Sixth Street targets $970m for lending in Europe

The firm expects more opportunities in the post-covid market due to the greater amount of high-quality companies experiencing difficulties.

Sixth Street Partners is targeting €800 million ($970 million) for a Europe-focused specialty lending fund, according to documents from Pennsylvania Public School Employees’ Retirement System.

Sixth Street Specialty Lending Europe II will focus on mid-market credit opportunities in Europe, specifically the United Kingdom, Western Europe and the Nordic countries. Investments will be across different sectors. Its hard-cap is €1 billion ($1.2 billion).

Sixth Street was founded in 2009 in partnership with TPG to focus on credit investments. Earlier this year, Sixth Street and TPG officially became separate entities.

Sixth Street has dedicated one previous vehicle to this strategy. As of June 30, that fund had a net internal rate of return of 11.7 percent.

A PA Schools memo said the firm expects better opportunities amid the fallout of the covid crisis because of a greater need for liquidity from borrowers. Firms can take advantage of the increased number of companies requiring rescue capital to invest in “larger, more-stable capital structures at decreased risk levels, and higher transaction volumes.”

The firm focuses on three types of deals: good businesses with good balance sheets, good businesses with bad balance sheets and bad businesses with good assets. In the previous fund, the last deal type provided the best opportunities. Now, with more good companies experiencing financial difficulties, all three are generating deal flow, the PA Schools memo said.

As far as sectors, the strategy will focus on tech-enabled business services, recurring revenue software and fintech payments, retail asset-based lending and rescue financing.

The firm will target companies with enterprise values between €50 million ($60.5 million) and €1.5 billion ($1.8 billion). The fund will target net returns of 11 percent to 14 percent. The fund’s investments will consist of 60 percent to 75 percent senior secured debt, but it may also do up to 20 percent secured mezzanine investments, and, on an opportunistic basis, between 5 percent and 20 percent structured equity or equity co-investments. The firm will hold loans for about two years, and target position sizes between 4 percent and 6 percent.

PA Schools committed $125 million to the fund at its board meeting last week. Other LPs in the fund include State of Wisconsin Investment Board, according to Buyouts data.

Action Item: read the PA Schools memo on Sixth Street Specialty Lending Europe II, L.P. here.