Asset managers focus on direct lending

European-based fund managers have $41b ready to deploy in direct lending deals

Asset managers have raised billions of dollars from investors to lend to companies as fund houses step into an arena traditionally dominated by banks.

European-based fund managers have $41 billion (Dh150.5 billion) ready to deploy in direct lending deals, twice as much as in 2012, according to Preqin, the data provider. This backs up suggestions asset managers are increasingly becoming socalled shadow banks.

The fund management industry has flocked to the direct lending space in the wake of rules introduced since the financial crisis, which have made it less attractive for banks to loan to businesses to the same degree they once did.

Fenton Burgin, partner

in the debt advisory practice at Deloitte, the consultancy, said investors struggling to achieve strong returns amid low interest rates are helping to drive the growth of the sector.

Higher returns

Long-term institutional investors are swapping the liquidity of bonds for higher returns by putting money into private debt funds, he said.

Towers Watson, the consultants, said its clients, typically pension funds, have globally allocated more than $7 billion to illiquid credit investment strategies, which range from direct lending to property debt, over the past five years.

Chris Redmond, global head of credit at Towers Watson estimates around a third to half of the assets deployed by clients went to direct lending deals. “We view [illiquid credit investment strategies] as an excellent opportunity for investors with a tolerance for illiquidity and a desire to improve overall portfolio efficiency,” he said.

According to Deloitte, 61 direct loans were made during the third quarter of this year in Europe, up 14 per cent year on year.

KKR, the private equity group, has loaned more than half a billion dollars to companies in Europe this year. A loan to the Casual Dining Group, which is behind the Cafe Rouge chain of restaurants, is among eight direct lending deals KKR has made in the region this year.

“This is the first year [direct lending] has achieved a critical mass in Europe,” Marc Ciancimino, KKR’s head of European private credit, told the Financial Times.

Last week, Hermes Investment Management, M & G Investments and AIG Asset Management signed an agreement with Royal Bank of Scotland, the UK bank, to co-fund loans of up to £100 million.

Assets in the direct lending industry have more than tripled since 2006 to $441 billion by the end of last year, according to figures from Brown Brothers Harriman, the financial services group, and Preqin.