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Large investors capable of writing big cheques are compelling fund managers towards bespoke so-called evergreen funds as they seek to exert more control of their investments in a hot credit market. Managers, though, while keen for extra investment, are still contemplating the drawbacks of such structures. These funds are created with 20-year life spans but investors can opt to either withdraw entirely or renew the structures on a time frame that is as aggressive as once a year.
The private debt asset class is proving to be popular with investors, as 2017 was a record-breaking year for amount raised for direct lending funds globally, according to Private Debt Investor research. While it was a banner year, managers are still seeking for funds. This has in turn enabled investors to dictate terms and empower them to seek out structures that particularly favour their investment mentality.
Compared to direct lending funds, evergreen funds give LPs more flexibility in the ability to withdraw funds in the short term. At the same time, they are in line with LPs’ longer-term investment mentality. While evergreen funds are not perpetual vehicles, they give LPs the opportunity to continually reinvest their capital with trusted and established managers at the end of the lifecycle.
“Investors who want an evergreen-type arrangement don’t like uncertainty around timing of when the capital will be drawn down and when they will be repaid,” said Jeffrey Griffiths of Campbell Lutyens.
Investors prefer managers who have a proven portfolio quality over time rather than the speed and amount of funds deployed. They also favour those with expertise in choosing assets than those who plan investments around the timing of the credit cycle.
However, investors’ criteria in choosing managers are not necessarily aligned with how managers are incentivised.
“This is at odds with how managers are rewarded in terms of management fees, so the management will be looking for different fees, based on holding the capital rather than simply deployed capital,” said one fund structuring lawyer.
Like so much of the European mid market, these new funds draw inspiration from the US and from large-cap markets. US investors are looking to create structures that closer mimic those they are familiar with in the US, like business development companies (BDC). Similarly, investors who are more comfortable with the liquidity of large cap and high-yield bond investing may be seeking a more familiar strategy in less liquid private debt sphere.
However, features favoured by investors, such as the flexibility to withdraw funds, can be a double-edged sword, especially where managers are concerned. They can, though, structure controls into the agreement, with some seeking a lock-up period for the first few years of the fund.
Despite whatever grievances managers have towards evergreen funds, their growing appeal with investors in the European mid market and the large amount of capital they bring could be alluring.
With the ability to raise amounts as large as EUR 600m, evergreen funds could yet prove charming enough for managers to ignore their downsides.
Mid market picks
Financiers are taking a closer look at German ophthalmology chain Ober Scharrer’s hefty acquisition spend after sellside adviser Rothschild put forward figures for the sale of the company at a busy lender education on 16 January.
The vendors suggested structuring the deal off around EUR 30m run-rate EBITDA, which includes income from a number of signed add-on acquisitions, on EUR 120m expected revenues this year. Ober Scharrer generated EUR 26m-EUR 27m EBITDA in 2016.
Its management expects to spend around EUR 80m on takeovers this year alone.
Blackfin Capital Partners has mandated Arma Partners to guide the sale of its portfolio company NeoXam, a French investments software specialist.
IMs will be sent to private equity firms and trade buyers in the next few weeks. The company reported EUR 13m in EBITDA for FY 2017. EBITDA is expected to increase to EUR 16m over the next year.
NeoXam enjoys strong recurring revenues due to its low level of customer churn, making it attractive to debt providers. There is room however for the company’s acquisitions to be better integrated to improve the offering of its legacy software.
Finnish water treatment specialist Evac secured an eight bank club deal to part-fund sponsor Bridgepoint’s September buyout of the group.
The club consists of Bank of Ireland, Danske Bank, ING, Nordea, RBS, SEB, SMBC and Société Générale, who are providing a debt package comprising a bullet EUR 120m seven-year term loan paying Euribor+375bps, a EUR 15m six-year RCF paying E+350bps and a bullet EUR 50m seven-year capex/acquisition facility paying E+375bps.
Opening leverage on the deal is circa 5x.
Phoenix is funding its acquisition of UK holiday lodges business Forest Holidays with GBP 60m of drawn debt, structured as a unitranche from Ares alongside super senior debt from RBS.
Initial leverage stands at 5x on an EBITDA of GBP 12m, with additional undrawn facilities in place to finance Forest Holiday’s rollout plans.
Phoenix paid GBP 50m for its majority stake, valuing the company around GBP 110m. LDC and the Forestry Commission retained minority stakes in the company.
Dutch credit management company Credit Exchange Group is reaching out to financiers over a refinancing of its existing debt, with debt advisers Nielen Schuman running the process.
The company is seeking around EUR 50m in order to refinance some of its existing debt with the additional debt to be used to fund future growth. However, the group has some existing bonds borrowed by SPVs which are not being refinanced in the deal. These bonds are CE Credit Management II’s EUR 30m 7.75% unsecured 2019s quoted at 102-mid, CE Credit Management III’s EUR 35m 7% unsecured 2019s quoted at 102-mid and CE Credit Management IV’s EUR 15.5m 6% unsecured 2020s quoted at 100.3-mid.
by Joelle Jefferis and Fabian Graber