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Issue 1 | march 2013
privatedebtinvestor.com
GSO’s headquarters,
345 Park Avenue, NYC
FROM NYC
TO LONDON
WHY GSO SEES
OPPORTUNITY
IN EUROPE
THE LONG ROAD TO CLOSING
The fundraising challenge
LEVERAGED FINANCE
A tale of two markets
WHEN THE MUSIC’S OVER
Hilco to HMV’s rescue?
PLUS: the Transatlantic divide | Funds of debt funds | Debt in the Dell deal
Fund structures | and more...

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editorial comment
Private Debt Investor: march 2013
The new debt paradigm
ISSN 2051-8439
Issue 1 | march 2013
Editor, Private Debt Investor
Oliver Smiddy
Tel: +44 20 7566 4281
Oliver.s@peimedia.com
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© PEI 2013
No statement in this magazine is to be construed as a
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in companies and/or their securities mentioned in their
contributions herein.
Dear Reader,
Welcome to Private Debt Investor.
The debt markets are going
through fundamental structural
changes. Investment banks are
responding to regulatory and
political pressures with greater
circumspection. The role they
play in the markets is changing,
and the volume of debt they’re
able to provide is reduced, at least
for the moment, as they endeavour
to delever.
The departure from the European
market of most current
CLOs over the next year or so
also leaves a sizeable hole.
Yet demand for debt still exists,
from investors as well as the end
users. Private equity, real estate, and infrastructure
sponsors still have sizeable amounts of equity to
deploy, but they need debt to underwrite their
deals.
Into this breach steps a new breed of credit
supplier. A geographically, structurally and strategically
diverse array of private debt providers
are poised to capitalise on the dislocation in the
credit markets.
We believe that this cohort of managers,
together with the advisory community and investors
in their products, needs a publication focused
on their world. We also think investment banking
professionals should take an interest in how the
new players interact with the established credit
ecosystem. Just look at the role Microsoft is playing
in the buyout of Dell, committing $2 billion
in debt to complement a ‘traditional’ senior debt
package from four banks (page 8).
Many in this rapidly evolving industry began
their careers in banking. Our keynote interviewee,
GSO’s Tripp Smith, served his apprenticeship at
DLJ during the mid-1980s (together with his
“A GEOGRAPHICALLY,
STRUCTURALLY AND
STRATEGICALLY
DIVERSE ARRAY
OF PROVIDERS
ARE POISED TO
CAPITALISE ON THE
DISLOCATION”
co-founders at GSO). His current
firm is further along the road than
most, having been launched in 2005.
It’s now the second biggest part of
The Blackstone Group by assets
under management. Turn to page
22 to read about the development
of a private debt powerhouse.
We also chart the challenges facing
managers on the fundraising trail
(page 28), and talk through typical
fund structures and terms (page 32).
A key theme this month is the
schism between the European and
North American markets. Nowhere
is this more pronounced than in the
CLO industry, although there are
promising signs of resurgence in
Europe (page 10). From a leveraged
finance perspective, the US continues to lead the
way in issuance, as we discuss on page 34.
Tracking the ever more diverse group of debt
professionals out there and giving them a forum
for debate is one of our key objectives. We’ll be
hosting a dedicated conference, The Capital Structure
Forum 2013, in London this July which we
encourage you to attend. And our website, www.
privatedebtinvestor.com, will bring you breaking
news of deals, fundraising and people moves as
they happen, together with analysis and commentary.
We hope you enjoy the magazine, and
welcome your feedback.
Happy reading,
Oliver Smiddy
Editor
What do you think?
Have your say
e: oliver.s@peimedia.com
March 2013 | Private Debt Investor 1

Private Debt Investor: march 2013
contents
8 Debt in the Dell deal
22 GSO’s European push
28
Fundraising
NEWS ANALYSIS
features
comment
4 The two-minute month
The biggest stories in private debt
from around the globe.
8 Does the Dell deal
smack of déjà vu?
What does the debt underpinning
Silver Lake’s $24bn bid say about
the availability of credit today?
10 CLOs: the Transatlantic
divide
The appearance of several new
CLOs suggests there’s hope for
the ailing European market yet.
12 A forest of new funds
Growth in the private debt market
is driving demand from investors
for funds of funds. But can the
metric work?
20 Termsheet
The collapse of HMV, and
its potential rescue from
administration by distressed debt
investor Hilco.
22 Capital Talk
GSO Capital Partners’ co-founder
Tripp Smith explains why the firm is
bullish on Europe
32 The shape of things
to come
Weil Gotshal’s James Gee maps out
the different structures and terms in
use by private debt providers.
34 Leveraged Finance:
A tale of two markets
A review of trends in the
leveraged finance markets on
both sides of the Atlantic.
1 Editor’s Letter
14 The Lawyer
Ashurst banking partner Mark
Vickers warns managers must heed
the lessons of the past
15 The Advisor
Ross Hostetter and Ryan McNelley
of Duff & Phelps discuss the
valuation of debt products.
36 The Investor
Gregg Disdale of Towers Watson
reveals what investors are looking
for when debt funds pitch.
44 The Last Word
Private debt is the most interesting
area for Partners Group, explains
René Bider.
Book excerpt
17 Investing in Private Debt
ICG’s Max Mitchell maps out the
private debt opportunity.
Special report
28 Fundraising: The long
road to closing
The challenges facing new and
existing managers seeking to raise
capital.
data
38 Data Room
Private debt funds in market,
sponsor-backed public offerings,
leveraged loan and high yield bond
markets data.
2
Private Debt Investor | March 2013

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News
two minute month
Private Debt Investor | march 2013
REFINANCING
UK bond market tapped
for HS1 refinancing
The Channel Tunnel Rail Link - known as
HS1 – has completed a £1.6 billion (€1.9
billion; $2.5 billion) refinancing of the £1.3
billion of bank debt that was deployed
when Canadian institutional investors
Borealis and Ontario Teachers Pension
Plan (OTPP) paid £2.1 billion to acquire a
30-year concession to own and operate the
UK high-speed rail line in November 2010.
HS1 was able to raise £760 million in
the UK bond market – well in excess of
a target amount of £455 million. Other
funding was raised from a US private placement
last year and a new bank facility. The
new debt structure will amortise over the
life of the concession.
“Market conditions and the fact that
HS1 is low risk, good quality high-performing
infrastructure has meant our
proposition has been very well received,”
said HS1 chief financial officer Graeme
Thompson in a statement.
Banks involved in the bond issue
included BNP Paribas, Lloyds, RBS, NAB
Borealis and OTPP raised £760m in bonds to refinance the Channel Tunnel rail link
and Scotiabank. Export Development
Bank of Canada participated in the bank
facilities.
HS1 connects St Pancras International
station in central London with the UK
entrance to the Channel Tunnel, linking the
UK to the European high-speed network
with direct routes from London to Paris,
Lille, Brussels and beyond.
In paying £2.1 billion for HS1 in
November 2010, Borealis – the investment
arm of Ontario Municipal Employees
Retirement System – and OTPP exceeded
the UK government’s expectations of raising
between £1.5 billion and £2.0 billion.
The Canadian pairing beat off competition
from three other consortia led by Eurotunnel,
Morgan Stanley and Allianz.
PROJECT FINANCE
‘Shadow banking’ could
lead to a credit bubble
Standard & Poor’s (S&P) estimates private
debt sources – what it calls ‘shadow banking’
– can provide up to $25bn of project
finance loans this year. The rating agency
reported one-quarter of all project finance
lending last year in the US came from institutional
investor-fuelled alternative debt
sources, almost as much as the amount of
project finance debt raised from the public
bond markets. The ratings agency added
that Europe, the Middle East, Africa and
Asia Pacific were following a similar trend.
S&P argues banks will continue to be the
dominant force in infrastructure financing,
although it predicts that regulatory
pressure on banks combined with yieldhungry
institutional investors will continue
to boost the private infrastructure debt
market.
PEOPLE
ICG builds team for debut
US fund
UK-listed ICG is working to put together
its first US-focused private debt fund. In
so doing, the firm is also building up its
US team headed by former Blackstone
mezzanine executive Sal Gentile. Several
sources who have had recent conversations
with the firm said Gentile, who ICG officially
announced hiring in December, is
hiring additional people to work in the
New York office, including an investor
relations professional to help with the
fundraising.
FUNDRAISING
Canadian debt fund
concludes maiden
fundraising
Greypoint Capital has held a final close
for its maiden fundraising. The fund, which
4
Private Debt Investor | March 2013

News
had a target of $200 million, closed on an
undisclosed amount according to a statement.
Founder Holly Allen launched the
process last March, having conducted premarketing
with a select group of investors
with whom she had worked in the past.
Greypoint’s LP base comprises family
offices, high net worth individuals, small
pension funds and foundations, a source
said. The fund will provide senior debt
facilities, stretch senior debt, second lien,
mezzanine, acquisition facilities and other
debt products to Canadian companies with
enterprise values in the $100 million to
$1.5 billion range, and which have strong
real estate or fixed asset holdings, or commercial
real estate businesses.
REFINANCING
Brookfield refinances
Washington office
Mesa West Capital has provided Brookfield
Asset Management with a nearly $100
million loan to refinance a Washington
DC office property that the global asset
manager has owned for almost 10 years.
According to a statement from the Los
Angeles-based real estate lender, Mesa
West furnished Brookfield Real Estate
Opportunity Fund I with a $95.5 million
first mortgage loan against 64 New York
Avenue NE in Washington DC. A spokesman
noted that the firm provided the
financing on behalf of its Mesa West Real
Estate Income Fund II, which closed on
$615 million in 2010.
PEOPLE
Carlton Group builds
presence in Frankfurt with
senior hire
The Carlton Group has appointed Fernando
Salazar as head of its real estate
investment banking division in Frankfurt.
He will be responsible for originating and
closing new deals on behalf of financial
institutions and borrowers, as well as
establishing the new office. Prior to joining
Carlton Group Salazar, who holds dual
German and Spanish citizenship, was head
of real estate and commercial banking at
Eurohypo from 2006 to 2010 and has
been in the banking business for the last
30 years. He has been heavily involved in
more than $10 billion of loan originations
and restructurings.
FUNDRAISING
Gávea raises R$1bn credit
fund
Christ the Redeemer in Rio
Gávea Investimentos has raised R$1 billion
(€372 million; $503 million) for its
Crédito Estruturado FIDC fund, falling
short of the R$1.25 billion target it had
set in the vehicle’s prospectus, according
to a Valor Economico report. Crédito
Estruturado FIDC will provide longterm
debt financing to Brazilian private
companies, addressing “the deficiency of
long-term lending from private sector
entities in Brazil, which exposes many
strong companies to refinancing risks
and reduces their efficiency and competitiveness”,
according to an International
Finance Corporation release. The IFC has
committed $29 million to the fund.
➥
march 2013
the data
$55bn
The amount of new CLOs issued in the US
in 2012
$9.9bn
US CLO issuance in January 2013
174
The number of private debt funds currently
in market
$24.4bn
The value of Silver Lake’s offer for Dell
4
The number of investment banks
underwriting the debt for the deal
-141%
HMV’s total debt to equity ratio for the
2012 financial year.
$56.4bn
GSO’s AUM at year end 2012
¥50bn
Shanghai International Group’s fundraising
target for its Sailing Capital International
private debt
March 2013 | Private Debt Investor 5

News: analysis
march 2013
Said and done
“Imagine you’re a VP
at a private equity
firm. You take a deal
to a partner, and
not only do you
pitch that you’ll
finance it with a
debt instrument
he’s never heard of,
but you’re going to
source it from a firm
he’s never heard of
either. It’s a tough
sell.”
A London-based private debt
fund manager reveals there’s still
work to do to educate sponsors
about the asset class.
“They should
probably change the
name. They’re bonds,
and they provide
yield, but the ‘high’
bit isn’t necessarily
appropriate these
days.”
An experienced debt lawyer
suggests the high yield market isn’t
quite what it’s cracked up to be.
“If you pitched a £10
billion take-private
now, you wouldn’t
be viewed as barking
mad. Three months
ago you’d have been
laughed out of
town.”
A senior banking source admits the
Dell and Virgin deals have changed
market perceptions of big buyout
financing.
Affinity Water benefitted from a £95m direct loan
Cornerstone
from USS
seals first UK deal since Laxfield tie-up
REFINANCING
USS lends to Infracapital/
Morgan Stanley water firm
The UK’s second-largest pension fund,
Universities Superannuation Scheme
(USS), has provided £95 million (€110
million; $150 million) of 20-year class
B inflation-linked financing to UK water
firm Affinity Water. The borrower, Affinity
Water, is owned by Infracapital Partners
and Morgan Stanley, which acquired the
company last summer for £1.24 billion
from French firm Veolia Environnement.
The deal was made through a private
placement, USS said. Affinity Water has
issued £480 million of bonds as part of its
recently implemented £2.5 billion multicurrency
bond programme.
PEOPLE
Goldman pair join former
colleague at CVC
Steve Hickey, chief risk officer at CVC
Credit Partners (CVCCP), has lured two
former colleagues from investment bank
Goldman Sachs, the firm confirmed in
a statement. Mark DeNatale and Scott
Bynum have joined their former colleague
Hickey, who moved to the debt arm of
buyout firm CVC Capital Partners from
Goldman in April last year. CVCCP was
launched as CVC Cordatus in 2006 and
has since expanded significantly. Last year,
CVC Capital Partners sold a 10 percent
stake in itself to a trio of sovereign wealth
funds, proceeds from which were used
in past to expand the credit business. It
also announced a tie-up with US manager
Resource America to combine Apidos
Capital Management with CVC Cordatus
last June.
PROJECT FINANCE
Ageas helps fund €300m
French prisons PPP
The insurance company is providing a
30-year, fixed rate tranche as part of a
€100m loan put together by Natixis for a
French prison’s PPP. The deal is the first
from a €2bn debt partnership between
the French bank and Ageas, signed last
October. The partnership between Belgian
insurance company Ageas and French bank
Natixis has yielded its first deal – a €100
million loan to help fund three French
prisons. Natixis acted as mandated lead
arranger, hedging bank, agent, and account
bank on a €300 million public-private
partnership (PPP) to build three prisons
in Valence, Riom and Lutterbach with a
combined capacity for 1,742 inmates. The
project sponsor is a consortium of fund
managers Barclays Infrastructure Funds
and FIDEPP together with French developer
Spie Batignolles and prisons expert
GEPSA, a GDF Suez subsidiary.
how hilco might
rescue hmv
Termsheet, p.20
6
Private Debt Investor | March 2013

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News analysis
buyouts
Does the Dell deal
smack of déjà vu?
Silver Lake set a new post-crisis benchmark with its audacious $24.4 billion offer for PC manufacturer
Dell last month. But does the deal presage a return to the highly-levered excesses of the pre-Lehman
buyout bubble, asks Oliver Smiddy
“Oh my God, it’s 2006 all over again.” That
was the reaction of one Private Debt Investor
colleague to the news of Silver Lake’s
audacious bid for PC manufacturer Dell
last month. And while it’s too early to call
the return of the so-called mega-buyout,
the numbers involved – particularly on the
debt side – are redolent of the heady days
of the private equity’s ‘golden era’ where
debt was cheap, plentiful, and de rigeur.
Silver Lake’s $13.65 per share offer, worth
$24.4 billion in total, would be the biggest
take-private by a private equity firm in the
post-Lehman era if it completes.
Silver Lake doesn’t wont for firepower –
it’s still raising its latest buyout vehicle, which
has already gone past the $7 billion mark on
the way to its $7.5 billion target. But it’s no
buyout behemoth in the Blackstone or KKR
mould, and the key to this deal is a hefty debt
package, including a sizeable $2 billion cheque
from an unlikely source.
First, the traditional lenders: BofA Merrill
Lynch, Barclays, Credit Suisse and RBC Capital
Markets have provided debt financing to
support the buyout, Dell said. That includes
$4 billion in ‘B’ term loans, $1.5 billion of
‘C’ term loans and a bridge of about $3.25
billion. The latter could well be refinanced
via the European high yield bond market,
sources suggest. Existing debt is being rolled
over, Dell’s spokesman added.
But a key component to the deal is a $2
billion loan from technology giant Microsoft,
reportedly in the form of a mezzanine tranche
or other convertible loan instrument. Such
a loan would rank amongst the largest mezzanine
deals ever, sources suggested.
Michael Dell - $4.5bn of skin in the game
“The US debt markets are extremely liquid
at the moment, sufficient to make a deal like this
possible,” commented a senior North American
banker interviewed by Private Debt Investor.
Interest rates in the US have also made
senior bank debt highly attractive, while Dell’s
sizeable cash surplus allows it to support a
significant debt burden with relative comfort.
“Across the marketplace, you’re seeing
increased availability of leverage,” another
industry source said. “That’s driven by the cost
of leverage and a search for yield across the
capital structure.”
The buoyant US CLO market means there’s
no shortage of appetite for leveraged loans, suggesting
the banking quartet should be able to
syndicate the debt package with relative ease.
The last piece of the capital structure
jigsaw is about $4.5 billion in equity from
company founder Michael Dell. So this is
no Barbarians at the Gate scenario – it’s
very much a consensual process, although
an upwelling of shareholder opposition to
the buyout could yet complicate matters.
Buyout industry sources were quick to
question whether the deal would herald a
return to so-called mega-buyouts however.
“The size of the deal is not a trend. It’s very
specific to this deal,” one senior US private
equity figure remarked. “You have an owner
with a massive amount of money he can roll
over, and there’s the Microsoft connection, so
that’s the opportunity.”
“The credit markets have been very accommodating
for some time and there was already
a general perception that you could do a very
large deal at frankly quite attractive average rates
in the credit markets,” said Blackstone Group
president Tony James during an earnings call last
month. “Dell doesn’t really move that needle
because they have a lot of investment grade debt
that’s assumable. You can certainly do a deal well
above $10 billion in the credit markets if it made
economic sense to the equity.”
News of a $28 billion joint bid by Warren
Buffett’s Berkshire Hathaway and 3G Capital
for New York-listed H.J. Heinz, and a mooted
€3.5 billion secondary buyout of French catering
company Elior as we went to press suggests
that others apparently agree. n
8
Private Debt Investor | March 2013

