Foreword
Welcome to the seventh edition of the Alternative Credit Council’s (ACC) Financing the Economy research series, produced in partnership with Allen & Overy LLP. We’re delighted to have the support of 57 leading private credit managers and investors managing an estimated $600bn of private credit assets in the development of this paper. We would like to convey our thanks to each of these firms for their contributions to this research.
The primary objective of this research is to provide investors and policymakers with data and insight on the market trends underpinning the development of private credit. As well as analysing how firms are deploying and raising capital, we have chosen to broaden the focus of this year’s research to incorporate how Environmental, Social and Governance (ESG) considerations are shaping the private credit market. ESG is now established as a priority for most investors. It is also central to policymakers’ approaches to the regulation of financial services and how businesses of all types manage their operations. Our research shows that, for private credit managers, ESG is also increasingly ‘business as usual’, with the majority having already implemented changes to integrate ESG considerations across their strategies.
Private credit managers are also a growing source of guidance and technical support to corporates on sustainability issues. These changes are being positively received by investors, but our findings indicate that they also expect more to be done. The integration of ESG is currently far from uniform, particularly across core areas such as loan documentation, data collection and investor reporting. The absence of established practices in these areas is a significant obstacle for investors seeking to assess and benchmark how their allocations contribute towards their ESG goals. It also offers ammunition to those seeking to paint industry efforts as greenwashing.
Integrating ESG into their business models does not appear to have prevented private credit managers from continuing their growth and expansion. Our research estimates that the sector deployed almost $200bn of capital during 2020. This capital has helped private credit strengthen its importance for the middle market and supported its expansion into newer markets and strategies. This diversification is likely to augment the resilience private credit has demonstrated to investors during the past 18 months. This research confirms that meeting investor ESG needs has now been added to the list of challenges as well as opportunities the sector must embrace to remain successful. Maintaining strong partnerships with borrowers and investors will be crucial. The findings we present in this paper show that ESG considerations are now a key focus within the industry.
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Jiří Król
Deputy CEO, Global Head of Government Affairs, AIMA
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Jake Mincemoyer
Partner, Allen & Overy
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Stanimir Kostov
Partner, Allen & Overy
Executive Summary
Private credit managers provided an estimated $196bn of fresh capital during 2020
This is a significant increase from the levels managers expected to deploy during last year’s survey, in which they indicated a likely annual business volume of $113bn by the end of 2020. SMEs and mid-market companies continue to be at the core of the private credit market, with 74% of respondents describing their most common loan size as below $100m. A substantial part of the market is now targeting larger borrowers, with 26% of respondents describing their most common loan size as greater than $100m, up from 10% last year. Despite larger companies having access to various financing options, many are increasingly choosing the private route to capital, prizing the tailored and efficient financing solutions that private credit can offer.
A stable and growing part of investor portfolios
The performance of private credit during the last 12 months has provided investors with further evidence with which to assess the resilience of the asset class. Borrower default levels also remain relatively low, with 74% of firms reporting under 5% restructurings across their portfolios. We also see further evidence that the asset class continues to diversify, with a notable number of firms now active in Asia or providing speciality finance. Private credit firms also raised significant sums of capital, despite the uncertainty of the past year.
Integrating ESG into the investment process
Our data shows that ESG integration is an integral part of most private credit managers’ lending strategies, with 74% noting that ESG is considered for all investments. While there has been widespread adoption of ESG in some form, the manner in which ESG has been integrated is by no means uniform across the sector. Key challenges for private credit managers are data availability, matching a consistent process to different lending strategies and markets, adherence to regulatory requirements and meeting diverse investor expectations.
Putting business on the track to sustainability
Private credit managers are playing a key role in driving sustainability changes among small and mid-sized companies. Private credit managers are a becoming a key source source of guidance and technical support on sustainability issues for many SMEs and mid-market businesses. Almost half of private credit managers surveyed see this as their biggest value-add on ESG issues, and nearly a third see their ability to influence ESG outcomes as their biggest strength.
