As the sale of Alcentra nears its conclusion, with Benefit Street Partners, the credit arm of Franklin Templeton Investors, in the driving seat to acquire it, it is hard to find anyone in the market with a positive word to say about it.
Certainly, the credit asset manager owned by Bank of New York Mellon has had its issues in recent times.
As GlobalCapital reported in a detailed investigation in December, BNY Mellon’s decision to sell Alcentra followed a difficult period for the asset manager, during which it had lost many key staff, especially from its direct lending business, which had been one of its strongest suits. As a result, the firm was also finding it difficult to raise a new direct lending fund of the size it would have hoped for.
During the sale process, the business has experienced yet more departures, as vice-presidents for Benelux and Southern Europe have left in recent weeks.
However, viewed against the backdrop of large US asset managers making great efforts to diversify their offering into alternatives, we may look back on this acquisition — assuming it goes through — as a rare opportunity to acquire access to a market with high barriers to entry.
Overblown negativity
It wasn't so long ago that Alcentra was viewed as a tier one direct lender in Europe. Under previous management, there were plans to expand the platform, open new European offices and extend the offering into real estate and infrastructure debt.
Clearly, it ended up going in a different direction. It is impossible to tell, from the outside, how much the owner was to blame for that. But even in its diminished state, the direct lending business has the potential to be revitalized.
Direct lenders typically deploy something like 60% of their dry powder into companies that they have already invested in before. Having a large portfolio of existing loans gives a firm a big head start because it provides a chance to rekindle relationships with the sponsors of the companies they are already supporting.
Some of those relationships will have gone cold, especially if the staff that originated the loans in the first place are no longer with Alcentra. The first course of action for a new owner must be to invest in the team.
That said, we shouldn’t forget that Franklin Templeton would be buying a lot more than just a direct lending business. When Fitch published its investment management quality rating for Alcentra, branding the firm "excellent", the stability or otherwise of the direct lending team was little more than a footnote.
“There was a senior level departure from the direct lending team in 2021; however, staff turnover overall was fairly low over the same period," the rating firm noted. "For example, there has only been one leaver in the structured credit business in the past eight years.”
At the end of 2021, Alcentra employed 182 people, 28 of whom were in the direct lending investment team. All of its funds and products have performed consistent with or exceeding expectations, according to the report.
Synergies
Franklin Templeton has been on an acquisition spree in alternative assets, most recently closing its acquisition of private equity secondaries investor Lexington Partners. Alcentra is small fry for them, but will represent another milestone in extending its reach.
Benefit Street Partners, the credit division though which Franklin Templeton is expected to acquire Alcentra, was founded by ex-Deutsche Bank executive Thomas Gahan in 2008 and sold to Franklin Templeton in 2018, at which time Gahan became Franklin Templeton’s head of alternatives.
Someone with that much experience in credit markets would not be walking into a transaction without a clear turnaround plan. For Benefit Street, which so far has no European operations, there must be great synergies in play with the existing CLO business, not to mention structured credit and direct lending.
Alcentra will not be the last opportunity for a firm to buy its way into the European direct lending game. Indeed, there are already rumours of other businesses coming to market.
But with those rumours come valuation expectations in the range of 15-20x management fees.
Assuming that the grapevine's €1.2bn price tag for Alcentra is in the right ball park, the sale may turn out to have been a one-off opportunity to acquire a European direct lender at a discount.