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News analysis
Structured credit
CLOs: the transatlantic divide
The contrast between the thriving CLO industry in the US and its ailing
European counterpart could not be more stark. Yet the appearance of a
handful of new-issue European CLOs suggests a tentative resurgence is
taking hold, writes Magda Ali
In the US, January was the busiest month
for CLO issuance since November 2007,
with $9.9 billion of funds issued, according
to JPMorgan data. And in Europe? Virtually
nothing. It’s been a similar story since the
credit crisis, with only a two new European
CLOs formed in the post-Lehman
era – one from European Capital marketed
by Deutsche Bank in 2011, and the
second by ICG Group in 2012, according
to Bloomberg.
In Europe, around €70 billion of CLOs
were used to underpin many private equity
deals prior to the financial crisis, but most
are now coming to the end of their five to
seven year lives. The departure of those
CLOs from the market will leave a big hole
in the continent’s credit supply, given the
lack of new issuance.
All that could be set to change, however.
UK-based credit asset manager Cairn
Capital, for instance, is poised to launch
a new CLO in partnership with Credit
Suisse. Many in Europe will be watching
eagerly to see both how it is received by
the market, and how it is structured.
But why the disparity between the US
and European CLO markets?
“CLOs have offered investors strong relative
value. The market has been resilient,
“The biggest problem
is supply. There aren’t
enough deals to get
a CLO running”
Sucheet Gupte
providing investors with 17 percent cash
returns on average,” explains Steven Miller,
analyst at S&P Capital IQ. “In 2012, $55
billion of new CLOs were issued in the
US, more than the total combined issuances
between 2008 and 2011. The market
could top $90 billion if the fourth quarter
run-rate holds up [this year].”
In Europe, however, there are significant
structural and economic reasons for the
withering of the CLO industry.
First, there is the regulatory environment.
Many cite the onerous ‘skin in the
game’ requirements for European CLOs,
which requires mandating managers (the
originator, sponsor or original lender) of
CLOs to hold an economic interest equivalent
to five percent of the total value of
the fund or securitisation. Cairn is getting
round this cleverly, holding the five percent
in a managed credit fund which will act as
counterparty to the total return swap with
Credit Suisse, someone with knowledge of
the deal told Private Debt Investor.
Some are confronting the issue headon,
lobbying regulators for a removal of
stringent risk retention rules.
Nicholas Voisey, director at the Loan
Market Association (LMA), tells Private
Debt Investor: “There are two main reasons
why there has been virtually no issuance of
CLOs in Europe. Firstly, market conditions
have been unfavourable and secondly, regulatory
risk retention requirements arising
from the European Capital Requirements
Directive 2 are largely prohibitive.”
“If CLO managers were able to raise
cheap money, they would do it,” explains
Simon Gleeson, partner at law firm Clifford
Chance.
Voisey adds: “Most CLO managers do
not have the capacity to hold the retention
required however. The LMA has been
in talks with regulators, seeking ways to
solve the regulatory requirement so that
this important source of funds, particularly
to the sub-investment part of the market,
can function effectively”, he says.
10
Private Debt Investor | March 2013

News analysis
A spokesman for the European Banking
Authority responds: “The CRDIV/CRR
proposal currently discussed at EU level
includes a mandate for the EBA to draft
regulatory technical standards (RTS) on
securitisation retention rules. The discussions
are still ongoing and a public consultation
on the RTS will be organised later
this year. In this respect, it is too early to
draw conclusions on what the final text
will look like.”
Some, like S&P Capital IQ director
Sucheet Gupte, feel regulation isn’t to
blame however. “Regulation is a hurdle
that most people get around. I don’t see
it as a hindrance for the market,” Gupte
says. “Most of the large CLOs would have
no problems with the risk retention rate.
There just aren’t enough deals to get the
CLO market moving,” he says.
In order for investors to make any substantial
returns from CLOs, managers are
typically required to buy at least 100 loans
and subsequently package them into one
pool. Institutional investors buy portions
of this pool, offering different payouts
depending on the level of risk the investor
takes.
“The biggest problem is supply,” believes
Gupte. “There aren’t enough deals to get
a CLO running – and asset spreads have
tightened for the underlying loans, so the
economics are not attractive either.”
Romain Cattet, partner at debt advisory
group Marlborough Partners, agrees:
“Though there are some encouraging signs
of CLOs making a comeback, the European
market is incomparable with the
US market. Primarily, there isn’t yet the
breadth and depth of assets in the market
to allow for CLOs to ramp up quickly.”
“Then, there are still issues with available
leverage quantum and pricing for
new vehicles. It is a mathematic exercise.
A CLO’s cost of liabilities needs to be lower
than the yield of the assets acquired in
order for it to be profitable. Unlike in the
US, the arbitrage doesn’t work quite as
well as it used to in Europe.”
Investors are still wary after many were
burnt by the crisis. “Normally CLO debt
tranches are reasonably liquid, but when
you really need to get out, it’s like trying
to get out of a burning house,” says James
Newsome, managing partner at placement
agent and consultancy Avebury Capital
Partners. “At the moment, a European
“The obvious providers
of AAA credit have
disappeared”
Nick Fenn
market with active CLO issuance is either
two to three years away, or never coming
back. In the US, it’s an artificial market created
by massive intervention by the Fed. We
might be seeing good deals and it might be
gaining momentum but it has been falsely
created. Having been through the cycles
in the credit markets I am concerned
that this is what securitisation of private
debt through CLOs will do – provide
too much funding now, distort incentives
and ultimately deteriorate performance,”
Newsome adds.
“In the US, they’ve breathed life into the
CLO model but over here it’s a different
story,” says Nick Fenn, founding partner of
London-based mezzanine firm Beechbrook
Capital. “The obvious providers of AAA
credit have disappeared, so you can’t get
the leverage at the fund level you used to.
It’s unclear whether there will be a new
generation of CLO, though institutional
fund managers are working hard to develop
alternative debt structures.”
That uncertainty is one reason all eyes
will be on Cairn’s new vehicle. Whilst it
would be overstating things to say the fate
of the European CLO industry rests on
the fortunes of one manager, a successful
launch will certainly prove a shot in the
arm to an industry that has lagged behind
its US sibling for several years now.
“In Europe it will be interesting to see
if the new CLOs that people like Cairn are
starting to market will get off the ground
or not,” says a financing specialist at a large
UK-based private equity firm. “A new wave
of those would be good for the European
market but it’s still early days and we may
be a while off from heavy new CLO issuance
on this side of the Atlantic.” n
CAIRN UNVEILS RARE
EUROPEAN CLO
read more at http://goo.gl/qkwou
March 2013 | Private Debt Investor 11

News: analysis
funds of funds
A forest of new funds
Growth in the private debt market is driving demand from investors for fund of funds-type instruments to
help them navigate through the thicket of new vehicles. Magda Ali looks at the challenges such a model
presents, and how a handful of managers are tailoring their products in response
One bellwether of a developing asset class
is the presence of funds of funds targeting
it. Such vehicles require not only investor
demand for the manager selection services
they provide, but also a deep enough pool of
managers to choose from. So the launch of
several funds of private debt funds in recent
months is an important landmark in the
development of the industry.
The market for dedicated funds of private
debt funds is relatively small, but is
slowly gaining momentum. Fund of fund
managers Golding Capital, Access Capital
Partners, WP Global, and even Morgan
Stanley are beginning to see a surge in
investors outsourcing decision-making to
managers who understand the nuances of
investing in debt.
One of the pioneers of funds of debt
funds (FoDF) is Frankfurt-based fund manager
Golding Capital. The firm currently
manages more than €1.8 billion in assets,
and though debt funds account for a comparatively
diminutive segment of that total,
its FoDF strategies are gaining traction with
German investors.
Poggioli: seeing increased LP appetite
“The underlying growth of the asset
class has led to dedicated private debt funds
assuming the role banks and CLOs played
in the past,” says Jeremy Golding, founding
partner at Golding Capital. The increased
appetite in the market for private debt will
also lead to the growth of dedicated fund of
(private debt) funds, and could see larger
asset managers developing tailored product
offerings to their investors, he adds.
There is rising interest by institutional
investors in the private debt asset class in
general through broader credit opportunities
funds, but also for specific sub-segments
such as distressed debt, mezzanine or dedicated
senior loan funds, explains Golding.
“The ways in which to access the asset
class differ by type as well as size of investor,”
adds Golding. “Larger institutions invest
directly into funds or even have in-house
teams to do deals directly [like Allianz,
which is building an infrastructure debt
team]. Small to medium-sized institutions
either invest directly into funds or via funds
of funds; there is also a trend among these
types of investors to go through individual
segregated (managed) accounts.”
Golding Capital currently manages a €150
million fund of debt funds – smaller than
some of its private equity-focused vehicles.
“Overall, the market – particularly in Europe
– is still relatively small. The additional layers
of fees are an unattractive component of FoFs
in the debt fund space. It definitely needs to
be justified by market performance through
better fund selection,” Golding admits.
12
Private Debt Investor | March 2013

News analysis
“On the private equity
side, the fund of funds
model is dying. But with
private debt funds it’s a
whole new ballgame”
Theo Dickens
Funds of funds who allocate to the
larger debt managers may end up doubling
down on the same underlying debt
investments because these managers are
in the same deals. “The more diverse and
often stronger strategies are developed by
the smaller funds,” says Jeremy Newsome,
managing partner at fund placement and
advisory group Avebury Capital Partners.
“Through the expertise gained by using FoF,
and although they have initially outsourced
their own decision-making to fund managers,
they are able later to allocate their own
internal teams to select managers.”
Newsome explains: “The emphasis by
private debt fund managers should be on
allocating to real opportunities, and not just
mega buyouts – a fund of funds in the debt
space works when a big fund invests in a
pool of small fund managers who then invest
in companies with high growth prospects.”
“There is a strong shift in demand from
investors for high yielding assets,” says Theo
Dickens, partner at UK-based debt fund
manager Prefequity.”Fund of funds have
been very heavily discussed this year and
most managers are trying to figure how
to extract yields, but with all the layers
involved in the process, it is proving a difficult
task.”
Fund selection is the key skill required,
explains Golding; “Volatility of fund
returns is still pretty high and therefore
selecting the right managers and avoiding
the losers is crucial to achieving abovemarket
returns.”
Due to the cyclicality of credit markets,
most people agree it is necessary to build
a diversified and well-balanced portfolio
combining different investments strategies,
including senior loans, mezzanine, credit
opportunities and distressed debt.
“On the private equity side, the fund of
funds model is dying. This is due to the fact
that FoF strategies have been overplayed in
the private equity space, and the numbers
have reached their peak,” says Dickens. “In
the private debt fund space, it’s a whole
new ballgame, and with the emergence of
new debt funds, we expect many investors
to opt for employing a fund of fund
manager to do debt selection for them.”
The main question for private debt
managers in the US and Europe is whether
to decide on outsourcing capabilities or
having dedicated teams in-house and invest
directly in funds. “Dedicated fund of fund
managers as well as larger asset managers
need to have an established platforms, an
established investor base and a proven track
record [to be successful],” says Golding.
Philippe Poggioli, managing partner
at French fund of funds manager Access
Capital Partners, says his firm had seen
uptake from investors for funds that invest
across mezzanine, junior and senior debt.
As a result, it’s broadened the remit for its
second fund of debt funds beyond the mezzanine-only
strategy of its maiden 2007
vehicle. “We are broadening our scope. The
strategy allows us to invest across Europe.
It gives us the mandate to cover larger segments
of the debt market, and we are less
dependent on mezzanine dealflow into this
fund,” explains Poggioli.
The firm secured its first commitment
for its €250 million fund of debt funds this
month. Addressing the issue of fees, Poggioli
says that co-investing alongside the
funds Access backs would allow the firm
to reduce management fees and improve
performance.
Access Capital hopes to receive investment
from institutional investors, pension
funds, and insurance companies. “Our
coverage is broader, and so is our target
[audience]. We expect to see interest from
a wider range of investors. Having a niche
is really important, but so is covering a
breadth of sectors and regions.”
Besides traditional fund of fund structures,
a trend is developing towards individual
solutions such as managed accounts,
where investors determine geographies and
segments, and outsource decision-making
regarding allocation to a fund manager.
Rather than marketing a fund of funds,
Morgan Stanley’s managed accounts division
is looking to invest in real estaterelated
debt instruments on behalf of
investors. “Investors are starting to realise
that now is a good time to be building
debt exposure,” explains a source close to
the bank. “The window to access the debt
side of real estate will stay open for at least
another three years,” the source adds.
For an asset class that is still, relativelyspeaking,
in its infancy, funds of funds
could prove an attractive proposition for
investors eager to access this developing
opportunity. The key for the providers and
managers of such funds will of course be
the fee issue – structuring their products
so as to still deliver attractive returns after
twin layers of fees have been deducted
remains the most pressing issue. n
ACCESS SEALS FIRST
COMMITMENT
read more at http://goo.gl/RF7hH
March 2013 | Private Debt Investor 13

