an end investor’s perspective it’s not clear that this set-up makes much sense. In many cases it is the same investors behind the direct lenders that would be buying the loans in primary if the market was open.

Insurers, pension funds, family offices — all are pumping cash into direct lenders but they would also be taking exposures were the capital raising done in other markets. They just seem to be paying a middle man now to do what they would otherwise do themselves.

But change may be already afoot. If investors have that much cash to put into direct lenders that they can fund whole deals on their own, why don't they be even more direct and lend it to the borrowers themselves? There are signs that this is already underway with some investors hiring teams from direct lenders to do the work.

Having already lost market share to direct lenders, banks may well find that upon their re-entry to the market, they face an even more competitive landscape.

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