The emergence of ESG-linked loans
A third of firms reported offering ESG-focused private credit products that incentivise businesses to become more sustainable, for example linking the interest rate to ESG-related criteria. Such products are likely to become more prevalent, with a further 28% of respondents planning to make loans with ESG-linked financial incentives in the future. While the materiality of how ESG performance is assessed continues to be debated within the industry, managers and investors interviewed for this research agreed that ESG-linked loan terms should not reward ‘business as usual’ and potential greenwashing and bluewashing are shared concerns.
A sustainable approach to ESG
Private credit managers have adapted and deepened their approach to ESG integration relatively quickly, but there is a consensus that methodologies, loan documentation and engagement practices will continue to evolve. While greater alignment between investors, private credit managers, borrowers and regulators will support this process, the industry’s desire to innovate is likely to be the biggest driver of new solutions.
Case studies
AIG Investments provides €140m to European real estate developer and asset manager
Ares Management Corporation lends £1 billion of available debt facilities to RSK Group in largest sustainability linked private credit financing to Date
Founded in 1989, RSK Group (“RSK”) is the U.K.’s largest privately-owned multi-disciplinary environmental business. Led by Founder and Chief Executive Officer Dr. Alan Ryder, RSK is a fully integrated, environmental, engineering and technical services group currently comprised of over 100 businesses and employing more than 7,000 specialists. The company has an established presence in more than 40 countries around the world. RSK supports its global client base across diversified sectors, from energy to water, to conduct business in a sustainable, safe and environmentally responsible manner through comprehensive, solutions-led services. In the third quarter of 2021, Ares’ European Direct Lending team announced it had structured as sole lender £1 billion of available debt facilities for RSK, marking the largest private credit-backed sustainability linked financing to date. The facilities will be used to refinance RSK’s existing credit lines as well as to support its continued organic and inorganic growth plans. The new debt facilities include an annual margin review based on the achievement of sustainability targets, which are broadly focused on carbon intensity reduction and continual improvement to health and safety management and ethics. These targets are aligned to RSK’s Corporate Responsibility and Sustainability Route Map, which forms the basis of its sustainability strategy, based on RSK’s sustainability pillars and the United Nation’s Sustainable Development Goals. RSK anticipates interest savings in excess of £500,000 per year and has committed to donate a minimum of 50% of this margin benefit toward sustainability-related initiatives or charitable causes.
CVC Credit provides funding to UK-based online used book marketplace
Hayfin provides €410mn unitranche loan to German TV home shopping player
Having been a lender to HSE24 for a number of years, when it was a repeat syndicate loan issuer, Hayfin provided the German TV home shopping player with a €410mn unitranche loan (as well as a PIK bridge) to refinance existing debt and fund a dividend when the sponsor, Providence, transferred the asset into a new vehicle. Hayfin’s long-term lending relationship with HSE24 is managed by its team in Frankfurt and is a product of the firm’s commitment to maintaining an extensive European footprint and being local to the markets in which it lends.
This led to extremely strong institutional knowledge of the asset, sector, management team and the sponsor, allowing Hayfin to structure a comprehensive financing solution in a short timeframe for a bespoke transaction when Providence opted to move the asset into a new vehicle. Hayfin is one the select few European direct lenders with the firepower to lead-arrange, underwrite and retain such a large facility, offering Providence the convenience of dealing with its lender on a bilateral basis. HSE24’s strong, protected and very cashgenerative business model is highly attractive and provides investors with strong credit backing.
INOKS Capital’s funds finance sustainable food value chains (grains & specialty crops) in the Ukraine
INOKS Capital supports sustainable farming practices in the Ukraine to enable local or export-oriented grains and specialty crops value chains related to i.e. wheat, corn or lentils. The facility agreement of up to 7.5 mln USD over max. 12 months helps to finance the following activities:
- Sustainable & precision farming on leased land,
- Aggregate surplus from local nearby farmers,
- Elevate & store, and
- Sell on local and export markets at best pricing
The full transaction value chain related to farming is covered throughout the financing facility agreement: Purchase of inputs and associated logistic costs, the farming and harvesting services and the marketing services (delivery costs).
