- Searching for higher yield
- U.S. market stronger than Europe’s
- New capital for buyout deals
A number of European institutional investors are turning to the U.S. mid-market in their hunt for yield as frustration with the hamstrung European credit markets drags on, sister service Thomson Reuters Loan Pricing Corp. reported. Facing persistently low returns on government and public debt instruments, investors are sitting on an abundance of cash and looking for opportunities.
“Investors in Europe are very frustrated with the public debt markets. It’s very hard to find floating-rate corporate bonds, for example,” said René Biner, partner and head of private finance at global investment manager Partners Group. “The private debt market offers very attractive opportunities.”
At the same time, European bank lending appetite has significantly reduced and collateralized loan obligation issuance is paralyzed. Some of that money is spilling over into the U.S. where the credit markets are functioning.
Mid-market loans, largely a buy-and-hold asset class, typically offer higher returns, but with more conservative structures, terms and leverage levels compared with broadly syndicated leveraged loans. U.S. institutional middle market term loans are currently yielding 6.81 percent, with large corporate leveraged loans yielding 5.76 percent. That compares with 1.61 percent for 10-year German government bonds, 1.895 percent for UK 10-year notes and 5.38 percent for Spain’s 10-year government debt.
In response to this, select firms are looking at ways to provide European investors exposure to mid-market loans.
In September, Partners Group raised a €375 million ($487 million) senior loan fund to lend to mid-market companies in Europe and the U.S. with a minimum floor of $20 million in EBITDA. The fund is allocated 60 percent to European mid-market issuers and 40 percent to U.S. mid-sized borrowers, but the split is flexible. Partners expects the fund, which has a five to six year investment horizon, to be 50 percent invested by year-end.
“Eighteen months ago investors were asking for less U.S. exposure. Now they are asking to increase U.S. allocation,” said Biner. The shift is largely due to a relatively better macroeconomic outlook in the U.S., as well as the attractive overall market opportunity in the U.S. credit markets.
Target investors for the fund include pension funds, insurance companies, as well as fixed income teams making allocations to loans, an addendum to existing financial institution allocations. “The middle market makes sense for pension funds. They do not need liquidity now,” Biner said.
3i Group plc, the London-based private equity and debt manager, which in August established its presence in the U.S. credit markets with the acquisition of WCAS Fraser Sullivan Investment Management, is considering targeting the U.S. mid-market via a business development company or through CLOs, said Jeremy Ghose, chief executive officer of 3i Debt Management. “The U.S .middle market is absolutely on our radar,” Ghose said. “It reinforces our game plan to diversify, but it has not yet been consummated.”
Meanwhile, U.S.-based mid-market lender Monroe Capital is raising a $400 million senior secured debt fund that is being marketed to both U.S. and European institutional investors, including pension funds and insurance companies.
“The fund will lend directly to mid-market and lower mid-market U.S. companies, seeking to deliver above market double digit current yield with no correlation or volatility,” said Ted Koenig, president and CEO of Monroe Capital. “It’s about asset allocation and getting exposure to anything yield-oriented,” he said of the increased global demand for credit assets.
(Leela Parker is a correspondent for Thomson Reuters LPC in New York.)