The Evolving Line Between Syndicated and Direct Lending

Right. That working. Seems to be the last session of the day. Well done for staying around for this. Um, first off, you might notice that we're missing somebody.

Matt the Arcus from Irish management unfortunately has caught the dreaded influenza back in London. So, he couldn't even step on a plane. He was so ill. Um, but my guests here tonight, um, Joe and Miguel, they're actually quite happy about that because they get to actually speak a lot more than than if Matt were here. But anyway, so our our final panel, um, is really looking at what is rapidly becoming the shrinking um, uh, distinction between uh, private credit and the broadly syndicated loan market.

I mean once upon a time they were very very distinct but I think as we just heard it was um uh it was Ted from Monroe just on the on the prior panel to this who said that they're now bumping up against each other. Um so we're going to explore this a little bit. Um really ask ourselves is that actually happening why it might be happening where is it happening? Um because I said they were once very very distinct whether that be in pricing whether that be in liquidity whether that be in documentation and dare I said whether that be in underwriting standards. So um I'm going to start then just asking that question.

To what degree do we think this this this sort of defining line is being blurred and if so where's that most being seen? Which segment of the market but either in size or geography are you seeing that? So Joe why don't we why don't we start with you if I may.

Yeah.

There we go.

There it is.

Um so so look firstly Jack thanks for having me. Um it's it's great to be here and thanks to AMA for for hosting this event. Um for Bearing's uh private credit strategy, we we have a real long-standing focus on middle market and we're we're relatively disciplined about that. And and for us that means EBIT DAR at origination of somewhere between 10 and 75 million in local currency. And so you know for us that's where the the the midmarket sits.

Now it is it is clear that there is an increasing convergence the further up that scale you go. Um but a and I think it also varies by region. So my strategy which is the European strategy we we very much see that um you know deals below 40 million euros of Ebar still look and feel like mid-market deals and as you go up in size you you're seeing increasing convergence. I think in our minds they're they're fundamentally quite different products and propositions and and for LPs I think that the the discipline on uh strategy and focus on middle market is important. So all of our loans in Europe uh continue to have financial maintenance covenants.

We think that's that's appropriate from a middle market perspective. um you know spreads continue to be you know circa 200 bips wide of the um of the broadly syndicated equivalent yield and we think the middle market offers that that nice balance of attractive risk adjusted return as well as good controls in the documentation. The challenge is very much as borrowers graduate up and grow under our ownership and that's where we see increasing convergence slightly different deal styles but for us it's you know we welcome um development of increased financing options at the at the large size range because it gives us an option to exit the deal um and yeah

whilst a lot of the chats around deployment you know we need to return capital to investors as well so having that function at the larger end is important

so I can I can see already here um uh Joe that the the the competitive dynamics that seem that seem to be evolving are not really troubling you too much at the moment given where you occupy the sort of space you occupy in the middle market. But Miguel, turning to you, what what's what's your answer to that original question I asked about kind of where you're seeing it and um and how is it impacting you?

Yeah, absolutely. Thank you, Jack, and it's great to to to be here and to speak to everyone. Uh I'm Miguel. I'm you know part of CVC uh within the credit team uh as part of our executive committee in private credit. So at CVC you know Jack we we focus on the middle market direct lending same as sorry same as Joe does uh where companies tend to have ebida 25 to 75 million euros and there you're not seeing as much convergence as Joe said.

Um just to flag also that the the direct lending market you know as some other folks have said earlier in this conference uh encompasses you know two trillion plus um dollars of of AUM across multiple different strategies. So for example we have capital solutions at CBC which you know we do junior capital lending that's something I focus on um where there's not any convergence with the with the broadly syndicated market. So, just to contextualize it, we're speaking about large cap corporate companies that have the ability to access um the syndicated markets because they're large and they can access liquid loans. And then you've got the the direct lending equivalent um at that large cap level where there's some convergence in documentation and a bit in underwriting standards and a bit in spread. But again, in that mid-market layer or in the non-traditional direct lending uh senior layer, there's not that much convergence, especially in Europe.

Yeah. So you know we definitely seem to see it's happening in the upper end. I don't know where we have if there's a cut off limit. Certainly 500 million plus sort of size deals is is kind of where the most the competition starts to be f felt acutely and and um and and it goes up from there which actually we'll we'll sort of that might bring us on a little bit later to um to ask the question is scale an advantage or a disadvantage in many ways if that's the sort of space that you are competing in. um geographies.

I mean, I know you're both European focused. It seems to me and from what I hear, this sort of um uh narrowing of the distinction between the two is happening more in the US than in Europe. But is is that your understanding?

