Securing yield through long-term lending partnerships.
Hermes Direct Lending Introduction
Patrick Marshall, Head of Private Debt and CLOs, introduces the Hermes Direct Lending Strategy, which aims to lend to attractive, growing businesses on terms seeking capital preservation and yield capture.
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. He was previously 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 and restructuring at Lehman Brothers respectively. He has a Bachelor of Commerce in Business Administration and French from the University of Edinburgh.
Mark Miller, Head of Global Client Group, speaks to Patrick Marshall, Head of Private Debt and CLOs, about the current market outlook for direct lending strategies across Europe, where Patrick outlines why he thinks we are currently in an aggressive market.
Europe v US: For direct lenders, where is the relative value?
Direct lending is a promising market in Europe, but does it offer better opportunities than its more-established US counterpart? Patrick Marshall, Head of Private Debt & CLOs at Hermes Investment Management, assess the differences between the two and presents his views on what it takes to invest successfully in European loans.
Europe: New kid on the bloc
Europe’s emergence as a direct lending market is still relatively recent. The changing regulatory landscape in the post-financial crisis era transformed loan markets. New capital adequacy rules, amplified by the Capital Requirements IV directive under Basel III, have forced banks to reduce risk and therefore the size of their loan books.
Prior to 2008, banks provided more than 80% of larger corporate loans in Europe. Data from S&P LCD shows the European loan market grew aggressively from €15bn in 1998 to €165bn in 2007, a year before the global financial crisis.
In its wake, small- and medium-sized (SME) businesses had little access to capital. Their borrowing needs could not reach the scale required to cost-efficiently access the bond market. This created a gap in the market for alternative lending, and investment firms have filled the void left by European banks to provide SME financing.
Direct lending now accounts for 10% of Europe’s loan market. This rapid growth is in no small part driven by a surge of interest in the asset class. Investors with long-term liabilities are attracted by an illiquidity premium of almost 60bps, as well as a desire for strong yields that are lowly correlated with listed markets, capital preservation and inflation protection.