European
Direct Lending
Targeting attractive risk-adjusted returns which focus on capital preservation and a stable income by lending to high-quality, non-cyclical small and mid-sized businesses domiciled in Northern Europe.
Reasons to invest
Corporate strategy
Unique origination
Downside protection
ESG integration
Highly experienced team
Strategy overview
Our distinct origination capabilities generate significant deal flow, allowing us to invest in the best quality credit opportunities. We seek to provide our investors with a conservative portfolio of loans to well-managed, non-cyclical small and medium-sized enterprises (SMEs), with terms that capture an attractive yield and attempt to minimise any downside risk to our investors’ capital.
Why European Direct Lending?
Offering an attractive combination of low risk and a stable income, senior secured corporate loans can exhibit low levels of volatility, low correlation and, potentially, a reduced risk of capital loss (please note that while we seek to reduce the risk of capital loss, this is not guaranteed). Floating-rate coupons provide some protection against inflation.
Direct loans to small and mid-sized European businesses have continued to generate strong and steady yields over the last decade, even showing resilience during the recent Covid-19 pandemic. Yields from traditional fixed income securities remain low and corporate direct lending offers investors an illiquidity premium to boost portfolio returns.
Our primary investment focus is on the more creditor-friendly countries of Northern Europe, which are home to businesses that benefit from stronger recovery rates in insolvency situations and shorter restructuring periods. Banks continue to dominate the European loan markets for small and mid-sized businesses, providing an attractive opportunity for the Federated Hermes direct lending funds given our four legally binding banking partner origination agreements.
How we invest
Investment philosophy
We aim to generate attractive risk-adjusted returns for investors, providing stable income and preserving capital by taking a conservative approach to direct lending. As a result of our unique origination capabilities, we review hundreds of potential investments a year, allowing us to invest in only the highest quality loans that meet our stringent criteria and that afford us traditional lender protections.
Investment process
Our Direct Lending team tracks transactions introduced by our partner banks with weekly pipeline calls. We also independently monitor other potential transactions that fall outside of our co-lending programme.
The team undertakes intensive fundamental, bottom-up credit analysis in order to assess the creditworthiness of any potential investment, initiating (where possible) site visits, management meetings and a review of all external due diligence. Following management and due diligence meetings, a full fundamental credit analysis is presented to the Investment Committee, including a comprehensive assessment of the ESG risks of the potential borrower and its industry.
The Direct Lending team operates a three-pillar approach to ESG:
- Exclusion: Our industry exclusion list ensures funds do not invest in sectors where the risks outweigh the rewards;
- Awareness: As part of the analysis of any potential fund investment, the team undertakes detailed ESG analysis, considering all current and potential ESG risks of the borrower and its industry. Where deemed appropriate, the team will also seek to incorporate ESG conditions in the loan documentation to strengthen a borrower’s ESG standards and practices. The team’s analysis is supported by a proprietary ESG rating tool, with ratings monitored and updated by the team throughout the life of an investment.
- Engagement: Should ESG issues arise during the life of an investment, the team will seek to engage with the management and owners of the borrower to remedy the problem, with the aim of enhancing the enterprise value (EV) of the business, thereby benefiting our investors.
We undertake pre-investment and post-investment mandate reviews – as well as quarterly reviews of, for example, ESG ratings – to ensure that investments are in line with our guidelines and restrictions. We will engage with management teams to ensure any issues are resolved and mitigated.
Team
Patrick Marshall
Head of Fixed Income - Private Markets, Federated Hermes Limited
Laura Vaughan, CFA
Head of Direct Lending
