With new funds springing up across Europe, the middle market is becoming an ever more competitive space. Pricing in the EUR 50m debt size bracket is getting particularly tight, with a proliferation of funds now able to provide this debt level without breaking a sweat.

In an effort to preserve returns, a bifurcation is emerging within the lending space, with funds targeting either very small niche deals, larger transactions or the more complex or higher risk deals.

With the lion’s share of mid-market funds taping the same investor pool for their funds, LPs are also wising up to what realistic yields are in this market.

Standard unitranche pricing is now Euribor+/Libor+ 6.75%-7% with a 1% floor and 3% fee, although some deals pay much higher interest, sometimes even over 10%. Most deals have a fee but a floor is negotiable.

When it comes to preserving yield, funds in Europe are falling behind their US counterparts. Unitranche Stateside is pricing at L+ 7.75% to 8% with a floor and 4% fees.

“The main difference is that in the US the market is at a certain level and that’s it, and here it is negotiable,” said a debt advisor.

Go big or go home

The larger European funds are using their capacity for larger underwrites to compete with the banks on the higher end of the market by moving quickly and offering flexibility, at a cost.

“The big branded guys, the credit arms of large global asset management businesses such as Cinven, CVC, and Permira have the capacity to underwrite the larger chunks which allows them in turn to be more aggressive with pricing,” one investor said.

Funds competing for the larger pieces include Alcentra, Ares, Babson, Bluebay, Hayfin and ICG. Two to three of these funds could easily club together to provide EUR 500m of financing. Ares has been at the forefront of this move, recently showing up on mid and large cap deals with standalone unitranche pitches.

Chasing the yield

The smaller, sub-EUR 50m mark tells a very different story. With a bountiful raft of capital in Europe and a number of banks still operating on a EUR 15m- EUR 20m senior debt hold basis, some funds are moving to back the smaller and higher risk EBITDA groups, where they can continue to reap juicy returns. Others, such as GSO and KKR, are targeting the higher yielding, more opaque end of the market, with a focus on specific credit opportunities as opposed to size.

With the unitranche space extremely competitive, some funds are turning to the lower yielding all-senior market. A number of new direct lenders are raising stretched senior funds which have lower return hurdles. Groups such as AIG, Hermes, M&G and Pemberton are amongst those looking at the below 6% hurdle rate, as well as heavy weight BlackRock, which is in the process of raising a senior-only fund.

Sourcing higher yielding opportunities is the main challenge for funds. Investment in local origination teams is key if funds are to stake out the premium returns.

by Emma Roche

Debtwire's European Mid-Market Forum takes place on 26 May 2016 at Rosewood London. 

Emma Roche Reporter Debtwire

Reporter for Debtwire’s mid market desk since August 2014. Emma has worked as a print and broadcast

journalist for 10 years focussing on the financial and political sector. Previous employees include Euromoney,

BBC News, Sky News and UTV. Emma holds an LLB qualification from King’s College London and an MSc in

International and European Politics from the University of Edinburgh.