Speaker Interview: Real Deals UK Mid-Market Debt Q&A
Andrew McCullagh, Hayfin Capital Management
1. When you compare leveraged and acquisition finance markets now to when Hayfin was launched, what would you say are the main differences?
Back in 2009, it was tough for many companies to access credit – the CLO market was closed, banks were looking to reduce their overall loan exposures and being very disciplined about any new lending, and there were only a small number of alternative credit managers with capital to invest, of which Hayfin was one. We’re now seven years further into the credit cycle and deals are being structured today which wouldn’t have happened back in 2009, and indeed many companies are accessing credit who probably couldn’t have done so seven years ago. Part of that reflects the greater risk levels lenders are taking, as you would expect as you go through a credit cycle. But it also reflects a much greater choice that borrowers now have when looking to access credit and the myriad of lending strategies out there, and that’s a clear positive.
2. There has been huge growth in the number of direct lending funds in Europe in the last few years. Did you foresee that when Hayfin was only one of a handful of such funds?
The market dynamics in European leveraged finance for a credit investor, particularly one with the ability to invest across the capital structure and in different credit strategies, were attractive at the time that Hayfin was founded. In that respect it’s natural for a succession of newer direct lending funds to have subsequently sought to emulate this approach. Nevertheless, the increase in the number of Europe-focused funds has been extraordinarily pronounced, from two or three at the time of Hayfin’s inception to the dozens we see today, and overwhelmingly concentrated in London. What remains to be seen is whether the market will retain as large a number of new entrants throughout the next phase of the credit cycle. This will place greater demands on funds’ ability to originate good-quality risk-adjusted returns as competition increases, as well as on their workout capabilities as defaults start showing up in their portfolios.
3. Is the rapid growth in the number of direct lending funds, and the amount of capital they have to deploy, sustainable?
The sharp increase in the number of direct lenders in the European market has made origination of investment opportunities more challenging and necessarily put pressure on the returns these funds can generate for their investors. One way established players are looking to sidestep this competition is by developing the specialist sector expertise required to access more complex areas of the market which remain largely untapped by generalist private debt funds, as Hayfin has with its shipping and healthcare teams. In the longer term, the fact that alternative lenders in Europe still account for a far smaller proportion of activity in leveraged finance markets than in the US suggests that there is scope for further growth in deployment – especially if we see additional changes to the regulatory environment for banks.
4. In the long-term how do you see your interaction with the banks developing? Will you be competitors or collaborators?
It’s difficult to know with any certainty what banks will look like in 10 years’ time, as regulatory pressures and the rise of FinTech companies and other alternative lenders force them to reconsider which activities are their most profitable. If these changes were to prompt banks to withdraw from the kind of conservative, low-risk corporate lending which they currently almost monopolise, it’s credible to suggest that Hayfin and other direct lenders will fill this gap and continue to expand the amount of the market provided by the alternative lenders. Of course there will always be competition for the best quality assets between banks and funds. But collaboration more accurately describes the relationship, where funds such as Hayfin provide additional firepower for these lower-risk loans where bank capacity is constrained.