Victoria Young assesses the advisers targeting the alt lending crowd
‘Almost every partner in our team is working on a direct lending mandate right now and that’s reflective of where markets are moving,’ notes White & Case partner Gareth Eagles. ‘It began as a niche, but it’s now a regular part of the funding mix. It’s not alternative finance. People said the Beatles were alternative in 1962 but they didn’t by 1966!’
Coming from a historically bank-centric firm, that is quite a statement. The growth of direct lending has been well-documented after a break-through period in 2013/14, and while Deloitte’s European alternative deal tracker records just 2% year-on-year growth at 267 deals for 2016, City finance partners are bullish on their prospects, especially as deal count in the UK in the final quarter of 2016 was up 48% year-on-year. Back in 2013, Deloitte recorded just 136 deals.
Such specialist lenders are frequently providing ‘unitranche’ – a hybrid debt combining subordinated and senior terms in one instrument – while also increasingly looking to commit senior debt as the sector matures. Also speaking to its mainstream appeal has been the recent willingness of lenders such as Barclays and Goldman Sachs to team with alt credit houses on deals.
Eagles, who has raised his profile in credit circles with work for GSO Capital Partners, the credit investment arm of buyout giant Blackstone, says that direct lenders are now a major chunk of the portfolio of White & Case’s 11-partner City leveraged finance team. While White & Case declined to comment on the deal, Eagles is understood to have advised on GSO’s €625m unitranche package to finance the merger between plastics firms Polynt and Reichhold – a record for the European private debt market. Three years ago, deals over £100m turned heads.
‘The direct lenders are looking at bigger and bigger deals and multiples are now into the hundreds of millions,’ agrees Proskauer Rose partner Alex Griffith. ‘The biggest players like Ares, ICG, GSO, Alcentra and BlueBay are doing even bigger club or sole investments.’
‘People said the Beatles were alternative in 1962. They didn’t by 1966!’
Gareth Eagles, White & Case
Griffith, who left DLA Piper for Proskauer, notes: ‘I moved 18 months ago to harness the boom and focus on the growth of direct lenders. This firm has all this experience from the States, and I am a big believer in it getting bigger.’
His exit was followed by partners David Miles and Philip Butler, who quit for Dechert. While the duo had clients such as Barclays and Lloyds, by the time they left direct lending had become more than half of their practice.
Other well established US players include Ropes & Gray – whose partners Fergus Wheeler and Mark Wesseldine are known for their work with Kohlberg Kravis Roberts (KKR). Also cited is Paul Hastings’ London arm, which has built its practice in London with hires like the well-regarded former Ashurst partner Luke McDougall and the recent hire in New York of Bill Brady from Proskauer.
However, one US law firm partner cautions: ‘The issue for all of us is pricing. What you get paid, it is still quite low and that is hard for US firms with big cost bases.’
As Cadwalader, Wickersham & Taft partner Yushan Ng puts it: ‘There are two types of direct lender work now; you can do commoditised SME lending for £50k a pop, or bespoke work and get up to 3% of the deal value in legal fees. We obviously focus on the latter and it is very lucrative but you still have to be efficient – the clients will pay for creative structuring and proper credit risk advice but don’t want hordes of associates churning paper – you need to spend significant senior time on the matter.’
Of the London players, Hogan Lovells, Ashurst and DLA have been active in recent years. Comments one US rival: ‘In the middle market it is hard. Unless you are KKR, who will choose their own firm and charge what they want to charge, people say it is not economic because you can’t do deals for that price and you have to pick your clients.’
Hogan Lovells partner Paul Mullen concedes: ‘The market is relatively commoditised but the reason for doing it is seeing debt funds as the future. The well-established [lenders] are already moving into higher value deals, for example, direct lenders are taking places on lower level high-yield debt. Once you get to that sort of scale you can command a greater fee position.’
Ashurst partner Paul Stewart adds: ‘As debt funds increase their ticket sizes and play more in the senior debt space we will see more financing deals being led by debt funds that would have been traditionally done by banks, and that justifies the effort we have been putting in over the past few years.’
While the Magic Circle has been slow to move in this area, Linklaters is touted by City partners as having an active practice with Annette Kurdian acting for Alcentra. Kurdian also sits on the Loan Market Association’s unitranche inter-creditor working party, which held its first meeting in March, alongside Proskauer’s Griffith. And as deal sizes grow, even Latham & Watkins’ City finance practice – which only has about 10% of direct lenders in its mix of clients – is sizing up the field.
Partner James Chesterman, Latham’s point-man for direct lenders, concludes: ‘As the ticket sizes get bigger, it plays into our strengths because we are seen as a bulge bracket leverage finance firm and we are the sort of people that asset managers want to go for significant or complex deals.’
And, these days, where Latham goes…
victoria.young@legalease.co.uk