Direct lenders look to non-sponsored market
Direct lenders are taking an increasingly pragmatic look at lending to non-sponsor owned companies, as competition intensifies in the sponsor-backed market.
Christophe Rust, co-head of European credit opportunities at investment manager NinetyOne, told Alternative Credit Investor that the asset manager’s private debt portfolio consists purely of non-sponsor owned firms.
While many asset managers feel that sponsor-backed lending is less risky than non-sponsor, Rust said that for firms with the expertise and contacts required to originate the loans, non-sponsored presents a relatively untapped opportunity.
Read more: Debt funds dominate UK sponsor-backed deals in Q1
“We’re not allergic to lending to sponsored borrowers,” he said. “But rather, what we are allergic to is partaking in competitive processes where we are price takers and where we are takers in terms.
“Our job is to pick the right credit. Whilst there are many non-sponsored borrowers that maybe aren’t great, equally, there are many that are superb.”
He admitted that loan origination in the non-sponsor space is considerably more difficult. It involves building a network of professionals who can refer borrowers, and then having the time and expertise to do thorough due diligence.
Rust estimates that of the approximately $1.7tn (£1.3tn) of assets in the private credit markets, around 70 per cent is currently with sponsor-owned borrowers.
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Another private credit fund manager, with a roughly 80 per cent sponsor-backed portfolio, told Alternative Credit Investor that he was making a concerted effort to attract more non-sponsor business as a point of differentiation in the market.
He agreed that the opportunity was often overlooked by asset managers that did not want to, or were unable to, originate loans in the non-sponsor space but disputed that private equity-backed companies were inherently less risky.
Meanwhile, Bridgepoint head of direct lending Andrew Cleland-Bogle said that 95 per cent of his portfolio comprises sponsor-backed companies.
While Cleland-Bogle was able to highlight two non-sponsor loans that made brilliant returns, he said that it was generally prohibitively onerous to source and diligence non-sponsor businesses. In contrast, Bridgepoint’s strong network of private equity-backed businesses provides a reliable pipeline of originations.
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However, Cleland-Bogle is clear that non-sponsor is not fundamentally unsuitable for direct lending. “There’s some fantastic risk/return on offer in that market,” he explained. “We have financed businesses of that size, and we will do that where they’re growing fast, and we can see them on the cusp of graduating into the middle market, but they’re not just quite there yet.”
Blair Faulstich, senior managing director at alternative asset manager Benefit Street Partners, said that it is important for credit managers to differentiate their portfolio construction and highlighted that sponsor-backed lending should not be seen as a guaranteed way to mitigate risk.
“There’s an assumption with investors that sponsors will write incremental equity checks when a company is off plan, but that’s not how it always works,” he said.
Moody’s senior vice president Jeanine Arnold said that risk could not be calculated purely on the basis on whether a company was sponsor or non-sponsor owned.
“Ownership is important, but you cannot generalise at the end of the day,” she said. “When you’re thinking about risk in this new environment of low growth, high rates for longer, contested valuations, you need to think about debt affordability, cash flow, which is back to fundamental credit analysis. And I’m pretty sure that is what asset managers lenders will be looking at. It’s good, old fashioned credit analysis.”
