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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

Conservative strategy, focusing on a diversified portfolio of attractive first lien European senior secured and unitranche corporate loans

Unique origination capability providing significant deal flow through four co-lending agreements

Downside protection sought, coupled with stable long-term yield. Please note that while the strategy seeks a level of downside protection, this is not guaranteed – the value of investments can go down as well as up

Environmental, social and governance (ESG) analysis fully integrated into the investment process, with related risks monitored throughout the life of a loan

Target return of EURIBOR + 5-6% on a gross annualised basis

Highly experienced team with an average of 16 years industry experience, which includes successfully structuring, monitoring and restructuring loans across Europe

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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.

Patrick Marshall, Head of Private Debt and CLOs

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

Our unique origination strategy helps us to sustain a strong pipeline of high-quality loans to issuers in non-cyclical sectors. We have an exclusive co-lending programme with four major European banks, each of which is a leader in its respective market. This provides us with significant deal flow.

In addition, our investment team sources senior-secured and unitranche loans directly through their extensive network of contacts across Europe.

We target companies with established and tested management teams, first-class shareholders or sponsors, strong market positions with the benefit of high barriers to entry, resilient profitability, and cash flow generation over the cycle. We maintain robust-lender protections by monitoring the financial performance of borrowers for early-warning signals to help defend against defaults. This allows us to engage with management teams to mitigate any potential downside risks.

ESG analysis is fully integrated into our investment process and we consider all relevant ESG factors when assessing investment opportunities. We assign an ESG rating to any potential investment that progresses to the Investment Committee and we maintain and update that rating, in conjunction with management teams, for all investments in our portfolio on an ongoing basis. Our best-in-class ESG practices aim to reduce risk and improve long-term returns.

Our integration efforts are supported by our dedicated Responsibility Office and stewardship team – EOS at Federated Hermes (‘EOS’). With $1.1tn in assets under advice (AUA), EOS represents a significant source of expertise.

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

Our team of six investment professionals has significant mid-market expertise, which includes successfully structuring, monitoring and restructuring loans across Europe, and has an average of 16 years’ industry experience.

Patrick Marshall

Head of Private Debt and CLOs

Laura Vaughan, CFA

Head of Direct Lending

Supported by

Credit team

Legal

Investment Office

Operations

Our Purpose

To deliver Sustainable Wealth Creation

Like all our investment capabilities, Federated Hermes European Direct Lending aims to deliver Sustainable Wealth Creation: the generation of wealth through investments that enrich investors, society and the environment over the long term.

Our business provides three equally powerful pathways to achieving this aim. European Direct Lending features in the Active ESG route.