Private debt helps financing lower and mid companies in a pandemic and post-pandemic world.

By Kirsten Bode, Co-Head Private Debt Pan Europe at Muzinich & Co.

It has been an unprecedented year as businesses faced periods of extended lockdown which has resulted in declining production output and falling revenues. However, the global macroeconomic backdrop is now recovering, underpinned by fiscal stimulus and accommodative central banks. As a result, the economic cycle is improving enough to increase investors’ confidence in credit markets.

While valuations appear tight in liquid credit, a large part of the cash accumulated in money market type instruments during the pandemic is likely to be put to work as investors hunt for yield, benefitting higher-yielding assets such as private debt.

Banks have been retrenching from the lending market since the great financial crisis, increasingly limited by ongoing regulation and capital constraints. This trend was exacerbated by the COVID-19 pandemic as banks did even fewer deals.

Entrepreneurial approach of private lenders

As private lenders, we too witnessed a fall in the number of opportunities as well as bifurcation, where it proved easier to provide lending solutions to companies in COVID-resistant sectors such as IT services, software and healthcare. In the lower mid-market, there has also seen a shift towards more lender-friendly terms. 

Private lenders can take a more entrepreneurial approach than banks and may also have a greater speed of delivery and a good relationship with the debt advisor to secure the most attractive risk-return profile for their clients. This trend is likely to continue as borrowers look for creative financing solutions in an environment where the economic outlook for companies may have changed.

Companies in the lower middle-market segment (5-25 million euros EBITDA) can offer a diverse opportunity set for private lenders. There are higher barriers to entry due to the scale and size of the market.

Therefore, a provider with a local presence and credit analysis capabilities, who understands the culture and legal regime, is key to a successful investment strategy. Indeed, during an unforeseen crisis such as the global pandemic, having local teams on the ground in the countries in which a manager invests can prove vital in maintaining relationships with borrowers as well as setting up new deals.

Need of financing is further growing

For investors, an asset manager who can offer a flexible and customized approach to lower-middle market companies could help achieve an enhanced risk/return profile versus liquid credit investing. Private debt may offer benefits over traditional fixed income including the potential for higher yields due to the illiquidity premium and a cash yield with a floating base rate which provides protection against rate rises/volatility. 

The evolution of the European banking landscape will continue to generate meaningful opportunities for alternative or complementary lending. Traditional lenders are less able to provide long-term financing to non-investment grade businesses, which largely comprise the lower mid-market. These businesses will continue to need financing for growth, development and expansion particularly as the economic recovery gains momentum in a post-pandemic world.

Kirsten Bode has been Co-Head Private Debt Pan-European at Muzinich & Co. since 2015. She has more than 20 years of private market experience. Kirsten graduated from ESB Reutlingen and Middlesex University London with a B.A. (Hon) in European Business Administration.

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