Yeah, look, I mean um you know, bearings wider platform, we're we're getting close to half a trillion dollars of AUM and that covers multiple regions, multiple strategies, including a very large and long-standing um public credit strategy on the subinvestment grade side. So, so um you know, we're we're well placed to spot where the convergence is happening and I would say the US market um is probably and and always is the case a few years ahead of of of Europe. Fundamentally, the the US is is a more uh efficient market than Europe um from a private credit perspective. uh it's a homogeneous uh currency language um you know business region and you've got multi-party deals happening really all the way down into the mid-market and and you're seeing Covite penetrate further down into the midm market. Um I think for Europe it remains you know a market that has higher barriers to scale.

I mean barriers to entry are low for anyone. Anyone you know can set up a private credit fund but having um the critical mass the team scale language cultural um ability to drive origination to create the portfolios favors managers with scale and and so we see kind of more consolidation of the market in Europe and I think that just makes it that little bit harder for the same trend to become true. Although we do see um signs of it at the very large transaction size as you say typically above $500 million of financing volume.

Yeah. And and you mentioned there um uh you know some of that's being manifested in covenants and and more covenant like deals going on. I mean uh Miguel I mean if we if we agree that this this this um narrowing is happening where is that most being felt is that or being manifested is that in sort of the underwriting standards is in the covenants is in the documentation or is the competition mainly at the pricing end or is it just where are you seeing it most or where is the market seeing it most?

Yeah absolutely Jack. So I think you know when when folks and when we think about um convergence it's typically in the documentation side where a lot of people are focused because obviously you've had the two big recent examples in the US around trickor and and first brands where and and now there's a lot of noise around altis where arguably because of weaker documentation it allowed the the borrower to do things that you know may take value away from the lenders in particular the senior debt lenders Just to flag of course that that is not direct lending the way we do it uh at CBC and the way Joe does it at bearings. That's more feature of the syndicated markets. Um and so you know there is that perception that the documentation at the upper end is weaker is looser and gives rise to to potential um negative outcomes for for lenders. Now if you just broaden the brush strokes you know um underwriting standards is certainly the the bit where we see very limited convergence you know I think the way that senior lenders who can tap into the liquid loans think about underwriting is different there'll be a huge credit element but obviously they have the benefit and we have a huge CLO platform so we know this they have the uh the benefit of liquidity so they can trade and sell loans once they have a differing uh credit fee, but because in in the direct lending um segment of the market, we're very focused on making long-term loans to to companies, we have to take a very long-term horizon underwrite.

And so we tend to favor um having strong deep underwriting standards and ensuring that we know the companies inside out, we know the sectors uh and we know the management teams and the private equity sponsors that back them. And then you could go into uh what does that mean? you know uh in terms of outcomes for returns typically there's a there's an ill liquidity premium as Joe mentioned earlier on the private credit side which has been maintained you know we see that as being 200 to 250 basis points as Joe said um possibly even more uh depending on which jurisdiction you're looking at um which has been the case so you know you're not really seeing convergence there so I think you know to answer the question squarely Jack it's really on the documentation side and the ability for companies if they're in sticky situations to take value away from senior lenders and potentially give that to the private equity sponsors or to new lenders. That's the big focus area and that's not really a direct lending theme. That's a more syndicated loan theme.

Yeah. No, that that is interesting. I hadn't realized that actually that liquidity premium and pricing had actually been maintained while all this is going on. So that's really

Yeah. There's a there's always a deal where, you know, everyone talks about it and it and it hasn't been, but but if you're if you're a scaled manager, you're not looking to do one deal. You're looking to do we've done 60 deals in the last 12 months um including portfolio add-ons. And so um making sure you've got a a wide range of price points um to deliver that average, which gives the investors and the portfolios the the liquidity premium they need. But you need scale to do that.

Um

yeah,

have that that sample size. So I wonder how borrower behavior is changing. I mean the the the great thing about private credit for borrowers is the certainty of execution, the flexibility of the structuring um the kind of speed with which they can do it which you historically haven't been able to see in in in uh if you're borrowing through the syndicated market. Uh do you find that the borrowers certainly the deals and transactions that you're looking at that is still very much to the four of what it makes them come to you rather than go to the um the syndicated market where they are going to get it um at a lower price. Yeah, I think I think um you know price is an important um input for for for GPS on the private equity side when they're they're running their returns, but um there still remains a a very compelling case for private credit that can be speed as you say.

It can be confidentiality um around something like a take private a P2P for example. um you know buy and build strategies and their execution do not favor broadly syndicated financings. The the BSL CLLOs's do not like undrawn capital whereas um the capital bases of of of folks such as Miguel and myself you know draw down funds um SMAS can can provide that committed capital on an undrawn basis. So there there are a lot of reasons that there's sometimes a a complexity or a rating challenge which favors private credit and and time and again you see um large sponsors you know who are really the kind of borrowers who decide um what goes on. They'll explore both options but you know private credit year overyear continues to gain share.

