Direct lenders thrive on market dislocation

Key Findings - Autumn 2020

• The 140 deals in H1 2020 is a significant decrease from the 197 deals in H1 2019. While deal activity in the UK and France declined by 43.7% and 55.3% respectively, the rest of Europe saw a decrease of 56.2%. The biggest decline occurred in April and May 2020 which saw deal volumes collapse 58% from 115 deals in 2019 to 48 deals in 2020

• Looking at the purpose of the Direct Lending deals, dividend recaps volumes were down 73% to three Direct Lending deals in H1 2020 compared to 11 deals in H1 2019. Refinancing also witnessed a material decrease of 62% from 47 deals in H1 2019 to 18 deals in H1 2020. In contrast, Bolt on M&A and LBOs were less impacted, declining by 37% and 5% respectively.

• Companies in the Healthcare, Financial Services and Software sectors continue to attract strong demand. It appears headline commercial terms are not far off from Pre-COVID times, with businesses in these sectors still commanding 5.5x – 6.0x leverage at pricing of 600-650 bps, driven by a lack of supply and pressure for funds to deploy in COVID resilient industries.

• The pandemic has severely impacted fundraising this year, where global Direct Lending fundraising is to experience the slowest year since 2015 in terms of capital raised, with fundraising totalling just $18.2bn across 17 vehicles globally, down from $52.6bn raised in the first half of last year.

• Despite the likely impact on some direct lender managers, the Direct Lending asset class overall is likely to retain favour amongst investors as it offers attractive risk adjusted premiums compared to other asset classes in a likely continued low-yielding environment for the next decade.

• At present, banks are largely pre-occupied with their existing loan books and their reduced risk appetite for levered deals will create opportunities to further gain market share in the mid-market and become a force to be reckoned with in the larger syndicated and HYB markets.