We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Origination is key to success in direct lending

Home / Press Centre / Origination is key to success in direct lending

Patrick Marshall, Head of Private Debt and CLOs
08 August 2017
Direct Lending

Since the financial crisis, changing regulation and a more conservative risk environment mean that banks have been reluctant to make loans of the size that they did prior to the crash in 2008. As a result, small and medium-sized companies have had to look to other financing providers. One, albeit small, source of funding has been institutional investors, which have established pure direct lending funds to service this growing demand. Patrick Marshall, Head of Private Debt & CLOs at Hermes Investment Management, discusses the options for loan origination. 

Like all asset classes, this asset class comes with inherent risks. These include credit risk in the form of borrowers’ defaults, which was a significant issue for lenders during the financial crisis. Medium-sized companies have an average default rate of around 3.1% over the past 10 years. However, senior secured loans, which stand at the top of the capital structure, enjoy average recoveries on default in Europe in excess of 75%, which is significantly higher than some other asset classes such as high yield bonds.

A more pressing issue for investors today is the significant uptick in capital allocated to private debt funds. The amount of dry powder yet to be deployed in private debt in Europe is at an all-time high. This combination of needing to minimise credit risk and competition for opportunities means that loan selection and origination are more important than ever for private debt investors.

The first solution to these challenges is to conduct detailed analysis of each opportunity, undertaking full financial and business analysis to ascertain the risk of a credit event with the borrower. The analysis is undertaken from a top-down and bottom-up perspective. Top-down research sheds light on broader industry dynamics, such as sensitivity to the business cycle, the level of competition in a sector and pertinent regulatory issues. However, it is also vital to understand the business’s own model, the resilience of this and its financial profile. Further considerations are the borrower’s ownership structure and management team as both these constituents will be paramount to the success of a business. An ability to negotiate the right terms within the loan documentation is important in providing the lender with the right level of safeguards for the life of the loan. This can only be undertaken by a highly experienced team.

The other half of the solution is having access to the best deals in the first place. The ability for the loan provider to be able to choose the right loans protects them from becoming a forced lender, who is obliged to deploy in the very few opportunities that arise. In order to maximise the loan opportunities available, Hermes signed an exclusive co-lending partnership with RBS. This agreement is a real differentiator from any other in the market, and a game changer for the fund as RBS is required to share all lending opportunities, within certain parameters, with us. This allows us to choose whether or not to progress an opportunity, and ensures that investors can consider a broad and consistent range of deals with limited direct competition from other private debt funds. RBS was the second-largest middle-market lender in the UK in 2015 and 2016, which reflects the volume of deals available through this kind of partnership.

An experienced team will also be able to access compelling loan opportunities in the market through contacts working in the corporate world, financial advisors such as audit firms and law firms, among others. While this deal flow is not as consistent as that offered by a partnership, it provides some idiosyncratic opportunities that may not come to the attention of larger lenders. By combining original partnerships with deals sourced through existing contacts, investors should still be able to select the best loan opportunities in an increasingly competitive market.

In a world of low return, direct lending offers a compelling opportunity for investors in terms of risk-reward. While loan investments have their risks, by carefully selecting borrowers from a range of deal sources, investors can lend to sustainable, reliable businesses and achieve a significant potential rate of return in the process.

Share this post:
Patrick Marshall Head of Private Debt and CLOs Patrick joined Hermes in June 2015 to launch and manage the Hermes Direct Lending Strategy, which invests in senior loans to UK and European mid-market businesses. His previous roles were Head of Direct Lending in London at Tikehau Capital, and Partner at WCAS Fraser Sullivan Investment Management, where he established the firm’s European loan business. Prior to that, Patrick managed loan portfolios in excess of $4bn and $10bn as managing director at the Lehman Brothers Estate and Head of European and Asian Loan Portfolio Management & Restructuring at Lehman Brothers respectively. He has a Bachelor of Commerce in Business Administration and French from the University of Edinburgh. Further information about Hermes Direct Lending.
Read all articles by Patrick Marshall

Find posts by author

  • Alex Knox, ACA
  • Amy Wilson
  • Andrew Jackson
  • Andrew Parry
  • Claire Gavini
  • Dr Michael Viehs
  • Emeric Chenebaux
  • Eoin Murray
  • Geoffrey Wan, CFA
  • Harriet Steel
  • Ilana Elbim
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Kimberley Lewis
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Maxime Le Floch, CFA
  • Michael Russell, CFA
  • Michael Vaughan
  • Neil Williams
  • Nick Spooner
  • Nina Röhrbein
  • Peter Hofbauer
  • Philip Nell
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Crockford
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • direct lending

Press contacts