comment
LEGAL NOTES
Making sense of the legals
The growing pains of an
innovative new market
comment
The burgeoning private debt
funds industry faces a few
hiccups, warns Ashurst partner
Mark Vickers
One of the prominent features of the private
debt market in leveraged lending in
the last 12 months has been the gathering
momentum of credit funds.
In 2007, European leveraged loan issuance
maxed out at €220 billion; in the
year just completed, new European leverage
lending was a mere 12 per cent of that
peak - at €27 billion.
As many lenders, (in hindsight now
styled ‘traditional lenders’) grapple with
capital constraints, restrictive regulatory
change and legacy stigmas associated with
historic exposure to leveraged finance, the
liquidity gap is being filled by alternative
credit providers.
The European high yield market has had
a blistering run over the last year, fuelled
by over €29 billion of inflows and below
average default rates (indeed the asset class
outperformed US high yield and emerging
market bonds over the last 12 months).
And encouragingly, the green shoots of a
renaissance in the CLO market may also
be emerging.
However, of all the sources of alternative
debt funding, it is the credit funds area
which is the fastest evolving sector.
The new community of credit funds is
diverse – including traditional heavyweights
such as ICG, Apollo, GSO, Carlyle, Oaktree,
Ares, Fortress, Sankaty, Babson and Haymarket
Financial among others. There are
now upwards of 40 credit funds focussing
on mid-market leverage finance, including
Summit, Triton, Butler Capital, Prefequity,
to name but a few, with new entrants entering
all the time such as 3i alumni Jonathan
Russell and Andrew Golding’s Spire Partners,
announced last month.
“A vexed question is
how the new world
of credit funds is likely
to perform in the
short term”
xxxxxxxxxxxxx
A vexed question is how the new world
of credit funds is likely to perform in the
short term, until the supply-demand equilibrium
for mid-market debt comes closer
into alignment. The proliferation of funds,
and the paucity of good quality credits is, for
the time being, making it difficult for the
funds to deploy their capital. At the upper
end of the mid-market the issue is being
compounded by the burgeoning high yield
market, and its encroachment into a domain
hitherto seen as too small in terms of deal
size for high yield.
Alternative debt providers are seen as
having a stronger appetite for risk compared
to the more conservative traditional
bank lenders, with a more flexible approach
to the credit requirement of specific deals.
The preponderance of unitranche deals for
example have bullet repayments after five to
eight years with covenant-lite protection.
In this lean deal environment, it is difficult
for new entrants with no direct track
record to compete: unless a fund has an
‘edge’, the competitive drivers in winning
deal mandates become quantum of debt
and price.
There is evidence that leverage ratios
are trending upwards, margins are trending
downwards and covenants are becoming
looser. Credit funds are not adverse to
lending up to 6.75 times EBITDA in appropriate
cases, whereas traditional banks are
more comfortable with a senior structure
typically around 4.5 times, with mezzanine
taking leverage to 6.5 times. Margins on
senior A were 4.5-5 percent six months ago;
now 4-4.25 percent is not unusual. It is
not surprising, therefore, that at least nine
sizeable transactions completed in the last
six months by major sponsors are looking
to re-price by reducing the margins on their
existing leverage loans.
Competitive pressures on credit funds
to do deals may in the short term nudge
them to complete by stretching debt fundamentals.
These are the growing pains of
an assertive, dynamic and innovative market,
but only the unwise would ignore the lessons
of the bad behaviour of 2007. The
proper pricing of risk, and not just a search
for yield, is still a premium skill. n
Mark Vickers is a partner in the banking department at
London-headquartered law firm Ashurst, and is co-head
of banking strategy.
What do you think?
Have your say
e: oliver.s@peimedia.com
14
Private Debt Investor | March 2013

the ADVISOR
Expert opinion on key aspects of private debt
comment
Illiquid debt – par for the
course, or not?
comment
The alternatives industry may
be comfortable establishing Fair
Value for equity, but for debt
products it’s a different story,
explain Duff & Phelps executives
Ross Hostetter and Ryan
McNelley
The economic uncertainty across the
Eurozone continues to make headlines
– some for posing significant challenges
for Europe’s policymakers and businesses,
and others for creating investing
opportunities. The widely anticipated
credit shortage arising from banks’
shrinking balance sheets and tightening
of lending standards has created an
opening for new entrants in the market
to fill the capital void. Not surprisingly,
the alternative investment community
has stepped in with a flurry of fundraising
activity as it rises to the challenge.
Although investing in European credit
securities is hardly new ground for alternative
investment fund managers, less
than 10 percent of Europe’s corporate
lending has historically been provided
by non-bank lenders. So there will be
challenges along the way as fund managers
increase their exposure to this asset
class. Chief among those challenges is
determining Fair Value, which, even for
performing debt, may not equate to par.
Most alternative investment funds
are required to report their investments
on a Fair Value basis. Whether defined
under IAS or US GAAP, the task is the
same: to determine “the price that
would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants
at the measurement date” (as defined in
IFRS 13 and in FASB ASC Topic 820).
The definitional requirement appears
straightforward. However, there are
many complications in determining the
Fair Value of loans in particular. First,
the accounting guidance is essentially
silent on the specifics of valuing loans.
IFRS 13 and ASC Topic 820 highlight
the importance of “market participant”
assumptions, but provide no specific
guidance as to sources for the assumptions
and only high-level guidance on the
appropriateness of standard valuation
methodologies.
While much of the industry guidance
on valuing illiquid securities is centered
on equity, little has been written on the
subject of valuing loans.
Further, the lack of transparency
in the private loan market – the very
attribute that often gives rise to the
investment opportunity – creates the
biggest challenge where the accounting
guidance favours observable inputs over
managerial discretion.
Finally, and perhaps most significantly,
industry norms are difficult to break. After
all, the lending market was long referred
to as “the par loan trading” market for a
reason; loans traded at par, so there was
no challenge in setting the mark. Further,
the preponderance of traditional
bank loans (often cited as the target of
new fund raises) are classified as “held to
maturity,” so have historically been marked
on an amortised cost basis in accordance
with IAS 39. These historical practices,
however, are not consistent with a Fair
Value standard that requires an assumption
of a liquidity event at the measurement
date, irrespective of any intent to hold to
maturity. So, before discussing a roadmap
for valuing loans, the biggest challenge may
be affecting the change in mindset that will
be required in marking this asset class to
Fair Value.
Despite these difficulties, fund managers
still have to fulfill their fiduciary
obligation to determine Fair Value.
Although the debt valuation framework
does not always lead to par, it does lead
to a robust and defensible Fair Value. In
the process, it may also create a differentiated
product offering. n
This article was co-authored by Ross Hostetter (New
York) and Ryan McNelley (London), who are members
of the alternative asset advisory practice of Duff
& Phelps.
For graphics that set out a hierarchy for selecting the
appropriate valuation approach and establish a framework
for model-based valuations, read this article on
www.privatedebtinvestor.com.
What do you think?
Have your say
e: oliver.s@peimedia.com
March 2013 | Private Debt Investor 15

comment
THE CONSULTANT
Inside views on private debt in the portfolio
Is private debt a panacea for
yield-starved investors?
comment
The hype surrounding private
debt is justified, but there are
several key issues that need to
be addressed if managers are to
successfully win commitments,
argues Towers Watson’s Gregg
Disdale
Private debt has become increasingly interesting
to institutional investors during the
ongoing financial crisis. This is perhaps
unsurprising given the paucity of yields
available in financial markets, a significant
issue for investors with liabilities to meet.
As a result investors are increasingly considering
allocating to risky and/or illiquid
assets to achieve their required returns.
One approach is via private debt strategies
and the current dynamics in lending
markets suggest now is an opportune time
to consider it. With increased aversion to
illiquidity, increased regulations making
lending less attractive for banks and a need
for those same banks to deleverage, it is
unsurprising that spreads between private
and public debt have increased. In the US,
for example, spreads between middle-market
lending and broadly-syndicated loans
reached post-crisis highs in 2012.
Which strategies interest
investors?
Despite much commentary about the
merits and demand for private debt, capital
raised remains below pre-crisis levels. This
is mainly because fundraising in mezzanine,
which is highly correlated with fundraising
in private equity, is below peak levels despite
it looking a comparatively more attractive
strategy. It is a challenging strategy
to undertake on a standalone basis in an
environment where high-yield debt markets
are being particularly accommodating to
companies that can access it.
Where we do see growing appetite is
for those strategies driven by bank disintermediation,
namely real estate and infrastructure
debt and senior secured lending
to sub-investment grade and/or smaller
companies which cannot access public
markets. In the US, private debt strategies
have long been part of the shadow banking
infrastructure and consolidation in the US
banking market and elevated spreads have
led to increased interest in these areas. In
Europe, these are still emerging asset classes
for institutional investors as previously they
have been dominated by banks. While we
expect banks still to be meaningful participants
in Europe, there is an opportunity
to participate alongside them to fill what
appears to be a significant funding gap.
What are the impediments?
There are numerous impediments to fundraising
but key among these is what actually
makes these asset classes attractive: a scarcity
of risk capital and a desire for liquidity.
When looking at these strategies, investors’
first consideration is whether there is sufficient
compensation for locking up capital.
Answering this question is relatively subjective
and needs to be considered in the
context of an individual investor’s portfolio.
Hand in hand with the above consideration
is the cost of accessing these strategies.
Often the spread over liquid alternatives
appears attractive but management and
performance fees can eat into a significant
portion of this. Practices in this space that
we believe need changing include investment
managers charging fees on leverage
and a full catch-up on profits after the
preferred return for the performance fee.
While recognising a meaningful infrastructure
is required to manage these strategies,
investors need to fund these assets from
liquid alternatives so the net-of-fees proposition
needs to be extremely compelling on
a relative basis to justify locking up capital.
Tax considerations require careful navigation,
as do governance constraints which
make allocating across a number of illiquid
strategies challenging.
The case still appears
compelling
Investor appetite for private debt strategies
appears genuine, which is reflected in the
proliferation of funds and strategies looking
to take advantage of bank disintermediation.
This in itself should not motivate investors
to invest – indeed caution is advised – but
subject to careful consideration, we believe
there is a compelling macro-economic case
for institutional investors to exploit their
long-term capital in these strategies. n
Gregg Disdale is a senior investment consultant at
Towers Watson.
What do you think?
Have your say
e: oliver.s@peimedia.com
16
Private Debt Investor | March 2013

ook excerpt
Investing in Private Debt
INVESTING IN
PRIVATE DEBT
A global guide to private debt as an asset class
and an integra layer of the capital structure
feature
New sources of liquidity
in the European market
In an excerpt from PEI Media’s forthcoming guide ‘Investing in Private Debt’,
ICG’s Max Mitchell maps out the opportunities and challenges facing private
debt fund managers
The provision of private debt to the
European buyout market has historically
been dominated by the
European banks, which typically funded
their loan books using their balance
sheet. However, following the recent
financial crisis, the European banks’ ability
to provide liquidity has significantly
contracted and this contraction is negatively
impacting private equity transactions
(both involving existing portfolio
companies and potential new buyouts)
in Europe.
We believe that for the European
buyout market to return to a more
‘normal’ state (including dealing efficiently
with refinancing requirements
of existing private equity owned portfolio
companies), it will need to transition
from a heavily banked market to
Banks provided 51%
of European buyout
finance compared to a
mere 15% in the US in the
first 9 months of 2012
xxxxxxxxxxxxx
a more balanced bank and institutional
market, as has happened many years ago
in the US.
The evolution of non-bank
lending in Europe
Unlike the US, Europe remains primarily
a banking market. Banks provided 51%
of European buyout finance compared
to a mere 15% in the US in the first 9
months of 2012. The US market benefits
from a deep institutional market which
provides consistent liquidity and is highly
developed and diversified, including
CLOs, mezzanine funds, direct investments
by insurance companies, credit
hedge funds, distressed debt funds and
Prime Rate funds. The latter are a material
component of the US market and
raise capital from both retail and institutional
investors.
By contrast, the European institutional
market is still in its infancy. Historically
the only significant non-bank
lenders in the European private debt
market have been CLOs and the independent
mezzanine funds.
As the traditional bank and CLO lenders
exit the market, we are seeing a new
breed of non-bank lenders coming to the
fore. From a borrowers’ perspective the
decision as to whether to work with
➥
chart title
US buyout funding sources
European buyout funding sources
n Banks 14% n Banks 51%
n Institutions 84% n Institutions 47%
n Others 2% n Others 2%
Source: S&P
March 2013 | Private Debt Investor 17

feature
private debt funds will be driven by a
wide range of matters specific to each
borrower and / or each deal. However,
from our experience to date, most borrowers
have been open to working with
private debt funds, particularly those
that are managed by fund managers with
whom they have existing relationships.
Some other key considerations are:
1. Reduced complexity: private debt
funds are generally looking to make
significant investments in individual
transactions. Fundamentally this
means that deals can be done with
smaller clubs or even on a bilateral
basis, which has the benefit of significantly
reduced complexity.
2. Certainty / cost: private debt funds
are generally take-and-hold investors,
which removes need for onerous syndication
language / risk of market
flex. In addition, given their decision
structures, private debt funds are typically
more fleet of foot in terms of
delivery of approval.
3. Flexibility: compared to a conventional
bank-led financing, private
debt funds are often more flexible
around loan features (including nonstandard
amortisation) as long as the
overall balance of risk is appropriate.
We are aware that a number of the
private debt funds do require noncall
protection but we note that it
is typically significantly shorter than
that required by traditional mezzanine
funds and therefore is more suitable
for refinancings where the sponsor is
not looking to remain in the investment
for a further three or more years.
What type of transactions will
private debt funds target?
It is likely that new funds will broadly
focus on two different investment strategies,
each of which will be more relevant
depending on the particular circumstances
of the transaction.
Deals can be done with
smaller clubs or even
on a bilateral basis
xxxxxxxxxxxxx
The first is to partner with remaining
active European banks to provide borrowers
with capital solutions on a ‘club’
basis. This is essentially a bank replacement
strategy and is targeted at performing,
consistently structured, ‘mainstream’,
borrowers. Most of these ‘clubs’
would comprise of typically 2-6 lenders,
including at least one bank. Loans in these
‘clubs’ would typically be senior secured
loans pricing at LIBOR (or Euribor) plus
550bps – 850bps margin with arrangement
fees. We believe that this is the
strategy that is most likely to become
the primary funding solution to replace
the bank and CLO liquidity that has left
the market.
The second is to focus on those
transactions which the European banks
are typically moving away from as they
reduce their risk tolerances. Whilst the
return on these transactions may be
higher, they inherently include a higher
level of risk, including higher leverage or
potentially sub-ordinated debt investing.
In some instances, this strategy will compete
with the banks where the quality
of the business is on the margin. This is
more of a bank substitution or bank disintermediation
strategy, and often there
will be no bank present in the syndicate.
We see this as more of an extension to
the traditional mezzanine market and,
as such, demand for this product will
be lower and these funds will establish
themselves as a niche product.
Who will private debt funds
appeal to and how do they
invest?
In our experience only a few of the larger
institutional investors in Europe have
historically had any knowledge of, or
exposure to, the private debt asset class
(exposure was generally via investment
in the senior (‘AAA’, ‘AA’ and ‘A’ rated)
debt tranches in CLOs). Private debt
was generally ‘below the radar’ for institutional
investors and was perceived not
to be able to deliver sufficient returns
to compensate for illiquidity and capital
charge treatment.
In our experience the increased interest
in the private debt asset class has been
driven by the following factors:
1. In the current capital market environment
it is very difficult for institutional
investors to generate sufficient returns
to meet their core needs for (1) regular
income distributions and/or (2)
long term liability matching.
2. The returns available from investment
in European private debt are
currently significantly higher than
both the long-term historic average
and the equivalent returns in the USA.
Modelled returns based on current
deals in the market are perceived to
be sufficiently attractive to compensate
institutional investors for the
reduced liquidity of the investment
and the capital charges of lending to
relatively small, sub-investment grade
borrowers.
3. Other attractive features that appeal
to institutional investors are the
lower volatility of returns (compared
to for instance, the high yield market),
the ability to actively manage credit
loss risk through due diligence and
documentation, a low correlation to
other mainstream financial markets
and low duration risk protecting
against inflation.
Having made the decision to allocate
to the asset class, the next key consideration
for investors is to select a manager
with which to work. Based on our
18
Private Debt Investor | March 2013

