Wealth & Finance International - February 2017

Wealth & Finance International 24 Lending a Helping Hand ayfin Capital Management is a leading European credit platform that provides lending solutions to middle-market companies and asset management services to institutional clients. The firm has extended more than € 9bn in loans to over 200, predominantly middle-market European companies since being founded in 2009, and it manages more than € 8bn in assets for its investors. Andrew McCullagh, Head of Origination at Hayfin, tells us more about the type of companies that Hayfin lends to and the advantages that this brings. “Within the broad framework of lending to European middle-market companies, Hayfin looks at as many businesses seeking funding as pos- sible, from across all sectors, in order to cherry-pick the highest-quality lending opportunities from a risk/return perspective. We have our local European offices for precisely this reason, allowing our team to build close lending relationships with local companies and to identify the very best credits across the continent. “This also explains why we regularly lend to private companies who don’t have a conventional financial sponsor, such as those owned by their founders, a family office, or specialist investor. By contrast, the vast majority of loans extended by European direct lenders go to companies backed by traditional private equity firms, whose owners typically have a more aggressive attitude to sourcing financing from the most competi- tive parts of the market.” The ready availability of debt financing – at the very least for companies run by private equity firms – represents a marked departure from the situation in Europe in Hayfin’s early days, as McCullagh explains. “Back in 2009, when Hayfin was founded, banks were being very cautious about any new lending and seeking to reduce their overall loan exposures, making it very difficult for many companies to access credit. It was incumbent upon a small number of alternative credit managers with capital to invest, one of which was Hayfin, to keep these mid-mar- ket European companies supplied with capital. “Since then, the lending appetite from banks has recovered and banks still account for the bulk of corporate lending in Europe, having a significantly higher share of the market than in the US. Nevertheless, in a regulatory environment where banks continue to be disciplined about how and how much they lend, direct lenders continue to provide a critical alternative and flexible source of capital.” Private debt has since become a very fashionable asset class, with more and more investors allocating capital to this strategy and the number of European-focused direct lending funds increasing in kind. McCul- lagh explains further: “The steady inflow of capital into the space that we’ve seen in recent years isn’t surprising – direct lending provides a low-volatility, attractive risk-adjusted return amidst a low-yielding global macroeconomic climate. Similarly, given the attractive market dynamics in European leveraged finance since Hayfin was established in 2009, it’s understandable that a succession of newer direct lending funds have sought to emulate the strategy. But while it represents a major vote of confidence in the industry, the increased competition and rising stockpiles of dry powder are inevitably placing more and more scrutiny on lenders’ ability to originate high-quality investment opportunities.” Hayfin strives to differentiate itself from competitors in such a crowded market by seeking to invest in a broad array of market niches that make up the European credit landscape. Andrew gives us an example of how it does this. “Through our sector-specialist teams, such as shipping and healthcare, we’ve developed the capability to access areas of the market in which de- mand for capital is strong but where the more generalist alternative lend- ers lack the technical expertise to invest. And with our offices in Amster- dam, Frankfurt, Madrid and Paris, alongside our London headquarters, we do a majority of our deals outside of the highly competitive London market. By contrast, the dozens of Europe-focused funds we see today – up from two or three at the time of Hayfin’s inception – are overwhelmingly concentrated in London, typically with limited scale geographically and focused on a narrow bracket of vanilla capital-raising transactions.” With regards to the future, there are both opportunities and challenges for Hayfin and within the wider industry. “The key challenge for any direct lender today is how to maintain risk levels in an increasingly competitive market,” states McCullagh. “This is particularly acute for newer funds trying to ramp their strategy and sig- nificantly increase their funds under management. Hayfin benefits from being an established player with an existing footprint across Europe. While we’re in no way complacent about the challenges, we feel we are well set to manage them effectively. “Moreover, as the market has become more competitive, the key focus for the industry has been on origination, finding opportunities to put money to work, and, as we’ve said, some are better set up to originate a broad opportunity set than others. However, at this point in the credit cycle, some forget the other key focus for any fund: how to go and get the money back when things go wrong and defaults start to increase. While we can debate the specific impact of Brexit, overall it is inevitable that Europe will go through a renewed earnings cycle at some stage. Andrew McCullagh talks about Hayfin Capital Management, its clients and how it stays one step ahead of the competition. H s