The impact targets are:
- Increase sustainable/organic farming
- Improve soil conservation
- Mitigate climate change by reducing emissions with precision farming
- Support 600 high value agronomic local job
- Support more efficient local logistic chain
- Improve high quality food availability, for both local and export markets due to surplus by yield optimization
In light of climate change and food security issues globally it is vitally important to support sustainable farming practices. Improved soil conservation and reducing emissions next to creating much needed local job opportunities add to the positive impact of this transaction in addition to the attractive return potential for investors. Inelastic demand for basic nutritious goods in the food sector next to the way how the transaction is structured (collateralized, goods pre-sold, insurance etc.) help to support the investment case.
LendInvest has partnered with Homes England to finance the development of 400 affordably priced apartments in Ashford, Kent.
The scheme is to be developed by Kings Crescent Homes and has an expected GDV across two phases of over GBP90 million. With planning already in place and a cleared site, construction is able to start immediately to bring into use a key development with the project to be split into two phases. Phase 1 will see the development of 143 units and some commercial amenity, with a GDV of over GBP35 million. Phase 2 will include the development of a further 257 flats, at a GDV of over GBP55 million. The units for this residential development will range from one to three bedrooms providing much needed affordable units, just 5 minutes walk to Ashford’s International Train Station, which is only 30 minutes to Central London and less than 2 hours to Paris. The project is anticipated to reach practical completion in 2023.
Oak Hill Advisors leads $500 million preferred equity commitment to corporate climate and energy advisor.
Oak Hill Advisors (“OHA”) led a $500 million preferred equity commitment to Bluesource, an experienced and diversified corporate climate and energy advisor providing environmental services and products in North America. This financing partnership will fund Bluesource’s acquisition of commercial hardwood timberlands in the U.S. and Canada, with the goal of establishing a sustainable forestry strategy by harvesting new tree growth and generating carbon credits. In order to generate carbon credits, the project must produce real, permanent and verifiable reductions in GHG emissions. Issuing carbon credits involves placing long-term conservation easements on forests, ensuring they will not be harvested in excess of new growth for at least 30-100 years. OHA believes this strategy will lead to long-term environmental benefits even beyond carbon reductions, such as habitat rejuvenation, soil retention and water management. OHA is excited to establish this partnership and has high conviction in Bluesource’s management team and capabilities to execute on its strategy.
Project 2G: Tor Investment Management provides funding to an electric vehicle business in Australia.
Tor provided an AUD 110 million two-year senior secured loan to TrueGreen Mobility Limited, an Australian electric vehicle business, for the refinancing of existing debt, capex, and working capital. TrueGreen is a leading manufacturer and supplier of zero emission buses and next generation hydrogen buses in Australia with a strong pipeline for government supply in the state of NSW. The company also has a developing business for EV commercial vehicles to be supplied to major corporates in Australia.
Tikehau Capital provides ESG linked-loan to European IT services company
In August 2021, Tikehau Capital served as sole arranger on a €180m financing for Prodware SA, one of its long-lasting relationships. The financing was split into a €140m unitranche to refinance the existing debt and a €40m committed Acquisition Capex Facility to support the growth strategy.
Founded in 1989, Prodware is a European leader in IT services, helping small and midcap companies to embrace innovation processes and drive their digital transformation in order to enhance their overall competitiveness. Prodware’s main activities consist in (i) providing consulting services to clients regarding their digital strategy, (ii) providing SaaS and IaaS (Infrastructure as a Service) cloud solutions that are customized for technical and service requirements and (iii) developing and integrating software based on Microsoft Dynamics ERP and Microsoft Dynamics CRM, which can be adjusted by customers as per their functional and technical needs. The Company also provides tailored-made solutions as per clients’ requirements.
Through an ESG ratchet, Tikehau Capital ambition is to assist Prodware in strengthening its sustainability roadmap considering key topics such as innovation and human capital. Tikehau Capital’s favorable view of the business is supported by Prodware’s ability to understand the challenges of a specific sector to adapt business IT solutions and provide packaged solutions, from consulting, to SaaS, integration and maintenance.