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experience when undertaking due diligence
the key considerations for most
investors are:
1. Reputation: because the asset class is
new to most institutional investors,
there is naturally a degree of apprehension
from an investor’s perspective,
given their lack of familiarity
with the asset class.
2. Track record – there are very few
managers that have a track record
as both an experienced investment
manager of third party money as well
as a creative investor in private debt.
Investors want managers that can
demonstrate the credit analysis and
selection skills necessary to deliver
the expected returns.
3. Proven origination platform: institutional
investors want to invest in
teams that can demonstrate the ability
to consistently originate high quality
investment opportunities. In our
experience, a conversion rate of 10%
of all new investment opportunities
into completed investments is a reasonable
working assumption. Therefore,
to build a diversified portfolio
requires a high flow of new investment
opportunities.
4. Execution capability: constructing
a reasonably diversified portfolio of
loans within the direct lending space
is a highly labour intensive process
and requires a team of proven investment
professionals. The nature of
the origination and execution process,
along with lower conversion
rate, means that the team set up
for a direct lending platform needs
to be tailored around this process,
especially when compared to a fund
buying solely syndicated loans. Close
monitoring of the portfolio is also a
key part of risk management. Therefore
managers need to have invested
in building a large team of experienced
professionals.
Investors want
managers that can
demonstrate the credit
analysis and selection
skills necessary to
deliver the expected
returns
xxxxxxxxxxxxx
Challenges and threats to the
growth of European private
debt funds
Direct lending private debt funds certainly
have the potential to address a
significant part of the liquidity requirements
of the European buyout market.
However, this is still a nascent market in
Europe and there are a number of challenges
to the development of private debt
funds as a mainstream lender alongside
the clearing banks:
1. Illiquidity: private loans for mid-market
borrowers are generally an illiquid
asset class and therefore it is difficult
for fund managers to offer investors
any form of redemption liquidity. In
the US fund managers have found a
partial solution through the use of
listed Business Development Company
(BDC) structures and exchange
traded mutual funds often referred to
as prime rate funds.
2. Proof of strategy: given the state of
evolution of the European direct lending
market, the experience of investors
in the first wave of funds will be critical
in the successful long term development
of the market. The diverse range
of marketed returns and strategies will
make wholesale comparison unlikely.
3. Defaults/ Recoveries: a critical
attribute in the appeal of senior
secured debt is the historically low
default rates and comparatively high
recovery rates. The continued evidence
of these characteristics will
remain paramount to further evolution
of the market
4. Regulation: a number of European
governments have historically been
opposed to the meaningful development
of the non-bank lending market.
This has typically manifested itself
is particularly prescriptive legislation
as to who can provide financing
for companies and how it should be
done. However others, including the
UK, have taken the opposite stance
and more recently been highly supportive
of direct lending funds which
contribute to kick starting the economy
by making financing available to
mid-market companies.
5. In addition, regulators for pension
funds and insurance companies have
had a clear bias towards forcing
these institutional investors towards
marked-to-market, liquid assets.
The uncertainty over the timing and
scope of the Solvency II framework
has resulted in insurance companies
being highly hesitant in investing in
new asset classes in an ever evolving
capital requirement framework.
Conclusion
As banks continue to reduce their lending
appetite and CLO capacity shrinks further,
we expect that the European buyout
funding market will eventually transition
from a heavily banked market to a more
balanced bank and institutional market,
as has happened many years ago in the
US. Economic and regulatory uncertainty
has slowed this process down but there
is evidence of momentum building up as
more investing institutions seek solutions
to enhance the yield of their portfolios. n
For the full version of this
article or to receive more
details on the entire content of
the upcoming book, please Email
Anthony.o@peimedia.com
March 2013 | Private Debt Investor 19

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termsheet
hmv
When the music’s over...
‘Nipper’, immortalised
in HMV’s logo, has
much to ponder
...turn out the light, sang the Doors. For music, film and games retailer HMV, a burdensome
debt load and weak performance brought the curtain down on more than 100 years of
trading. But the acquisition of its debt by Hilco could pave the way for a positive outcome,
writes Oliver Smiddy
T E RMS H E E T
Another day, another retail casualty.
When HMV finally yielded to the
inevitable and entered administration
in January, it seemed to spell the end for a company
that traces its roots back to the 1890s. Its
name and logo, for example, were derived from
the Francis Barraud dog-and-gramophone
painting “His Master’s Voice”, bought in 1899
by the company that would later become HMV.
Administration was announced in January.
As many as 50 suitors, including a large
number of distressed investors such as the
UK’s Better Capital and Endless, appeared
to see value in the iconic company, and not
just from its substantial real estate portfolio.
Just seven days later, Hilco, a restructuring
firm specialising in distressed retailers, won
the bidding war to acquire HMV’s debt from
eight banks including RBS and Lloyds Banking
Group. Hilco’s offer of around £34 million
($52.1 million; €38.9 million) was reportedly
lower than some rival bids. But informal (albeit
not legally-binding) assurances from Hilco that
it would strive to keep the company going
swayed the banking syndicate, which feared
reputational damage should a well-known high
street chain be carved up and sold off and its
6,320 staff made redundant.
Retail analyst Nick Bubb tells Private
Debt Investor: “The physical market for
entertainment is still pretty big, despite
the digitalisation of many products. So I
can see why Hilco is interested in the rump
of HMV, not least as it has shown with
HMV Canada [acquired from HMV Group
in 2011] that there is life after death.”
The acquisition of HMV’s £176 million
debt gave Hilco de facto control
of the company. Negotiations with the
company’s administrators as to how
to restructure the company are ongoing.
Hilco declined to comment, while
administrator Deloitte’s restructuring
team were unavailable for comment at
the time of going to press.
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Private Debt Investor | March 2013

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Under-paced and over-geared
It’s no secret that retailers generally have been
squeezed in the economic downturn as consumers’
spending power has been eroded. In
addition though, HMV was dealt a grievous
additional blow by a growing trend towards
online music and computer game sales at the
expense of traditional high street retailers.
“HMV didn’t adapt its business quickly
enough to the decline in the CD and DVD
market: it should have moved more quickly
into technology and shouldn’t have frittered
around with things like cinemas and live
music,” Bubb says.
Performance since 2011 had declined
sharply, with revenues more than halving
from £1.88 billion in the 2008 financial
year to £873 million in 2012, according to
data provider Debtwire. HMV’s reported
EBITDA collapsed from £108 million to
£13.4 million over the same period.
If that makes grim reading, the debt section
of its balance sheet is worse. Total debt
rose from £35.5 million in 2008 to £193 million.
HMV’s total debt to adjusted EBITDA
ratio moved from 0.33x to 8.52x in those
five years.
The company recognised it had a problem
and took steps to address it last year. One of
those steps involved an ‘amend-and-extend’
to its £220 million senior bank facility last
April. That comprised a £60 million revolver,
a £70 million term loan A and £90 million
term loan B, whose maturities were pushed
out to 30 September 2014, or September
2015 if certain conditions were met. That
senior facility pays interest at LIBOR +4
percent.
Total net debt at 27 October 2012,
according to Debtwire, stood at £171 million
(£200 million total debt less cash), equating
to 5.69x leverage. A few months later,
management was replaced.
It had also been shedding assets. It sold
book retail chain Waterstone’s to A&NN
Capital Management for £53 million in
May 2011, the Hammersmith Apollo venue
to STAGE C for £32 million 12 months later,
and finally its live music division MAMA
group, including its 50 percent stake in
Mean Fiddler, to LDC for £7.3 million in
December 2012.
None of these measures helped to stave
off the threat of insolvency. In December,
HMV warned that due to weak trading in the
half year to 27 October, it faced breaching
covenants in January this year. On 14 January,
its shares were suspended after it announced
it would be appointing administrators.
On 22 January, Hilco’s UK team
announced in a statement that it had
acquired HMV’s debt from its lenders, but
had not bought the business itself. “Hilco
believes there to be a viable underlying HMV
business and will now be working closely
with Deloitte who, as administrators, are
reviewing the business to determine future
options,” the statement said.
Hilco reportedly offered £15 million in
cash for the debt – more than a 75 percent
discount to face value – with a second payment
of around £19 million contingent on
the company returning to profitability.
It’s been a busy period post-acquisition.
Deloitte announced last month the closure of
66 loss-making stores from its overall portfolio
of 220 outlets. The 66 stores together
employing 930 staff.
Nick Edwards, one of the Deloitte administrators
alongside Rob Harding and Neville
Kahn, said in a statement: “We have now
completed a review of the store portfolio
and have identified 66 loss making stores for
closure. This step has been taken in order to
enhance the prospects of securing the business’
future as a going concern.”
In addition, HMV shut down its website
and made around 60 redundancies at its head
offices, including replacement chief executive
Trevor Moore. He had been in post for
just seven months.
Significantly, it has also agreed terms with
its principal suppliers to secure the continued
delivery of major film, music and gaming
travelodge
timeline
1899 The Gramophone Company acquires
the painting ‘His Master’s Voice’
1907 The Gramophone Company begins
manufacturing disc records
1921 The first ‘HMV’ store opens in Oxford
Street, London
1998 HMV wins independence from
EMI, formerly known as the Gramophone
Company. Acquires book retailer Waterstone’s
2002 HMV Group floats on the London Stock
Exchange
2005 Buyout firm Permira’s £762 million offer
for HMV is rebuffed
2006 A second Permira offer is rejected
2007 HMV acquires music retailer Fopp out of
administration
2009 HMV acquires selected Zavvi retail
outlets out of administration, and live music
venue management business MAMA Group
2011 HMV issues profit warning and
announces the closure of 40 HMV and 20
Waterstone’s stores. Later that year, it sells
Waterstone’s
2012 HMV sells London venue The
Hammersmith Apollo, MAMA Group
2013 (January) – HMV enters administration.
Hilco UK acquires HMV’s debt and with it, de
facto control of the business
2013 (February) – Administrators Deloitte
announce 66 store closures
releases. Suppliers like Sony and Universal
Music are understood to be keen to back a
high street retailer as a rival outlet to supermarkets
and online retailers.
Any sale would now require assent from
Hilco. Its acquisition of HMV’s debt puts it
in an influential position, and could prove
to be enormously lucrative if performance
at the group improves. If so, it would mark
another success for the firm, demonstrating
that with the right skillset, distressed debt
investors can deliver outsized returns. n
March 2013 | Private Debt Investor 21

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capital talk
PRIVATE DEBT INVESTOR KEYNOTE INTERVIEW, FEBRUARY 2013
Goodman smith Ostrover
The three founders of GSO Capital Partners have been
at the forefront of private debt for more than a decade.
Oliver Smiddy sits down with co-founder Tripp Smith
to discuss the development of a credit powerhouse and
its push to capitalise on the European market’s current
dislocation
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Private Debt Investor | March 2013

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capital talk
“The banks, which used
to be very aggressive,
have since retrenched
and that’s created an
opportunity”
Sanjay Mistry, Mercer
Tripp Smith, the ‘S’ in GSO Capital
Partners, is getting to grips with
London. He moved here last year
to oversee the firm’s activities in Europe,
and to help make sense of the continent’s
“crazy” market.
He’s been to the UK capital hundreds
of times during his career in investment
banking and latterly at GSO of course, but
he now calls it home, so much so that his
sons are keen supporters of three different
Premiership football clubs. He’s partial to
soccer too, but his heart is really with college
football – although when Private Debt
Investor meets him at Blackstone’s London
offices in Berkeley Square he’s still smarting
from The University of Notre Dame’s
recent defeat in the championship finals.
It is from its London HQ that GSO is
launching a concerted attempt to crack
the European market, which hitherto has
proven a bank-dominated one.
“With the banks and CLOs pulling
back from the leveraged finance market
in Europe it feels like the market must
cheapen up to attract global allocators of
capital to fill the void,” Smith says. “In the
meantime, we may be in store for a dislocation
in the markets caused by this supply/
demand imbalance.”
Despite the conundra presented by the
markets on both sides of the Atlantic (the
US has its own, no less pressing, issues),
Smith and his partners have many reasons
to be cheerful. GSO declined to name specific
funds, but according to PDI’s research
and analytics division, it recently closed its
second dedicated mezzanine fund – GSO
Capital Opportunities II – on $4 billion.
Another string to the firm’s bow is its
rescue-lending business, which offers debt
financing solutions to help struggling companies
restructure. Its second rescue fund,
called GSO Capital Solutions II according
to the PDI data, is understood to have held
an interim close on $3.25 billion on its way
towards $5 billion or thereabouts.
If the ability to raise capital is the sign of
a healthy firm, GSO appears to be in great
condition and well-positioned to capitalise
on the structural changes going on in
Europe in particular. Few fund managers
can raise such amounts with the same
apparent ease. But just how did Smith
and his two partners, Bennett Goodman
and Douglas Ostrover, create this private
debt powerhouse?
Beginnings
The trio’s association goes back a long way.
In the 1980s, Goodman and Smith were
at the sharp end of the booming leveraged
finance industry, working at Drexel
Burnham Lambert, one of the pioneers of
high yield debt.
Goodman moved to Donaldson, Lufkin
& Jenrette (DLJ) in 1988 and promptly
founded the bank’s high yield capital
markets group. He was joined in 1992 by
Ostrover, and then by Smith a year later in
1993. That was the year the bank became
the number one global issuer of high yield
bonds, a crown the team held for the next
11 years according to GSO’s website.
Smith takes up the story. “When we
first started at DLJ there were 10 people
sitting in a room doing high yield bonds.
We grew that business without much
capital and expanded into Europe – we
were one of the first to come into Europe
with leveraged finance. We also started a
leveraged loans business and grew that too
until 2000, when we merged with Credit
Suisse.”
This early exposure to the European
market gave the team an inkling of the
unique challenges the continent’s markets
presented, particularly the dominating role
the region’s banks played.
“Europe was always a really difficult
place to compete,” Smith explains. “When
we were at Credit Suisse and DLJ, we tried
to get the high yield and institutional
market going in Europe, but the banks here
March 2013 | Private Debt Investor 23

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were just so aggressive. We would go into
a company and we’d pitch five times debt
to cashflow, global allocations of high yield
bonds and leveraged loans, and it would be
8 percent, and then the in-country banks
would come back with LIBOR plus 200
bps and we’d lose. It happened over and
over.
“I think that’s one of the main reasons
that the institutional market in Europe
never really developed – it’s always been
really shallow, and it’s about a sixth the size
of the US, yet the economies are roughly
the same size. It’s always been one of the big
frustrations. But that has got to change in
the long term and I think that’s a big theme
for the debt markets,” he says.
Spinning out
In 2004, Goodman, Smith and Ostrover
decided they wanted to go it alone. “At that
time we were a pretty important part of
Credit Suisse, but they were great about
it, and wanted to make sure the transition
was handled the right way. We couldn’t have
done it without Credit Suisse – they were
very supportive.”
Smith says there were no regrets.
“There’s no better business decisions that
we have made than to start our own firm,”
he says.
The spin-out was phased slowly. Goodman
left first, followed by Smith and then
Ostrover. The bank seeded the team with
capital, which became the kernel of a
hedge fund product. Raised in late 2005,
that fund effectively became GSO’s first
investment vehicle. Structured with a
side-pocket equivalent to 30 percent of
the overall capital pool, the main fund was
a long-short, event-driven distressed credit
fund. The side pocket gave the team the
flexibility to pursue illiquid strategies.
Next came a CLO fund. The firm
acquired the CLO unit of Royal Bank of
Canada in 2006, headed by Dan Smith.
GSO began to grow the business unit,
before branching out again in 2007, this
time into mezzanine. It had been an active
participant in the mezzanine and rescue
lending before, but the volume of opportunities
it encountered suggested dedicated
funds would be more appropriate. Its first
mezzanine fund raised $2 billion.
At this stage, GSO had pushed past
the $10 billion assets under management
mark, singling it out as a major player in
the private debt market. As a result, the
firm began to attract attention from other
heavyweight market participants.
The Blackstone connection
The Blackstone Group went public in
2007, at what with hindsight was the
very top of the market, the zenith of the
buyout boom that had started in the early
2000s. It had an enviable reputation as an
LBO specialist and the firepower to match,
and burgeoning real estate and hedge fund
businesses that were similarly viewed by
many as best-in-class. Its fourth business
unit – credit – was, some argued, the firm’s
weak link. It was also significantly smaller
in AUM terms than the other three business
lines.
“At that time, we probably had $10-12
billion in assets under management,” Smith
says. “Blackstone had a credit business that
was about the same size. They wanted to
merge their business with ours to create
scale, and put us in charge of it. That was
the genesis of the acquisition.”
There were existing links between the
firms too. They had got to know each other
over a number of years: Blackstone had
invested in GSO’s first hedge fund, and
its placement arm, Park Hill Group, had
helped GSO to raise two of its funds.
Blackstone chairman and chief executive
Stephen Schwarzman also revealed in
an investor call back in 2008 that he’d tried
to hire Goodman twice, first in 1999 and
then again in 2004 when he left Credit
Suisse. It was an attempt to rectify an error
GSO provided debt to underwrite
Clearlake Capital’s acquisition of
Swiss Watch International in December
“When we first started
... there were probably
10 people sitting in a
room doing high yield
bonds”
Sanjay Mistry, Mercer
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Private Debt Investor | March 2013

