In the offices of Federated Hermes, the word “discipline” is more than just a buzzword; it is a guiding principle.

One morning before the Covid-19 pandemic, Patrick Marshall (pictured), the head of European direct lending at the asset manager, walked into the office and placed Post-it notes with the word “discipline” on every monitor. This simple gesture was a testament to his determination to maintain a disciplined approach amidst the market highs of the period.

Marshall’s commitment to discipline is deeply rooted in the foundation of the direct lending business, which he established in 2015. Now celebrating its 10th anniversary, Federated Hermes’ direct lending arm, which is raising its third vintage, has always focused on collaborating with banks rather than competing with them.

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When Marshall joined the company, which was called Hermes at that point, he decided that he would set up legally binding co-lending agreements with top banks.

“I’d rather be competing for the 92 per cent of the deals, than be competing with everybody else for the eight per cent, so we decided that we’d be the fund manager that works with banks, and that was key,” he said.

The agreements are exclusive and require banks to show all their loan opportunities to the team. They are also structured so that Federated Hermes and the banks co-lend on the same terms.

While many claim to work with banks, Marshall highlights the difference between genuine collaboration and mere association. He points out that without formal agreements, banks might only show deals they do not want to keep on their balance sheets.

The team invests across what Marshall has dubbed “beer-drinking Europe”, or Scandinavia, the UK, Germany and Benelux, where regulations and rules are more creditor friendly. The geographic focus is part of Marshall’s efforts to mitigate risk, which also includes a requirement to do only senior secured loans and stay away from sectors like retail and hospitality. It is the reason the fund has come through the Covid period without any impairments or defaults, he says.

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His aversion to risk stems from his days at Lehman Brothers prior to the bank’s collapse.

“I saw aggressive lending prior to the bankruptcy and one of the lessons I took away was to keep things simple and keep things disciplined,” he said. “Prior to Covid, the market was again getting very aggressive. And I think some are seeing the fruits of that now.”

With this low-risk strategy now having a 10-year track record, Marshall acknowledges the need to expand into other areas, particularly looking at geographical diversification, potentially in the US, and a broader range of offerings along the risk spectrum.

Meanwhile, he foresees further consolidation in the industry, driven by a need for greater resources to meet client demands for increased transparency and rising competition for origination. In his opinion, further regulation is also on the cards for the private credit market.

“I actually want us to be regulated to be honest, because I think some of the things that are going on in the large cap direct lending market remind me of my days at Lehman,” he said. “When you’ve got big direct lenders underwriting loans and then syndicating them and doing covenant light, when the market collapses, you’re left with hung syndications, which then puts investors at risk. I think those direct lenders have forgotten what they’re supposed to be doing, which is at the end of the day, providing money to the real economy, providing their investors with sound returns.”

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