Latest developments at PCP
Ten years after the banking crisis became visible with Lehman Brothers and other bank failures, the market for corporate funding has radically changed. Mid-sized European companies now have a wide range of financing options. Even though banks are clearly more restrictive than before the crisis, especially when it comes to longer-term funding, most of them have stabilized and recapitalized and now constitute an important and more sustainable piece of the financing puzzle. The high-yield bond market has seen increasing inflows, and smaller companies have been able to tap public markets with the European high-yield bond market reaching a new height with EUR 93.7bn of issuance volume in 2017. Our main market, the private credit or direct lending market, has grown tremendously with available committed capital now at over EUR 50bn, corresponding to over 3.5 times the 2007 level. Whereas the leveraged finance market consisted of around 86% leveraged loans and 14% other sources at that point, the market is now roughly split into equal halves.
At the same time, the direct lending market is only a limited source of funding for entrepreneurial and family-owned companies. The bulk of the money is targeting private equity deals, so-called “sponsored” deals, and less than 20% of the direct lending transactions are in the “non-sponsored” market consisting of family firms and other privately held companies.
The market is at a very late stage of a long credit cycle; investment-grade spreads are lower than they have been for over 10 years, leverage in the high-yield bond market is at 5.2x and the share of covenant-lite loan agreements—loans where the lender has very limited protection against the borrowers’ underperformance and changing credit risk—stood at 76% in 2017, which is higher than ever. In short, there are signs of overheating in the market, and there is a substantial risk of negative development and possibly a backlash against the explosion of alternative credit sources.
In this development, PCP stands out as the largest direct lending provider to family-owned companies and entrepreneurs in Northern Europe. Family-owned companies is our main focus, but we are also selectively backing knowledgeable sponsors and listed companies. Our history in the direct lending market goes back over 15 years, and we recently completed our 99th, 100th and 101st deals: providing growth capital to the privately held Technopath Clinical Diagnostics, a global leader in in the development of in vitro diagnostics, refinancing and expansion capital to the Danish listed relocation services company Santa Fe Group as well as refinancing and expansion capital to the UK-based gym operator Xercise4Less . We are very excited about these three new partnerships and continue to operate as a strategic financial partner to mid-sized companies and their owners and management, supporting them as they strive to reach their full potential.
We recently completed a survey among companies that we have financed over the past eight years. The results show that the companies value our partnership and Proventus’ contributions to their growth and development. Over 75% of the respondents highlight our flexibility during the entire investment period including the speed at which the funding was closed, which in many cases helped the owners and borrower to win the deal, as well as Proventus’ support in pursuing additional opportunities during the life of the loan.
Our societies are in the midst of a forceful transition driven by changing attitudes to sustainability and ethics—a realization that we need not only to conserve finite resources and live within planetary boundaries, but also to accept a greater responsibility for human rights and the social conditions that result from our lifestyle choices. We have spent a lot of time thinking about how we can best engage with this transition and its challenges in relation to the companies that we fund. But most of all, we see the possibilities and opportunities that this transition creates and have been active in funding the development of new methods and technologies in industries such as renewable energy, recycling and sustainable food. We foresee doing even more in this niche in the years to come.
We will continue to develop our funding solutions and seek new partnerships with promising companies and entrepreneurs. We maintain an open mind and see ourselves as problem solvers; we therefore hope that you will be in touch with us whenever you see an exciting business opportunity in search of the optimal financing solution.