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Schwarzman admitted to making: the premature
sale of BlackRock.
“One regret we have is that we sold
BlackRock too early,” Schwarzman said
of the asset management division led by
Laurence Fink, which Blackstone spun off
in 1992.
Speaking after the GSO deal went
through, Schwarzman said: “For me, this is
the culmination of a long-term strategy of
rebuilding this part of our firm and bringing
Bennett and his outstanding team to
join us.”
GSO’s investors were supportive of
the deal, which was ultimately valued at
just shy of $1 billion – an initial payment
of $620 million in cash and Blackstone
stock, with an additional $310 million
paid over five years contingent on certain
conditions being met, Blackstone president
Tony James said at the time of the deal.
The economy of scale
The merger made absolute sense for both
parties, as Smith explains. “What we foresaw
at the time was that credit was going
to be a very good place to be. We’d just
gone through the crisis, people were very
defensive, and we thought that having scale
would be really helpful.
“We were used to running big businesses,
we had a great group of partners
that we’d assembled, and the ability to
double in size and get Blackstone behind
us we thought would be a good thing to do
to take advantage of the market.”
The rationale behind the scale argument
is simple, Smith says: there’s simply
too much private equity money around at
the moment, and too little debt, so a firm
that can provide a significant amount of
debt to a financing is likely to face little
competition. “We can play in situations that
others just can’t do, and if you can solve a
problem that others can’t, you can usually
get paid more,” he says.
GSO is now the fastest-growing of
Steve Schwarzman, a key player in bringing
GSO on board
“We can play in
situations that others
just can’t do, and if you
can solve a problem
that others can’t, you
can usually get paid
more “
Sanjay Mistry, Mercer
Blackstone’s four principal investment
businesses, Smith says. Its assets under
management, at more than $56.4 billion,
now exceed both private equity ($51 billion)
and hedge funds ($46.1 billion) and
has only recently been overtaken by real
estate ($56.7 billion), according to Blackstone’s
full year results for 2012.
It was a strong year altogether for GSO,
with ‘economic income’ up 130 percent to
a record $325 million and AUM growth of
53 percent. Its mezzanine portfolio was the
star of the show, delivering 26.2 percent
net returns for the full year, ahead of rescue
lending (up 15.7 percent) and hedge funds
(up 13.4 percent).
That growth has been predicated on
delivering consistently strong returns.
GSO’s flagship mezzanine fund, for example,
has delivered returns that many investors
in private equity funds would take
happily. How did GSO manage to deliver
strong performance from that fund, having
raised it at “probably the worst time ever”
to raise a mezzanine vehicle?
“We did a good job, we didn’t make any
mistakes,” Smith says.
That fund was almost exclusively
invested in the US market, he says. It was,
he admits, a difficult few years for the firm’s
sizeable London-based team. “The European
market at the time was tough – the
risk-adjusted returns you could get over
here versus the US were not attractive.”
Although the London team were understandably
unhappy about the lack of dealflow,
the firm’s reluctance to pitch into the
European market for the sake of it paid
off, as some rival managers, over-eager to
deploy capital, got burnt as a result.
During a break in the PDI interview,
GSO’s European head, Michael Whitman,
cracks a joke with Smith. “He runs our
office here,” Smith says on his return. “He’s
a good guy, been here since 2007”. There’s
a collegiate feel to the GSO team, belying
the sheer scale of a 230-employee business,
March 2013 | Private Debt Investor 25

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which now sprawls across offices in New
York, Dublin, Houston and London.
Solving Europe
Smith moved to London last year in order
to oversee an expansion of the group’s
activities in Europe – a priority for the
firm. He’s under no illusions of the challenge
this market represents though. The
first problem, he says, is Euro tail-risk.
Over the last year, fears over the future
of the Euro have added an extra layer of
risk to an already heady cocktail of economic
and political uncertainty. “If there’s
a 10 percent chance of the Euro blowing
up, that’s probably too high for a creditorientated
fund,” he says.
The second major problem is the
diverse array of regulatory regimes across
the continent. Smith elaborates: “There’s
that dynamic with the southern European
countries – it’s very difficult to lend into
them from a bankruptcy code perspective.
We spend a lot of time turning a Spanish
situation into a US deal if we can structure
it like that, for example.”
The firm did just that last August when
it invested in Spanish business Giant
Cement through its first rescue finance
fund. The fund has gained traction in the
wider market largely because of GSO’s
consensual approach, Smith explains.
“We’re not loan-to-own guys. The banks
want to introduce us to situations because
we’re not going to embarrass them [by running
away with a company].
“We could do a lot in Spain for example
“We’ve raised a
significant sum
of money for the
strategies that can
take advantage of the
secular shifts that are
going on”
Sanjay Mistry, Mercer
and help a lot of companies get through
what they’re going through. But you can’t
lend into Spain unless you can price in that
risk of bankruptcy and lower amounts of
recoveries you’ll get. There should be a
Euro-wide bankruptcy code, but there
isn’t.
“Europe should be at a discount due
to the currency, its jurisdiction issues, the
fact its economies are performing worse
and the lack of [credit] diversity – there’s
a whole variety of reasons. But there’s currently
a limited discount, and that’s because
the CLOs, which are nearing the end of
their reinvestment periods, are aggressively
purchasing because they have such
attractively-priced liabilities,” Smith continues.
He acknowledges that GSO’s own
CLO funds are doing exactly the same
thing because it makes commercial sense
at present.
Comparing the current European and
US CLO markets, Smith observes: “The
US market is doing well, but [in Europe],
there’s the regulation where you have to
have ‘skin in the game’ which makes it
Smith is now based in Blackstone’s Berkeley Square offices,
from which he’ll oversee GSO’s European operations
harder. There’s also not as much diversity
[of underlying loans] and the assets are
priced too richly for the liabilities. You need
the assets to trade off and then you could
do some deals,” he predicts.
Smith seems energized by the challenge,
rather than dismayed at the complexity
and uncertainty of the European economic
landscape.
“I’m personally really excited about the
European market and have obviously voted
with my feet. We have so much going on,
it’s a very exciting time for the group here.
It could be a great couple of years for us,”
he says.
“We’ve raised a significant sum of money
for the strategies that can take advantage
of the secular shifts that are going on. The
banks, which used to be very aggressive,
have since retrenched and that’s created an
opportunity,” he adds.
He thinks the prospect of widespread
corporate loan portfolios coming up for
sale as banks delever has been overstated
however. “I spoke at our LP conference last
April, and said we didn’t think there’d be
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Private Debt Investor | March 2013

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a big panacea with lots of deals – more
like three or four. The banks will let things
mature and that’s when the action will
happen.”
The wall of maturing debt is going to
be a big issue, Smith says, especially when
you factor in the withdrawal from the
European market of CLOs and further
retrenchment by the banks. The growth of
the high yield bond market, he believes, is
insufficient to plug the gap, paving the way
for further growth in private debt funds.
Spreading the message
In order to deploy capital however, private
debt providers need to win over dealmakers
at private equity, infrastructure
and real estate firms. It stands to reason
that in a European market which is far
less accustomed to non-bank sources of
debt, there’s a certain amount of ingrained
resistance towards private debt funds. That
is changing though, Smith believes, as sponsors
embrace alternative sources of debt,
particularly as products like mezzanine
can be used to do things traditional bank
finance can’t.
Investors too are switching on to the
opportunity. There’s seemingly a product
to suit most investors’ needs within the
GSO stable, from the aforementioned mezzanine,
rescue-lending and hedge funds,
to CLOs, managed accounts and business
development company (BDC) vehicles (the
latter being a US-only structure).
In a difficult economic climate, investors
have been pleasantly surprised at the
returns on offer and have in many instances
overcome concerns about illiquidity and
capped upside. Factors like quarterly distributions
also win favour, according to
investor sources.
For GSO then, Europe presents an
enticing opportunity. But alongside its
existing suite of fund products, there’s
the potential for a new initiative. The next,
obvious move for the firm in Europe is a
“I’m personally really
excited about the
european market and
have voted with my feet”
Sanjay Mistry, Mercer
push into direct lending. Smith declines
to comment on the firm’s plans in detail,
but says, “It’s pretty easy to see why that
would be attractive. We have that in our
DNA, and our brand name would be pretty
helpful, so we’ll probably do something in
the near term on that front – we’re just
Blackstone and GSO’s HQ on 345 Park Avenue, New York
working out how best to go about it.” Only
a handful of rivals, including the likes of
Ares Capital Management, are pursuing a
direct lending strategy.
For GSO, such a move would mark the
next stage in its evolution. The firm has
come a long way since its creation eight
years ago. Goodman, Smith and Ostrover
may have relinquished some of their independence
in agreeing to the Blackstone
deal, but they’ve capitalised on the additional
resources the merger provided to
build a franchise that goes from strength
to strength. The challenge in the short
term will be making sense of the European
market and capitalising on the evident
opportunity it presents. n
March 2013 | Private Debt Investor 27

feature
special report
fundraising
The long road
to closing
Raising capital is perhaps the greatest challenge facing new debt fund managers.
First, they need to convince investors of the merits of private debt.
Then, they need to persuade them to transfer allocations from other parts
of their portfolio. Magda Ali reports
28
Private Debt Investor | March 2013

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There are more than 170 private debt
funds currently in the market globally.
Collectively, those funds are chasing
commitments totalling almost $100 billion,
according to Private Debt Investor’s research and
analytics division. A hitherto relatively minor
part of the alternatives landscape is fast becoming
a major feature.
There are sizeable funds within that overall
total, from Shanghai International Group’s $8
billion vehicle, to Oaktree Capital Management’s
latest, a $4.9 billion-target fund.
Investors are evidently warming to this relatively
new asset class. The $5.7 billion New
Hampshire Retirement System, for example,
recently announced a 10 to 15 percent allocation
to private debt within its alternatives
portfolio. Elsewhere, Pennsylvania Public School
Employees’ Retirement System has committed
more than $943 million to private debt funds
in recent months.
“We are being flooded with proposals to
invest in debt,” says one Paris-based institutional
investor. “Debt managers are in a better situation
than private equity managers, so the story
does sound compelling. Most of us in Europe
are however fairly conservative and favour
established players.”
And therein lies the crux. For the raft of
new managers springing up to capitalise on the
dislocation in the credit market, finding a way
to work around the track record problem is
key to a successful fundraising.
Established managers with a proven ability
to generate returns are understandably better
able to convince investors that they can generate
regular yield. “Their longstanding relationships
to a large number of investors and ‘brand name’
recognition can help them to mobilise capital,”
says Scott Church, partner at placement agency
Rede Partners. “The larger, global firms rely on
close relationships with large institutions and
tailored solutions, often in separate or managed
account form.”
Bigger, established firms can also boast sizeable
in-house investor relations teams. With such
an infrastructure in place, they are able to raise
large sums very quickly compared to start-ups
for whom the road to fundraising success is
long and laborious.
Rede’s recent successes include helping to
raise AnaCap Financial Partners’ second-generation
credit opportunities fund at its hard cap
of £350 million after only a six month active
fundraising campaign. Part of AnaCap’s success
was due to its tight focus and willingness to seek
external support, Church believes. “Increasingly,
Sinik: nearing the finish line
the more focused or targeted ‘niche’ debt fund
managers are using specialist consultants and
placement agencies to increase the effectiveness
of their campaigns,” he says.
“The whole concept of risk and return is
being reassessed by investors,” explains Church.
“With all the pressure on returns in conventional
buyouts, investors are starting to realise
that they might benefit from more downsideprotected
strategies like private debt, and are
willing to consider longer lock-up structures.”
“Domain expertise in private debt is still
in development; private equity teams have not
traditionally spent much time on it, and some
of the more enlightened consultants are now
focusing in the space across liquid fixed income,
hedge funds and private debt PE in a less ‘silo’d
manner” adds Church.
First timers
Until recently, the debt fundraising market
was dominated by large funds brought to
market by established players. Increasingly,
specialist houses with either a sector focus
or a local focus are securing investments
for first time private debt funds. But for
these new players, the process of raising
funds is far more taxing one than for their
established peers.
Investors can be sceptical about the ability
of individuals to deliver returns without the
origination and execution infrastructure of a
large investment bank or asset management
behind them.
Ilkka Rantanen, principal at fledgling private
debt fund manager Metric Capital Partners,
admits that it’s a challenge. “It is not an easy
task to convince investors about credibility of
a manager with whom they may not be familiar,
alongside an asset class in which they have
little or no experience investing. Ultimately it
comes down to illustrating the ability to generate
highly attractive risk-adjusted returns in the
current environment.”
Metric, which was founded in 2011 by
former Towerbrook and UBS executive John
Sinik, is nearing the finishing line for its first
fundraising. Having held a first close on €100
million in March last year, the firm hopes to
hold a final close of its fund end of this month.
“After completing five deals with robust companies
operating in non-discretionary sectors
like healthcare, we have earned a reputation
for deploying a recession-resistant investment
strategy,” says Sinik. Reaching a first close and
then putting capital to work in order to demonstrate
the firm’s ability to do deals was key
in maintaining fundraising momentum, he says.
Elsewhere, newly-established private debt
fund manager Prefequity has been working
strenuously to raise capitalfor its first debt
fund. The London-based fund manager is
approaching its first close and is set to finalise
10 to 12 commitments of between £5 million
and £20 million by the end of March, allowing
the firm to hold a first close for its £125 million
(€146 million; $197 million) fund, after
12 months on the road.
“Institutional investors such as European
pension funds that are interested in private
March 2013 | Private Debt Investor 29

feature
special report
fundraising
debt are usually more comfortable investing
in larger debt funds that operate on a pan-
European basis – though we think there is a
role for smaller, country-specific strategies,
too” says Theo Dickens, partner at Prefequity.
“So for our first fund we are focusing less
on institutional investors and more on family
offices,” adds Dickens. One institutional investor
that has already committed to the fund is
the European Investment Fund, which seeded
the fund with an undisclosed commitment.
Prefequity also hopes to receive investment
from the British Government under its Business
Finance Partnership.
Though the fund is relatively small, Dickens
says the firm has already built a long pipeline
of potential transactions. “The market that we
are trying to cater for is a niche one – between
what banks will offer and where private equity
investment is required,” he adds.
“There are opportunities there, but the real
difficulty lies in extrapolating a track record for
future returns,” explains Mark Vickers, partner
at law-firm Ashurst. “Newly-formed debt fund
managers need to find the equilibrium between
yield and risk by analysing what is on offer.”
The allocation question
Figuring out how to pitch funds to investors
is proving to be a key issue for managers.
To do so effectively, managers need
to understand how investors will choose
to allocate private debt within their portfolios.
But the fact that most institutional
investors are yet to have discrete allocations
to private debt is making the task difficult,
market participants say. “Although investors
see the attractions of the asset class,
they tend to lump it together with their
alternative investments such as private
equity,” says Dickens.
That can complicate the task of pitching
a private debt fund, because the returns
achievable with private equity aren’t capped in
the same way, and are generally higher (albeit
riskier).
Dickens: targeting a niche market
One Frankfurt-based institutional investor
tells Private Debt Investor: “Most investors prefer
private equity, primarily because it is viewed as
more sustainable, and is easier to understand.”
He continues: “A lot of the institutional
investors sit across different desks: alternatives,
fixed income, private equity, real estate. Often
it is the same team doing all the investing, and
they do not have the capacity to understand
debt well enough to know where to place their
allocations.”
In the US, where investor in the asset
class are almost exclusively pension funds and
insurance companies, between 10-20 percent
of investors already have allocations to private
debt, according to Dickens. “That is quite a
significant portion when you think about the
size of the market, and the fact that the asset
class is relatively new,” he adds.
This is partly due to the fact that US investors
are becoming more comfortable with
the risk-reward dynamics of private debt,
and are prepared to tap into debt to diversify
their portfolios, according to James Newsome,
managing partner at debt fund advisory and
placement group Avebury Capital Partners.
“Private debt funds remain most similar to
private equity funds in their basic structure,
Newsome says. “They tend to be around ten
years in length, typically don’t offer liquidity and
are pegged to offer high returns based on ‘expert
selection’ of individual credits. Some debt fund
managers are directly targeting private equity
investors, but are emphasising to those LPs that
the key advantage over private equity is that with
a debt fund, they receive cash early.
“This pays the manager’s fee and avoids the
dreaded J-Curve where returns are negative in
the early years. The processes of the manager
are also similar for true private debt funds:
they are ‘source, negotiate, select, monitor, then
work out or exit,” adds Newsome.
With gilts and bonds offering underwhelming
returns, the credit instruments crafted by
private debt funds, often with equity kickers
to allow for significant upside, are gaining even
more momentum. “Debt pays investors cash,
typically pegged to floating rates,” explains
Newsome. “In the past, the instruments did not
sell, predominantly because of macroeconomic
problems. Now, investors are seeing that these
instruments are high yielding and the financial
incentive is becoming more apparent.”
Philippe Poggioli, managing partner at fund
of funds manager Access Capital Partners, says
it’s a different asset class that should be looking
over its shoulder. “Typically we see private debt
falling into fixed income [allocations] more
than we see it in the alternatives space.”
Poggioli says most of the allocations are
coming from larger pension funds active in
the alternative and private equity space. “Fixed
income divisions at insurance companies are
also looking to debt instruments which have
recurring liquidity,” he explains.
Many fund managers are seeing particular
interest for debt funds on the infrastructure
side. “Larger institutions either invest directly
into funds or even target direct lending through
dedicated teams [such as Allianz, which is building
out an infrastructure debt-focused direct
lending team],” says Jeremy Golding, founding
partner at German fund of funds manager
Golding Capital Partners. “But most insurance
companies and pension funds will either
invest directly into funds, into funds of funds or
through individual managed account solutions.”
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Private Debt Investor | March 2013

