European direct lending offers investment edge: Permira

The direct lending market is garnering investor attention as it has performed well during periods of market volatility. As banks are cautious to take syndication risks amid uncertainty, private debt is key to filling the untapped demand, said David Hirschmann, head of private credit at Permira. 

The European direct lending market has grown around 50% every year since the 2007-2008 financial crisis, he said. Private debt funds continue to gain significant share as banks have retrenched from the market, and such funds are now a well-functioning source of capital for European firms, he added.

Hirschmann said Permira has the competitive edge in two areas: it has built a vast network of relationships in the market over the past 37 years; and its parent group Permira has strong expertise in tech, healthcare and business services.

The following is the full transcript of our Aug.10 email interview with Hirschmann.

▲ Would you briefly introduce Permira Credit?

“Permira Credit was established 15 years ago and is today one of Europe’s leading private credit investors. Since 2007, the business has provided more than €17 billion ($17.5 billion) of debt capital to over 300 European companies across direct lending, collateralized loan obligation (CLO) management and structured credit.

The firm’s direct lending funds have invested more than €13 billion into more than 160 businesses and the team comprises over 70 individuals based in a number of offices across Europe. Permira Credit is an integrated part of Permira, the global private equity firm, which was established in 1985 and has approximately 300 professionals in 16 offices across Europe, North America and Asia."

▲ How has the European direct lending market evolved over the last decade? What is the competitive landscape?

“The market for European direct lending has grown hugely (approximately 50% per year) since the great financial crisis, according to data from Deloitte. Private debt funds continue to gain significant share as banks have retrenched from the market, and such funds are now a well-established and well-functioning source of capital for European companies.

In part, this reflects the growth of the private equity market over the last decade, with sizable growth in dry powder driving increased deal flow, both in terms of volume and size of transactions.

In terms of competition, the market continues to be dominated by a relatively small number of well-established, large managers. On-the-ground presence and deep local networks are important in a market as diverse as Europe, and the value of incumbency is considerable.

For example, the top five European managers have done approximately 40% of all direct lending deals with mid-market companies over the last five years, according to Houlihan Lokey’s Q1 2022 MidCapMonitor, and these five managers, including Permira Credit, have remained in the market's top 10 since 2016.”

▲ How does Permira Credit differentiate itself in this kind of market?

“We are one of a handful of European credit platforms to be fully integrated with a global private equity firm, and this is a significant differentiator for us for two main reasons.

Firstly, Permira has more than 35 years of investment experience and during that time has built a vast network of relationships in the global market. Having access to this network benefits us significantly when it comes to deal origination, due diligence processes and in some cases even value creation.

Second, there is strong alignment between the sectors that both Permira and Permira Credit focus on. Over the years, Permira has developed deep sector expertise in areas such as technology, healthcare and business services, and our ability to tap into that knowledge when looking at our own transactions gives us a real competitive advantage over our peers. These core sectors for Permira Credit have also been more resilient through the Global Financial Crisis, the European debt crisis, Brexit, and more recently the COVID-19 crisis."

▲ How has the ESG agenda evolved in recent years in direct lending?

“ESG has played a role in direct lending for a long time, but the intensity of focus and the pace of change have sharpened over the last five years, both from the investment side and in terms of investors' expectations.

ESG has become a more holistic exercise, incorporating every aspect of the investment lifecycle, from pre-deal analysis and screening to post-investment engagement and monitoring, as well as reporting to investors.

Some firms, including Permira Credit, are starting to link the margins on loans to certain ESG-related key performance indicators within the businesses being lent to. These sustainability-linked loans or ESG margin ratchets are an interesting mechanism in the context of supporting delivery outcomes in direct lending in a tangible and measurable way. As a firm, we will continue to increase our activities in this area.”

▲ How does direct lending fare in a more volatile market environment such as the one we are seeing today and those we have seen with COVID-19 and the European debt crisis?

“The direct lending market has performed particularly well during periods of market volatility. Banks are typically more nervous to underwrite and take syndication risks during uncertain times, and therefore private debt is key in filling the untapped demand that this creates. Its fund structure allows direct lenders to take a long-term view and provide financing over a number of years, regardless of the volatility of the debt capital markets.

In terms of performance, direct lending funds generally performed well through the COVID-19 crisis, despite the unprecedented business interruption that the pandemic created in some industries. In many cases, the direct relationship between the lender and the sponsor helped companies to navigate this period of disruption and return to growth.

While there are challenges ahead in the economic outlook, we believe that the same dynamics will continue to be valuable to companies and sponsors for the foreseeable future.”

▲ What are the prospects for European direct lending looking ahead? Is there room for much more growth?

“The European direct lending market has grown significantly but that’s not to say there isn’t more room for growth. Take the dry powder in the direct lending market as an example – this still represents only approximately 50% of the dry powder in the private equity market, meaning there is still significant demand for private debt financing.

This is particularly the case in more volatile markets when the certainty and speed of execution that direct lenders offer are more valuable to a prospective borrower. Finally, Europe still has some way to go to catch up with the US direct lending market. For example, private debt funds accounted for approximately 60% of German mid-market buyout lending in 2021, according to data from Houlihan Lokey. The equivalent statistic for the US mid-market was even higher still.”

Hirschmann joined Permira Credit in June 2015 and is the head of private credit. He is a member of the direct lending investment committee.

He has over 20 years of European credit experience. Prior to joining Permira Credit, Hirschmann was managing director at Babson Capital Europe, where he was responsible for sourcing and transacting opportunities and was a member of the private debt investment committee.

Before that, he worked at UBS in leveraged finance and financial sponsors coverage. Hirschmann holds a Master's degree in Economics and Finance from HEC Business School, France. 

Write to Ji-Hye Min at spop@hankyung.com
Jihyun Kim edited this article.