Lending by asset managers resumed late last year in Europe, with transaction volume hitting a fourth quarter record after a lull during the coronavirus pandemic.
Direct lending operations, in which funds make loans that would traditionally be made or arranged by banks, had their best fourth quarter on record, according to Deloitte figures. Overall, the number of transactions increased by 52% in the second half of 2020 compared to the first, although at 232 the tally was still a decrease of 25% compared to the second half of 2019.
Robert Connold, head of debt advice to alternative lenders at Deloitte, said he expected the number of direct loans to decline in the first quarter of 2021, but still hoped for a longer-term recovery. especially in the UK. where coronavirus vaccination rates are high and an end to lockdown restrictions is in sight.
“I think we’ll start to see the volumes come back to a more stable state because people will have a lot more predictability about what happens with the clear trail that the government has established,” he said.
The slowness of mergers and acquisitions, which often use this type of financing, slowed the pace of transactions in 2020.
But pent-up demand supported the fourth-quarter rebound, Connold said. “We saw in the second quarter that the M&A market was very weak, but in the third quarter people started to put their feet in the pond.”
Firms generally have easy access to financing through the publicly traded debt and equity markets, and they typically pay higher interest rates on private lending transactions. But such transactions can give businesses more secrecy and flexibility.
Cécile Mayer-Lévi, head of private debt at alternative asset manager Tikehau Capital, said sectors such as healthcare, software, food and agriculture, and insurance brokerage were eager to find private debt financing. “Valuations have increased for these companies, which has led to a very competitive transaction environment with a major emphasis on reliable and timely financing offers to anticipate processes,” she said.
Tim Metzgen, managing director and head of debt counseling at management consultant Alvarez & Marsal, said the coronavirus crisis had not affected all direct loan funds equally. While traditional leveraged private equity funds have been able to find mergers and acquisitions to support, lenders in particular situations have had to compete with government support programs that have alleviated the need for businesses to their more expensive capital.
A number of direct lenders suffered losses last year after a string of insolvencies among large UK companies due to coronavirus restrictions.
The end of government stimulus efforts such as holidays, however, remained a source of uncertainty, Connold said. He also expressed concern about the impact of a new wave of lockdowns affecting mainland Europe.