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Regulatory hurdles
A growing asset class, particularly one
focused on leverage, is bound to attract
attention from regulators, and private debt
is no exception. In many ways, the focus
is even sharper given the often competing
imperatives at governmental level –
to delever the economy, and yet promote
increased lending to boost growth.
But in Europe in particular, the regulatory
landscape is a veritable minefield.
“Unlike other significant types of financial
services, there is no harmonisation at EU level
of the regulation of corporate lending, including
debt funds,” says Simon Crown, partner
at Clifford Chance. “In the EU, some jurisdictions
regulate corporate lending and some do
not. Although there is no sign yet that the EU
will harmonise regulation, the likely benefits of
such a development for the EU single market
mean that it is likely in the medium term, once
economic growth returns to the EU.”
In Germany, for example, it’s difficult for
debt fund managers to attain lending mandates
without first becoming authorised as a bank.
Some non-bank lenders consider becoming
an authorised EU bank because it is the
only way to operate a pan-EU corporate
lending platform with the ability to lend in
all major EU jurisdictions.
“A lender which is not regulated as an EU
bank will face significant obstacles in some
major EU jurisdictions (such as France and
Germany) to the development of its corporate
lending business,” exaplains Clifford Chance’s
Crown. “The process is simplified if the lender
becomes a bank and therefore gains a licence
to conduct corporate lending. However, this is
easier said than done. Regulators do not hand
out banking licences easily, and the initial and
ongoing costs of bank status, and the time to
market, are very significant.”
EU-wide harmonisation would bring
about a complete overhaul of the way debt
funds operate in Europe, anticipates Avebury’s
Newsome. “Everything needs to be more
Private Debt Funds in Market
by Asset Class
140
120
100
90
80
70
60
50
40
30
20
10
0
infrastructure
transparent for the market to grow. Regulators
and investors need to understand the various
issues for private debt fund managers in the
different jurisdictions.”
The long road ahead
The market is still taking shape, and fund
managers are finding that they have to develop
regional and pan-European strategies that
take into consideration Europe’s bleak macroeconomic
backdrop coupled with the fragmented
regulatory landscape across different
sub-segments.
“For European managers, it has been
hard to get Asian and American investors
Private Debt Funds in Market
by Geographic Focus
100
90
80
70
60
50
40
30
20
10
0
aMERICA
12
Source: Private Debt Investor
86
Source: Private Debt Investor
16
ASIA
PACIFIC
123
private equity
46
EUROPE
21
GLOBAL
39
real estate
5
MIDDLE
EAST /
AFRICA
comfortable enough to invest in Eurodenominated
funds. But recent progress in
the eurozone has been felt positively in the
fundraising markets,” says Poggioli.
Yet for every good bit of news, there’s
seemingly some bad to balance it out.
“For more high-value activity such as midmarket
growth capital, investors are prepared
to pay fees to managers which are closer to
two percent, similar to private equity,” says
Avebury’s Newsome. Unfortunately for private
debt fund managers, however, there has been
downward pressure on fees, particularly in the
multi-strategy funds of funds space, he says.
Despite this, market participants like
Golding expect money to continue to flow
into the private debt industry, with the proviso
that the overall economic environment
stays relatively stable.
“Attractive spreads should continue to
come down; flexible and opportunistic managers
who can invest both in the primary and
secondary market and are able to provide different
structures such as unitranche or mezzanine
should stand to benefit,” Golding predicts.
Ultimately, the big goal for managers to
is to build scale. As GSO’s founding partner
Tripp Smith points out elsewhere in this
issue, scale for a private debt fund manager
is highly beneficial.
“Private debt managers with larger platforms
(which allow broader market coverage)
continue to have an advantage in investing
as well as fundraising and are likely to gain
market share,” says Golding.
There is a general consensus that large
pension funds and other institutions are starting
to understand the value of private debt
in their portfolios, and are working ways to
shoehorn allocations to the asset class into
their portfolios.
Ultimately, the true measure of success
will be in seeing how many of those 174
private debt funds hit their targets. It will
be a long and bumpy road for many of those
firms. n
March 2013 | Private Debt Investor 31

feature
analysis
Fund structures and terms
The shape of
things to come
Debt funds are not a new phenomenon, but the shape of
the private debt fund market is in the process of a dramatic
transformation, and so too are the structures and terms
such funds employ, writes Weil Gotshal’s James Gee
In the wake of the financial crisis capital
constraints and regulatory pressures are
causing banks to reduce their lending.
At the same time CLOs have (in Europe)
been made unattractive by the retention
provisions in the Capital Requirements
Directive. This has created a funding gap
across a variety of different asset classes
and managers are stepping into these gaps.
Some of these are new managers. Some
are platforms being built within wider alternative
investment houses keen to exploit
their existing skills and to create a new
offering. At the same time as this new
market for senior debt funds has emerged,
many managers of mezzanine and distressed
debt, are having, in relative terms at least, a
‘good’ crisis. Mezzanine returns have held up
relatively well and the opportunities for distressed
debt specialist are clearly expanding.
In many cases it is these managers that are
looking to expand their offering ‘upwards’
into the senior debt space.
The result is a wider and more complex
class of private funds that demands
specialist attention. It crosses the whole
range of alternative assets. It extends up
and down the capital spectrum. In such
circumstances it is legitimate to ask,
what, if any, are the common features
that hold these funds together?
Most obviously - they are not (generally)
investing in equity: debt has certain
defining characteristics that means
even quite different products face similar
issues. To start with, private debt managers
need to ask who will invest in these
funds and what allocations will they use?
Furthermore, the debt instruments
themselves may well face similar tax and
regulatory issues regardless of what the
underlying assets are. It is possible that
some debt investments will ultimately
benefit from a more favourable capital
treatment under the newly emerging regulatory
regimes (such as Solvency II for
EU-based insurers). But this can require
complex and careful structuring. At the
same time, debt funds clearly operate in
the shadow-banking world. Some debt
funds, particularly at the senior end, are
effectively originating debt. They need to
study the regulatory line between banking
and fund management carefully across a
range of jurisdictions.
From a tax perspective, certain similar
themes also emerge. The principal
investor-facing vehicles may appear very
similar to fund structures used for equity
investments: partnership vehicles continue
to be common. But upstream and
downstream structures may need different
solutions. Some debt managers have
a much higher turnover of investments
in their portfolios; if they are potentially
treated as trading then the tax consequences
can be dramatically different.
This can often mean that structuring
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Private Debt Investor | March 2013

feature
considerations arise within this class of
funds, which would be less of a concern
in other areas of alternatives investing.
As with all fund managers, debt fund
managers are beginning to wrestle with
the waves of new regulation and tax initiatives
falling upon the wider industry,
particularly AIFMD in the EU, FATCA
and the Advisers Act in the US. All these
have quirks that will have particular resonance
for debt fund managers.
Finally it is worth noting that debt funds
are less likely to be involved in the activities
of the companies or other assets in
which they invest. The skills offered by
managers are origination, selection and
analytical rather than operational. Also it
is likely that the debt instruments, whilst
generally not granting their holders control
of an underlying investment, are at least
more liquid than equity. This can result in
different fund terms.
It is worth touching briefly upon fund
terms. They encapsulate the manner in
which the debt fund industry has evolved
out of other alternative asset classes. In
some cases the similarities are notable
but a number of differences are apparent,
particularly as regards fee levels.
For distressed, opportunity and mezzanine
funds however, fee terms can be
remarkably similar to other alternative
fund managers. And whilst 2 and 20 can
no longer be described as prevailing characteristic
of any fund class, its former
prevalence can still be seen in the DNA of
these funds. Headline fee rates are likely
to remain close to 1.5 per cent (albeit
blended rates may be pushed lower by
the rebates or volume discounts offered
to larger investors).
Within the senior debt end of the
market however management fees can be
much lower. The infrastructure senior
debt market has been particularly active.
Here fees can be as low as 0.5 percent,
although one usually encounters more
complex arrangements with a variety of
fee levels between 0.5 to 1 percent. Some
of the larger pensions looking for teams to
manage its dedicated account may even be
expecting to secure a headline fee lower
than that. There are also some very novel
proposals: an administration fee of about
20 basis points alongside a fixed share in
the fund’s return, without any hurdle, in
the order of 6-7 percent, for example.
For managers who can find a way to live
without a significant management fee,
this sort of fee structure is a potentially
compelling alignment mechanism to be
able to offer investors.
Whilst the growth of senior debt funds
has been particularly notable in the infrastructure
space, there is also evidence of
them being created across other asset
spaces too, particularly where CLOs and
banks used to operate. As with CLOs
these perhaps ought to be volume businesses
with lower fees of perhaps 20 to
40 basis points. But as funds they remain
very different products: their offering to
investors is based upon the selection of
a concentrated portfolio not the volume
based diversification and tranche structuring
offered by CLOs. Investors in debt
funds may be exposed to similar underlying
credits, but the price of more active
selection and management will inevitably
be generally higher fee levels.
“They need to study
the regulatory line
between banking and
fund management
carefully across a
range of jurisdictions”
What is notably different from
funds investing in equity is that the feebase
upon which the rate is charged is
much more likely to be slanted towards
invested capital rather than commitments.
So even for funds which can
otherwise look very surprisingly similar
to equity funds, a 1.5 perhaps fee may be
split into, say just 0.5 perhaps on committed
capital plus 1 percent to invested
capital. Debt fund managers of all hues
tend to be expected to put Investor’s
capital to work before a ‘full’ fee is paid.
This seems to be linked to the perceived
greater liquidity in debt funds
and it is also reflected in other defining
characteristics: they tend to have shorter
investment periods (typically three years
as opposed to four or five in the private
equity space) and are far more likely to
allow a greater degree of reinvestment.
And the “20”? It remains common
across many debt funds, even those
investing at the senior end. But debates
around the waterfall structure, preferred
return rates, catch-up continue. At the
senior end yield-based waterfalls and/or
lower preferred returns can be expected.
Across the whole debt fund space there
seems to be more variability than in
equity funds. Preferred Returns linked
to interbank rates are, perhaps unsurprisingly,
somewhat more common.
No doubt, in time, clearer differences
may emerge. But for the moment, it is
clear that debt funds are beginning
to merit more dedicated treatment.
Simply bolting them on to other existing
sectoral classes no longer seems fully
adequate. n
James Gee is a senior associate in the global private funds
group at law firm Weil Gotshal. He is based in the firm’s
London office.
March 2013 | Private Debt Investor 33

feature
analysis
leveraged loans
A tale of two markets
Leveraged finance bankers on either side of
the Atlantic are feeling optimistic about 2013:
yield-hungry investors, transaction-hungry
sponsors and a more diverse mix of funding
scenarios makes for a bigger – and better –
picture. Is it for real? David Rothnie reports
Outgoing US Treasury
Secretary Timoth Geithner
presided over an upturn in
the US economy...
Parts of the leveraged finance markets
have started the year with such a spring
in their step that Chuck Prince might
be tempted out of retirement to reach for his
dancing shoes.
As chief executive of Citigroup in 2007, it
was Prince who memorably said his bank was
“still dancing” in the leveraged finance markets
just as the growing sub-prime crisis recalibrated
everyone’s idea of what risk meant and why
leveraged lending was a not-so-popular tune.
Even now, more than five years later, many banks
in Europe are still slashing risk-weighted assets
and shrinking their balance sheets.
Today, this ‘great deleveraging’ has reached a
pivotal moment because, after years of risk aversion,
investors have returned to risk-on mode.
A combination of low interest rates following
stimulative actions by central banks, signs of an
economic recovery in the US, and a belief that
the worst of the European sovereign debt crisis
may be over, has spurred investors to search
for yield. And there are a growing number of
transactions where debt - and lots of it - is a
vital ingredient.
Yannick Perreve, a managing director in
leverage finance capital markets at Citigroup,
reports: “The leverage finance market is on fire
at the moment. Investors are cash rich from the
various actions by central banks. The problem is
that until now there has been a lack of supply.
The M&A pipeline is however building.”
That supply, it seems, has finally arrived. On
a single day in February, US computer giant
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Private Debt Investor | March 2013

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Dell announced a $24.4 billion take-private,
while Liberty Global unveiled an agreed $23.3
billion takeover of Virgin Media in deal sizes not
seen since before the crisis. In truth, neither deal
adopts a classic buyout structure, but they provide
an insight into the changing dynamic in the
global leveraged finance market and will provide
important test cases for gauging the true extent
of investor appetite. Meanwhile, two LBO deals
also in February from Cerved and DuPont saw
such strong demand that the timing of Cerved
was brought forward while Dupont was reworked
to reduce the overall cost of financing.
The search for higher returns had already
helped push leveraged finance volumes to near
record highs in 2012, when global leveraged
finance volume totaled $1.67 trillion, above the
$1.38 trillion reached in 2011, and the highest
annual volume since 2007, when $2 trillion of
deals priced, according to data provider Dealogic.
Within leveraged finance, global high yield
bond issuance reached a record $424 billion
in 2012, a 36 percent increase on 2011, and
beating the previous record of $351.2 billion
set in 2010. Global leveraged loan volume rose
17 percent to $1.25 trillion in 2012, the third
highest annual total on record.
But dig a little deeper and there is a stark difference
between the US and European markets.
US dollar-denominated high yield bond issuance
accounted for 86 percent of global volume, the
highest proportion since 2008, while Eurodenominated
issuance accounted for just nine
percent of the global total, the lowest share since
the crisis.
The picture is the same in leveraged loans,
where Dealogic data reveals that US volumes
increased to $880 billion while in Europe, leveraged
loans slid 3 percent to $176.6 billion
compared with $181.2 billion in 2011.
“As far as leveraged loans are concerned, it’s
a tale of two markets at the moment,” explains
Steven Oh, co-head of leveraged loans and global
head of fixed income at PineBridge Investments
in New York. “ Last year, demand in the US
picked up following a resurgence in new CLO
issuance during the second half of the year; in
...while President of the
European Central Bank
Mario Draghi had to put on
a brave face.
March 2013 | Private Debt Investor 35

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“The US dollar market
is an important one
for substantial
deals, but it’s not just
about availability …
it’s about the ability
to use covenant-lite
structures and more
favorable margins”
Matthew Gibbons
addition there were considerable institutional
and retail inflows. Meanwhile In Europe, the
loan market shrank as supply shifted to the high
yield markets.”
Towards CLO-sure
Bankers estimate that during 2012, around
$55 billion of new CLOs were created in
the US. By contrast, in Europe, the CLO
market continues to stutter as funds created
during the boom years of 2005 to 2007 are
hitting the end of their re-investment periods.
According to research from Standard &
Poor’s, in 2011 existing CLO re-investment
capacity in Europe stood at €70 billion, but
by 2014 that is projected to fall to €15 billion,
creating a huge gap in demand. The CLO
unwind, as it is commonly referred to, will
make a significant impact but not take hold
until later this year. “The existing CLO pool
still forms a material part of the market bid
today as funds are being re-paid from bond
refinancings,” advises Matthew Gibbons,
co-head of leveraged finance at BNP Paribas.
Investment banks have scaled back their
leveraged finance operations since the crisis,
but they remain keen to underwrite risk
through their ‘originate to distribute’ model
whereby they arrange a bridge loan for a
financial sponsor then syndicate it to investors
as quickly as possible.
Gibbons adds: “As a bank we have always
adopted a prudent approach to holds so our
model has not changed substantially and we continue
to hold loans after syndication. If there has
been a change over the last few years it is that
there has been retrenchment by some lending
banks to their domestic markets.”
The big change in supply terms is that banks
no longer manage big CLO funds, which used
to hoover up so much supply. But even the more
conservative lenders are eager to exploit investors’
desire for high beta products. “There is
always a risk of a hung bridge of a syndication
going wrong,” says one head of leveraged finance,
“but banks are typically holding smaller chunks
post-trade.”
The transatlantic mismatch
The thinness of the European market is
forcing the region’s borrowers to tap the
US market instead. Last year, the volume
of US-marketed leveraged loans by non-US
borrowers reached a record high of $66.4
billion, more than double the $28.7 billion
borrowed in 2011. Perreve adds that a record
40 percent of European high yield issuers
priced trades in dollars during 2012.
Virgin Media has continued this trend of
tapping the US market as it issued a mixture
of high yield bonds and loans to help fund the
acquisition by Liberty Global. The buyout is
being backed by a total £2.925 billion-equivalent
[$4.53 billion] loan as well as a £2.3 billion-equivalent
high yield bond. The loan portion includes
a split between a £600 million tranche and a
much bigger $2.755 billion tranche, which was
expected to price a minimum of 50bp cheaper
than the sterling tranche. “The principal difference
between the US and European primary
loan markets is that the US market is broadly
open, whereas in Europe, the market is being
more selective,” says Oh.
The favourable pricing that Virgin can
achieve in dollars versus sterling suggests the
move by European companies to tap the dollar
market is not simply driven by a lack of demand
at home. Gibbons adds: “Clearly the US dollar
market is an important market to go to for
substantial deals, but it’s not just about availability.
Borrowers take other considerations into
account when accessing the US market such as
the ability to use covenant-lite structures and
more favorable margins.”
Oh agrees, commenting: “The explosion in
risk-taking is leading to an increased appetite for
leveraged loans and a higher demand for looser
covenant structures.”
The rise in cov-lite loans has led some to
voice the concern that the market is becoming
dangerously frothy. “There is a misperception
outside the alternative asset management community
about cov-lite structures,” Oh believes.
“They are more widespread than you think –
around 55 percent of new issues are cov-lite.
Also, they are associated with low quality companies
but in fact the reverse is true. It is the
better quality companies that tend to issue covlite
loans because they can. Covenants provide a
useful warning system but they are not the only
way to analyse a company’s prospect of default.”
Filling the funding gap
While no market participant would try
and play down the importance of the
US market when seeking liquidity, some
bankers argue the negative impact of the
CLO unwind is over-played. While new
CLO issuance will remain muted, bankers
expect a trickle of new issuance, not least
from Barclays and Credit Suisse, which
are believed to be lining up new CLOs for
Pramerica and Cairn Capital respectively.
There are also signs of encouragement from
more traditional institutional managers, managed
accounts and multi-asset managers, who
are now putting more money to work in loans.
“In the past year, CLO managers have been getting
non-CLO money to manage and some of
36
Private Debt Investor | March 2013

feature
this is being allocated to high yield bonds and
loans,” says Jeremy Selway, a managing director
in leveraged debt capital markets at Deutsche
Bank.“ On the larger deals, increasingly, other
institutional investors are investing in loans,
managing money directly from pension funds.”
At the same time the growth of credit funds
continues to surge, with managers beginning
to segment the market in ways that evidence
a more stratified, and strategized, approach
– hence the appearance, for example, of debt
funds aimed exclusively at the mid-market.
Bankers are suggesting that new liquidity
providers can make an impact at the smaller
or more esoteric end of the deal spectrum.
“To date, direct lending has tended to work on
slightly off-pitch transactions, perhaps with a
restructuring history, or in a sector that banks
might find a bit challenging,” says Gibbons.
Last year, Czech banks arranged a loan of
up to €1 billion to energy group Energeticky a
Prumyslovy Holding (EPH) in the biggest club
deal in the country’s domestic market, and one
which featured a direct lending element.
“Direct lending tends to take place on
smaller, private deals so by definition the size of
the market is hard to judge,” says BNP’s Gibbons.
Bankers report that they are not encountering
the new breed of lenders on the big loan
syndications, and say that the days when large
numbers of non-traditional lenders have the
firepower to do a €100 million debt financing
are some way off, not least because of the
prohibitive pricing that tends to be directed at
companies that cannot tap the leveraged loan
or bond markets.
Perhaps unsurprisingly, banks welcome any
additional sources of liquidity to support what
they hope will be a revival of the LBO market.
In their minds there is no suggestion that private
debt funds are about to start taking meaningful
loan or bond underwriting market share from
banks, however. “Banks have got to start firing
on all cylinders again to boost their return on
capital,” insists one banker. “Leveraged finance
is a highly profitable business and will play a
key role.” This is in stark contrast to project and
infrastructure finance, where banks are pulling
back from long-term commitments that are too
expensive to hold under Basel III regulations.
Leverage rising, but not like the
old days
The search for yield amongst institutional
investors has injected an even greater sense of
urgency amongst deal-starved banks to write big
financing tickets for the supply that they crave.
Selway says: “There have not been many
completely new loans for a number of years –
instead there has been a recycling of secondary
buyouts and refinancings. This makes the new
deals we are seeing very welcome.”
The Virgin deal is especially welcome given
the borrower recently achieved investmentgrade
status and so had passed out of the leveraged
market.
The resurgence in risk appetite by investors
is fuelling an increased willingness to take on
leverage, leading one head of financial sponsors
to call the current dash to provide debt “like the
old days of 2008”.
Others agree that leverage levels have risen
to around six times, but that is still some way
short of the excesses of the last boom, when
“The explosion in risktaking
is leading to
an increased appetite
for leveraged loans
and a higher demand
for looser covenant
structures”
Steven Oh,
leverage multiples could hit 10 or 12 times
EBITDA.
Bankers predict that leveraged loan supply
will increase during 2013 with an uptick in
M&A activity across Europe. If the CLO unwind
is seen as a threat to demand, then sponsors are
driven by a similarly pressing need – the need to
put excess dry powder to work or risk having to
return capital commitments to investors.
“From talking to financial sponsors we do
see an increased desire to sell investments and
the strength in capital markets gives funds
the opportunity for refinancing and dividend
recaps,” says Gibbons.
There is a growing perception that with
the worst of the sovereign debt crisis over,
the appetite for corporate chief executives
to do deals will increase. The idea that the
jumbo deals from Dell and Liberty Global
will set a trend is wide of the mark however,
particularly as concerns still remain over economic
growth across Europe, where doing
big deals remains a leap of faith, a bet on
a macro-economic recovery that is at best
sluggish. The question is whether sponsors
will be prepared to accept lower IRRs, rather
than have to return cash.
“There is not a tremendous near-term loan
pipeline in Europe,” cautions Selway. “M&A is
picking up – debt is cheaper so deals are getting
done – but there still remain questions
about whether the underlying businesses in
Europe are going to perform well.”
Oh adds: “Spreads are significantly higher
than they were and leverage is creeping up
but despite all the newsflow, we do not believe
we are going to see a a deal glut.”
But there’s no doubt already that the warm
reception of Dell and Virgin Media, which was
able to price £1.1 billion of senior secured
eight year bonds at six percent, is encouraging
for a market that has been deprived of
sizeable new transactions. One European leveraged
finance banker captures the sense of
measured optimism, commenting: “I’m bullish
on the loan market compared with last year,
but that’s only because last year was such a
poor showing.” n
March 2013 | Private Debt Investor 37

DATA
data room
Private Debt Investor | march 2013
Almost 200 private debt funds are chasing combined commitments of $100 billion, according to Private Debt
Investor research, as managers look to exploit opportunities in the credit markets as banks rein in lending.
Private debt funds in market
FUND MANAGER FUND NAME HEADQUARTERS FUND STRATEGY TARGET (m) TARGET ($m)
Global Funds
AMP Capital Investors AMP Capital Infrastructure Debt Fund II Australia Infrastructure $1,000 1000
Bayside Capital H.I.G. Bayside Loan Opportunity Fund III (Europe-US) United States Private Equity $1,000 1,000
CarVal Investors CVI Credit Value Fund II United States Private Equity N/A N/A
Commercial Intelligence Funds Group Global Distressed Alpha Fund III Switzerland Private Equity $100 $100
Cordiant Capital Cordiant Emerging Loan Fund IV Canada Private Equity $1,000 1,000
Gramercy Gramercy Distressed Opportunity Fund II United States Private Equity $750 $750
Kohlberg Kravis Roberts (KKR) KKR Special Situations Fund United States Private Equity $1,000 1,000
Kreos Capital Kreos Capital IV United Kingdom Private Equity € 200 $267
Lone Star Funds Lone Star Fund VIII United States Private Equity $5,000 5,000
Northern Shipping Funds Northern Shipping Fund II United States Private Equity $250 250
Oaktree Capital Management Oaktree Emerging Market Opportunities Fund United States Private Equity $500 500
Oaktree Capital Management Oaktree Enhanced Income Fund United States Private Equity $500 500
Och-Ziff Capital Management OZ Structured Products Domestic Partners II United States Private Equity N/A N/A
PineBridge Investments Pinebridge Structured Capital Partners II United States Private Equity N/A N/A
Shanghai International Group Sailing Capital International China Private Equity CNY50,000 8,020
The Blackstone Group GSO Capital Solutions Fund II United States Private Equity $4,000 4,000
TPG TPG Opportunities Partners II United States Private Equity $1,500 1,500
Westbourne Capital Westbourne Capital Infrastructure Debt Fund Australia Private Equity A$2,000 2,068
The Blackstone Group Blackstone Real Estate Debt Strategies II United States Real Estate $3,000 3,000
Americas Funds
Stonebridge Financial Corporation Stonebridge Infrastructure Debt Fund I Canada Infrastructure $350 349
Angelo Gordon AG Select Partners Advantage Fund United States Private Equity N/A N/A
Apollo Global Management Apollo Credit Opportunity Fund III United States Private Equity $750 750
Ares Management Ares Special Situations Fund III United States Private Equity $650 650
Arrowhead Mezzanine Arrowhead Mezzanine Fund III United States Private Equity $500 500
Bain Capital Sankaty Middle Market Opportunities Fund II United States Private Equity $1,000 1,000
Balance Point Capital Managers Balance Point Capital Partners United States Private Equity $75 75
Bay Capital Group BCA Mezzanine Fund II United States Private Equity $90 90
BHC Interim Funding BHC Interim Funding IV United States Private Equity $200 200
Canal Holdings Canal Mezzanine Partners II United States Private Equity $50 50
Capital Point Partners Capital Point Partners II United States Private Equity $250 250
Cerberus Capital Management Cerberus Levered Loan Opportunities Fund II United States Private Equity $1,500 1,500
Chatham Capital Chatham Investment Fund IV United States Private Equity $350 350
Claritas Capital CCSD II United States Private Equity $100 100
Community BanCapital Community BanCapital United States Private Equity $100 100
Congruent Investment Partners Congruent Credit Opportunities Fund II United States Private Equity $200 200
Crescent Capital Group Crescent Mezzanine Partners VI United States Private Equity $2,500 2,500
Crown Capital Partners Norrep Credit Opportunities Fund Canada Private Equity C$150 150
Cyprium Partners Cyprium Investors IV United States Private Equity N/A N/A
Energy Capital Partners Energy Capital Partners Mezzanine Opportunities Fund United States Private Equity $800 800
Enlightenment Capital Enlightenment Capital Solutions Fund I United States Private Equity $100 100
Equity Group Investments Zell Opportunities Fund II United States Private Equity $1,000 1,000
Falcon Investment Advisors Falcon Strategic Partners IV United States Private Equity $850 850
Freeport Financial Freeport Financial SBIC Fund United States Private Equity 75 75
FrontPoint Partners FrontPoint-SJC Direct Lending Fund II United States Private Equity N/A N/A
G2 Investment Group MB Global Partners Fund United States Private Equity $500 500
Garrison Investment Group Garrison Opportunity Fund III United States Private Equity $750 750
Garrison Investment Group Garrison Lending Fund United States Private Equity $500 500
Golub Capital Partners Golub Capital Partners VIII United States Private Equity $250 250
Golub Capital Partners Golub Capital Partners International VIII United States Private Equity N/A N/A
Golub Capital Partners Golub Capital Pearls Direct Lending Program United States Private Equity N/A N/A
Graycliff Partners Graycliff Mezzanine II United States Private Equity $75 75
Green Brook Capital Management Green Brook Principal Opportunities Fund II United States Private Equity $200 200
Guggenheim Partners Guggenheim Private Debt Fund United States Private Equity N/A N/A
Hancock Capital Management Hancock Capital Partners V United States Private Equity N/A N/A
Harbert Management Corporation Harbert Mezzanine Partners III United States Private Equity $75 75
Highland Capital Management Highland RCP II United States Private Equity $400 400
Hunting Dog Capital HD Special Opportunities III United States Private Equity $150 150
Huntington Capital Huntington Capital Partners III United States Private Equity $125 125
Ironwood Capital Ironwood Mezzanine Fund III United States Private Equity $300 300
Kohlberg Kravis Roberts (KKR) KKR Lending Partners United States Private Equity $500 500
LBC Credit Partners LBC Credit Partners III United States Private Equity $650 650
Lighthouse Capital Partners Lighthouse Capital Partners VII United States Private Equity $275 275
Magnetar Capital Magnetar Constellation Fund IV United States Private Equity $500 500
38
Private Debt Investor | March 2013

DATA
Private debt funds in market
FUND MANAGER FUND NAME HEADQUARTERS FUND STRATEGY TARGET (m) TARGET ($m)
Medley Medley Opportunity Fund II United States Private Equity $1,000 1,000
Midwest Mezzanine Funds Midwest Mezzanine Fund V United States Private Equity N/A N/A
Monroe Capital Monroe Capital Senior Secured Direct Lending Fund United States Private Equity $400 400
Multiplier Capital Multiplier Capital United States Private Equity $75 75
New Canaan Funding New Canaan Funding Mezzanine V United States Private Equity $225 225
New Health Capital Partners New Health Capital Partners Fund II United States Private Equity $500 500
Partners for Growth Partners for Growth IV United States Private Equity $100 100
Penta Mezzanine Fund Penta Mezzanine Fund I United States Private Equity $150 150
Penta Mezzanine Fund Penta Mezzanine SBIC Fund I United States Private Equity $135 135
RLJ Companies RLJ Credit Opportunity Fund United States Private Equity $100 100
San Juan Holdings SJH Equity Partners I Puerto Rico Private Equity $25 25
Saybrook Capital Saybrook Corporate Opportunity Fund II United States Private Equity 350 350
Silver Lake Silver Lake Waterman Fund United States Private Equity $100 100
Spell Capital Partners Spell Capital Mezzanine Partners United States Private Equity $120 120
Spell Capital Partners Spell Capital Mezzanine Partners SBIC United States Private Equity $33 33
The Brookside Group Brookside Mezzanine Fund III United States Private Equity $75 75
Thomas H. Lee Partners THL Credit Greenway Fund II United States Private Equity $200 200
Urban Capital of America Urban Capital Royalty Fund I United States Private Equity $125 125
Veronis Suhler Stevenson VSS Debt Capital Fund United States Private Equity $225 225
Versa Capital Management Versa Capital Fund III United States Private Equity $750 750
Wayzata Investment Partners Wayzata Opportunities Fund III United States Private Equity $2,500 2,500
Wellington Financial Wellington Financial Fund IV Canada Private Equity N/A N/A
WP Global Partners WP Global Partners Private Debt Strategy III United States Private Equity N/A N/A
Brookfield Asset Management Brookfield Real Estate Finance Fund III Canada Real Estate $500 500
Canopy Investment Advisors Canopy Commercial Real Estate Debt Opportunities United States Real Estate $300 300
C-III Capital Partners C-III High Yield Real Estate Debt Fund United States Real Estate N/A N/A
Colony Capital Colony Distressed Credit Fund III United States Real Estate N/A N/A
Contrarian Capital Management Contrarian Distressed Real Estate Debt Fund II United States Real Estate N/A N/A
First Equity Capital First Equity Assets III United States Real Estate $50 50
Garrison Investment Group Garrison Real Estate Fund III United States Real Estate $750 750
Investcorp Investcorp Real Estate Credit Fund III Bahrain Real Estate N/A N/A
LEM Capital LEM Real Estate High Yield Debt Fund III United States Real Estate $300 300
Mesa West Capital Mesa West Real Estate Income Fund III United States Real Estate $650 650
Mesa West Capital Mesa West Core Lending Fund United States Real Estate $500 500
Pacific Coast Capital Partners PCCP First Mortgage Fund II United States Real Estate $500 500
Pearlmark Real Estate Partners Pearlmark Mezzanine Realty Partners IV United States Real Estate $400 400
Permit Capital Permit Capital Mortgage Fund United States Real Estate N/A N/A
Ramius RCG Longview Debt Fund V United States Real Estate $500 500
Terra Capital Partners Terra Academy Partners United States Real Estate $200 200
Torchlight Investors Torchlight Debt Opportunity Fund IV United States Real Estate $1,000 1,000
Tourmalet Advisors Tourmalet Matawin Fund V United States Real Estate N/A N/A
ValStone Partners ValStone Opportunity Fund V United States Real Estate $250 250
Europe funds
Allianz Allianz Infrastructure UK Debt Fund Germany Infrastructure £1,000 1,548
Aviva Investors Aviva Investors Hadrian Capital Fund I United Kingdom Infrastructure £1,000 1,548
Barclays Infrastructure Funds Barclays Senior Debt Infrastructure Fund I United Kingdom Infrastructure £500 774
Harbourmaster Capital Management Harbourmaster Infrastructure Debt Fund Ireland Infrastructure € 2,000 2,667
Sequoia Investment Management Company Seqimco Infrastructure Debt Fund United Kingdom Infrastructure € 1,000 1,334
123Venture Trocadero Capital & Transmission II France Private Equity € 100 133
Apollo Global Management Apollo European Credit Fund United States Private Equity N/A N/A
Ares Management Ares Capital Europe II United States Private Equity € 1,500 2,001
Argos Soditic Argos Expansion Switzerland Private Equity € 120 160
Avenue Capital Avenue Europe Special Situations Fund II United States Private Equity € 1,500 2,001
Babson Capital Management Almack Mezzanine III United States Private Equity € 500 667
Beechbrook Capital Beechbrook Mezzanine II United Kingdom Private Equity € 100 133
CapMan CapMan Mezzanine V Finland Private Equity € 150 200
Capzanine Capzanine III France Private Equity € 300 400
CM-CIC Mezzanine CIC Mezzanine III France Private Equity € 120 160
Connect Ventures Connect Ventures Fund I United Kingdom Private Equity £35 54
Darby Overseas Investments Darby Converging Europe Fund III United States Private Equity € 250 333
EQT EQT Credit Fund II Sweden Private Equity € 750 1,000
Haymarket Financial HayFin Special Opportunities Credit Fund United Kingdom Private Equity € 500 667
Idinvest Partners Idinvest Private Value Europe France Private Equity € 150 200
IPF Partners IPF Partners Fund France Private Equity € 100 133
Metric Capital Partners Metric Capital Partners I United Kingdom Private Equity € 300 400
Mezzanine Management Central Europe Accession Mezzanine Capital III Austria Private Equity € 350 467
MezzVest MezzVest III United Kingdom Private Equity € 600 800
Minority Capital Partners Minority Capital Partners United Kingdom Private Equity € 150 200
Neovara Neovara European Mezzanine 2011 United Kingdom Private Equity € 400 533
New Russia Growth Volga River Growth Fund Russia Private Equity $250 250
March 2013 | Private Debt Investor 39

DATA
data room
Private Debt Investor | march 2013
Almost 200 private debt funds are chasing combined commitments of $124 billion, according to Private Debt
Investor research, as managers look to exploit opportunities in the credit markets as banks rein in lending.
Private debt funds in market
FUND MANAGER FUND NAME HEADQUARTERS FUND STRATEGY TARGET (m) TARGET ($m)
Oquendo Capital Oquendo Mezzanine II Spain Private Equity € 100 133
Prefequity Perfequity Fund I United Kingdom Private Equity $125 125
Rantum Capital Rantum Mittelstand Capital I Germany Private Equity € 200 267
Rothschild Merchant Banking Rothschild Five Arrows Credit Solutions France Private Equity € 400 533
Syntaxis Capital Syntaxis Mezzanine Fund II Austria Private Equity € 250 333
Acofi Loan Management Services Predirec Immo 2019 Fund France Real Estate € 400 533
Aeriance Investments OREL Luxembourg Real Estate £200 310
AEW Global Senior European Loan Fund United States Real Estate € 500 667
AgFe AgFe Senior Debt Fund United Kingdom Real Estate £1,000 1,548
AXA Real Estate AXA Commerical Real Estate Senior 2 France Real Estate € 1,000 1,334
CapitalM Consulting R.E.D. Athos Germany Real Estate € 200 267
Henderson Global Investors Henderson Senior Secured Real Estate Debt Fund United Kingdom Real Estate £1,000 1,548
Henderson Global Investors Henderson High Income Real Estate Debt Fund United Kingdom Real Estate £250 387
ICG-Longbow Real Estate Capital Longbow UK Real Estate Debt Investments III United Kingdom Real Estate £500 774
Laxfield Capital Laxfield UK Commercial Mortgage Programme United Kingdom Real Estate € 1,000 1,548
M&G Investment Management M&G Real Estate Debt Fund II United Kingdom Real Estate £500 774
M&G Investment Management M&G Real Estate Debt Fund III United Kingdom Real Estate £500 774
Matrix Asset Management Matrix Commercial Mortgage Fund United Kingdom Real Estate £200 310
Pluto Capital Pluto/Mountgrange Residential Development Fund United Kingdom Real Estate £50 77
Asia Pacific
Hastings Funds Management Hastings Infrastructure Debt Fund III Australia Infrastructure € 100 1,334
Infrastructure Leasing & Financial India Infrastructure Debt Fund India Infrastructure 2,000 2,000
Services Ltd (IL&FS)
SREI Infrastructure Finance SREI Infrastructure Debt Fund India Infrastructure $500 500
Westbourne Capital Westbourne Capital Infrastructure Debt Fund Australia Infrastructure A$2,000 2,068
Bamboo Finance Microfinance Initiative for Asia Debt Fund Switzerland Private Equity $100 100
China Everbright Investment Management Everbright Mezzanine Capital Fund Hong Kong Private Equity CNY3,000 481
CITIC Private Equity Funds Management CITIC Mezzanine Fund I China Private Equity CNY5,000 802
CX Partners CX Partners Mezzanine Fund India Private Equity $350 350
Eight Capital Management Eight Capital Mezzanine and Special Situations Fund India Private Equity $250 250
Gen2 Partners Gen2 Capital Partners Fund II (Greater China Credit Fund) Hong Kong Private Equity $200 200
Shoreline Capital Shoreline China Value II Virgin Islands Private Equity $400 400
(British)
Sumitomo Mitsui Trust Capital Chuo Mitsui Private Equity Partners VIII Japan Private Equity ¥30,000 322
AXA Real Estate Japanese Commerical Real Estate Debt Fund France Real Estate N/A N/A
Balmain Investment Management Balmain Investment Management Secured Private Debt Fund Australia Real Estate A$500 517
Bhartiya International Bhartiya International Development Debt Fund India Real Estate INR7,000 130
Diamond Realty Management Diamond Realty Japan Mezzanine Fund II Japan Real Estate ¥10,000 107
Middle East / Africa
First Israel Mezzanine Investors Fund FIMI Opportunity V Israel Private Equity $800 800
Investcorp Gulf Mezzanine Fund Bahrain Private Equity $500 500
Investec Asset Management Investec Africa Credit Opportunities Fund 1 United Kingdom Private Equity $350 350
Jacana Partners Jacana Partners Mezzanine Fund United Kingdom Private Equity $75 75
The Rohatyn Group TRG Africa Catalyst Fund I United States Private Equity $300 300
40
Private Debt Investor | March 2013

data room
Private assets, public debt | january 2013
feature
europe
north america
MEZZANINE DEBT ISSUANCE, LTM
MEZZANINE DEBT ISSUANCE, LTM
Total (m)
7000
30
3000
$6332
6000
25
5000
20
2000
4000
15
3000
$2189 10
1000 $946
2000
$1181
1000
5
$677
$390 $332
$394
$441
$151
0
$97
$18
$60
0
0
Feb12 Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep2 Oct12 Nov12 Dec12 Jan13
Feb12
Source: S&P CAPITAL IQ
Source: S&P CAPITAL IQ
SPONSOR-BACKED PUBLIC DEBT ISSUANCE
SPONSOR-BACKED PUBLIC DEBT ISSUANCE
Total (m)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Feb12
$31,243
$34,021
$24,820
$32,465
$25,797
$31,517
$16,651
$28,748
$17,175
$14,337
Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep2 Oct12 Nov12
100
80
60
40
20
0
Dec12 Jan13
$19,340
$21,240
Volume
Volume
Total (m)
Total (m)
12,000
10,000
8,000
6,000
4,000
2,000
0
Feb12
$5,811
$2811 250
$2604
$2104
200
$2040
$1954
$1634
$1566
$1425
$1261
$594 $553
50
0
Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep2 Oct12 Nov12 Dec12 Jan13
$8,199
$5,610
$3,621
$5,968
$6,694
$10,116
$11,817
$10,770
$6,652
Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep2 Oct12 Nov12
150
100
25
20
15
10
5
0
Dec12 Jan13
$5,353
$7,328
Volume Volume
Source: S&P CAPITAL IQ
Source: S&P CAPITAL IQ
JANUARY ISSUANCE BY SECTOR
JANUARY ISSUANCE BY SECTOR
14,000
60
3,500
6
12,000
$12,717
50
3,000
$3,175
5
10,000
40
2,500
4
Total (m)
8,000
6,000
30
Volume
Total (m)
2,000
1,500
$1,732
$1,570
3
Volume
4,000
20
1,000
2
2,000
0
Financials
$802
Consumer
Discretionary
$1,051
Information
Technology
$235
Energy
10
0
500
0
Financials
Consumer
Discretionary
Information
Technology
$509
Energy
1
0
Source: S&P CAPITAL IQ
Source: S&P CAPITAL IQ
March 2013 | Private Debt Investor 41

DATA
data room
the leveraged loan markets in january 2013
The data is drawn from all W. European and N. American sub-investment
grade debt issuance totalling more than €150m and $150m respectively
europe
north america
LEVERAGED LOAN ISSUANCE BY DEAL TYPE
LEVERAGED LOAN ISSUANCE BY DEAL TYPE
Acquisition
$3,586m
Dividend recap
$1,270m
Buyout financing
€3,456m
Debt refinancing
€ 8,012m
Repricing
$9,353.3m
General corporate
purposes
$250m
LBO
$5,530m
Refinancing
$5,884.7m
Source: Debtwire
Source: Debtwire
LEVERAGED LOAN ISSUANCE BY TENOR
5000
LEVERAGED LOAN ISSUANCE BY TENOR
9000
Total value (m)
4000
3000
2000
1000
0
Source: Debtwire
€4,420
€2,152
€2,208 €2,326
Total value (m)
8000
$8,085
7000
6000
$6,879.3
$5,899.7
5000
4000
3000
$3,020
2000
$1,840
1000
€363
$150
0
3 4 5 6 7 3
4
5
6
7
8
Tenor
Tenor
Source: Debtwire
weighted average loan pricing comparison
weighted average loan pricing comparison
600
500
498bps
600
Dec 12 Dec 12
Jan 13 Jan 13
500
Pricing (bps over benchmark)
400
300
200
341bps
238bps
409bps
Pricing (bps over benchmark)
400
300
200
398bps
348bps
424bps
390bps
100
186 100
186
0
Senior secured term loan B
Senior secured undrawn debt
0
1st lien cov-lite
1st lien w/ covs
Source: Debtwire
Source: Debtwire
42
Private Debt Investor | March 2013

data room
the high yield bond market in january 2013
feature
The data is drawn from all W. European and N. American sub-investment
grade debt issuance totalling more than €150m and $150m respectively
europe
north america
HIGH YIELD BOND ISSUANCE BY DEAL TYPE
HIGH YIELD BOND ISSUANCE BY DEAL TYPE
General coporate purposes €375m
Share Premium €316m
Share Repurchase
$275m
Acquisition
$1,953m
Div Recap
$235m
Debt refinancing
€5,491m
Add-on acquisition
€1,205m
General corporate
purposes
$3,950m
LBO
$1,200m
Buyout financing
€1,592m
Refinancing
$18,450m
Project Finance
$1,500m
Source: Debtwire
Source: Debtwire
HIGH YIELD BOND ISSUANCE BY SENIORITY PROFILE
HIGH YIELD BOND ISSUANCE BY SENIORITY PROFILE
Payment-in-kind
notes
€316m
Senior secured
€4,149m
1st Lien Senior
Secured $6,465
Senior unsecured
€4,224m
Senior secured
second lien
€60m
Senior Unsecured
$1,8278m
Senior Subordinated
$2,360m
2nd Lien Senior
Secured
$460m
Senior
subordinated
€230m
Source: Debtwire
Source: Debtwire
HIGH YIELD BOND ISSUANCE BY TENOR
HIGH YIELD BOND ISSUANCE BY TENOR
3500
3000
€3,500
12000
10000
$10,193
$8,725
Total Value (m)
2000
1500
€1,932
€1,411
Total Value (m)
8000
6000
1000
500
0
Source: Debtwire
€875
€626
€566
€68
€0
3y 4y 5Y 6Y 7Y 8Y 9Y 10Y
Maturity
4000
2000
0
Source: Debtwire
$3,735
$2,530
$500
$1,105
$275
4y 5Y 6Y 7Y 8Y 9Y 10Y
Maturity
March 2013 | Private Debt Investor 43

comment
the last word
PRIVATE DEBT INVESTOR PUTS PARTNERS GROUP’S HEAD OF PRIVATE finance, RENÉ BINER, ON THE SPOT
Low risk, high returns
q&
A
Attractive yields and downside
protection comment make private debt the
most interesting area for Partners
Group at present, according to
René Biner
Where do you focus your attention in
Q Europe at the moment: on mezzanine
or senior debt?
In Europe the supply / demand imbalance
for private debt favourably impacts both
senior and mezzanine lending opportunities.
Both instruments provide attractive
risk adjusted returns and we expect this
to continue as European banks’ lending
activity remains constrained and CLO
reinvestment periods expire. We target
mid-market opportunities where our
long-standing private equity relationships
are important for sourcing deals.
Do you target primary or secondary
Q transactions?
During 2012, 16 of the 22 senior debt
transactions and each of the 12 mezzanine
deals that we did globally were in the
primary market. In the near term we see
the euro-denominated secondary market
experiencing a strong “technical bid” as
CLO managers push to keep as much of
their available capital invested just as their
investment periods expire. Our focus on
selecting stable credits means we do not
buy whole portfolios with mixed quality
loans, but instead select single assets we
know to be of high quality. An example
was the recent acquisition of an Australian
senior loan from a European bank that was
pulling out of that region.
Can you give an example of a deal you
Q recently declined, and explain why?
We recently declined a Holdco PIK investment
opportunity in a business whose
capital expenditure almost matched the
EBITDA generation over the business plan
period which led to insufficient cash flow
to support de-leveraging. Furthermore, the
company’s main assets were securitised
ahead of the proposed debt investment
which would be structurally subordinated
and provide a PIK-only yield. Taking these
considerations into account, we decided
the downside protection was insufficient
and declined the opportunity.
What trends are you observing on the
Q fundraising side for private debt?
In the current low interest rate environment,
investors are seeking the attractive
yield that private debt can offer, as well as
some exposure to floating instruments in
case interest rates rise in the future. At the
same time, risk aversion means that investors
are focussed on principal protection
and perceived safe investments. We generally
see strong demand from investors
for exposure to private debt, particularly
given the high contractual yields that can
be generated from low risk investments at
a time when GDP growth is low.
In the US, CLOs are coming back. What’s
Q the significance of this development
generally, and what does it mean for your
business?
There was approximately $54 billion in
new CLO issuance in the US in 2012 as
well as $9 billion in January 2013 which
has provided a substantial supply of credit
to that market. CLOs are typically under
“CLOs are typically
under pressure to
ramp up quickly, which
can lead to managers
being less selective
with their investment
decisions”
René Biner
pressure to ramp up quickly, which can
lead to managers being less selective
with their investment decisions. This puts
downward pressure on pricing – for example,
the debt supporting Apax’ acquisition
of Cole Haan, a branded shoe retailer,
was 3.5x oversubscribed and loan margins
were cut by 75bps. Instead of chasing
broadly syndicated loans, we focus on
the mid-market where CLO investors are
less active and our established relationships
make the difference in securing access to
the most attractive opportunities.
A look at your biannual ‘Relative Value
Q Matrix’ suggests private debt is currently
the most interesting activity for Partners.
What is the main reason for this?
We believe private debt is a very interesting
asset class for a variety of reasons.
Investors are attracted by attractive yields
with downside protection through financial
covenants and security afforded by
private loans and low default rates.
René Biner is head of private finance at Partners Group
and is a member of the firm’s executive board. He is
based in Zug.
What do you think?
Have your say
e: oliver.s@peimedia.com
44
Private Debt Investor | March 2013

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