Where is there more white space for private credit to gain share? in that larger financing size where um the broadly syndicated market which is bank originated and distributed has a larger um kind of share of the market today.

Yeah, Miguel, do you see anything different to that? Yeah, I think I think um Jack Joe Joe's spot on in terms of the the borrowers and the way the companies are are reacting to it. you know they are looking to maximize the flexibility they can receive um across both syndicated direct lending and also sorry syndicated loans and also uh direct lending uh and each situation you know to the extent that we can be a solution provider and and at CBC we look to provide 100% of the debt backing either an acquisition refinancing or or uh traditional LBO that allows us to have more control of the documentation and more um interaction action and and and direct um direct control in terms of the company and their actions, right? And so that's something we always focus on trying to be the 100% um the 100% solution provider just to have that additional um ability to speak to the companies directly and to speak to the private equity GPS directly and control the the the documentation so that uh from the outset it's less likely that the companies and the private equity sponsors and the borrowers will look to take advantage of you know the relaxed um standards that there may be in documentation.

Yeah. So turning from from borrowers, I'd like to sort of focus on the investors. Um, and I mean it would seem to me that um that that LPs are becoming more and more sophisticated. They understand this market better than they they ever have done. Um, and they've got a choice.

Um, what they can get in the syndicated loan market is liquidity. what they historically haven't been able to get in the private credit market is liquidity. Are you seeing um any change in investor behavior? I mean, you say that the the premium is still there, so they can still get better returns in private credit, but is that uh illiquidity premium sufficient at a time when they're looking for more um perhaps potentially looking for more liquidity?

Yeah, I look I think investors are becoming increasingly sophisticated. I think LPS see the difference between a a middle market strategy that has differentiated origination and unique portfolios that are that are diverse versus just taking a ticket in the same deal that five other managers are in. I think, you know, I'd contrast the the kind of alpha that's generated in in option A versus the beta that's generated in option B. Um, and I think they're becoming smarter about that. Um and that favors those managers who are scaled, have discipline around their strategy and a long multi-year track record.

Um which is driving consolidation of capital towards those managers in our view. In addition, I think you know GPS uh such as ourselves are becoming um increasingly um and it's driven by investor demand. uh you know good at serving complex and sophisticated LP requirements be that via you know bespoke SMAs be that via um perpetual funds be that via semi-liquid funds or indeed via securitization. So we we we issued the um first multicurrency private credit CLO in Europe this year and that was really interesting to see how that um securitization uh demand played out in the market for the first time and you know unsurprisingly you know very very strong appetites from certain parts of the world for the AAA's very very good um appetite for the equity from certain parts of the world and investor types. I think having the scale to offer you know a menu of options to investors and access points you know at times um you know in the cycle is is critical uh for managers.

So Miguel in the conversations you have with investors I mean what is what always floats to the top as the most important um uh thing that they are looking for. I mean clearly I from my point of view I think you invest in a fund you get the diversification you get the robust risk management the um uh the underwriting standards and rigor that you have in that way beyond price and and and liquidity but is that any of that changing given the convergence that we're hearing and talking about in certain segments

yeah Jack I think look fundamentally the absolute returns that we had two three years ago have come down a bit side right you know um the the the base rates have fallen you know Uribo has fallen from 4% to 2% as an example so it is true that absolute returns have fallen um but if you look at what investors mostly want from us as credit investors it's not to lose their capital and to return their capital and so uh if you look at the default rates in the private credit uh market and default rates as relates to CBC as an example we've not we've never had a realized loss uh to investors you know fundamentally if you're if you're a credit investor and you could demonstrate a very strong track record and show that you've not had any losses you know I think investors um see that as a huge positive because at the end of the day they're very focused on risk adjusted returns and so if you're able to deliver good absolute returns but with minimum defaults minimum losses um you know that that's that's a fantastic outcome for investors.

Great. Well, you all three of us can see the clock here and we realize we haven't got very much time and as this is the last session of our particular forum and summit here today. Um we're going to go a bit rogue. Forget the title that we have um as our what I've got you both here. I've got you captive.

It's towards the end of the year. Next year is a whole new year. Um we've heard a lot about private credit. share with the audience your views, your hopes, your aspirations for next year for private credit and for your ability to be able to drive um and generate returns for your investors.

Yeah, I think um funnily enough, I was uh rarely had six and a half hours to myself yesterday um on the plane and and thinking about exactly this topic as we we speak to the team before everybody goes away for Christmas. I think for us um the main thing and it crosses a number of different areas is you have the M&A boom vintage of 21 and 22 is going to turn over um and it's going to turn over mainly because it's going to be sold uh or put into continuation vehicles or refinanced um as contractual maturities come into view. I think that's a a critical time and it goes to convergence because the vast majority of those assets have grown in size and scale and so making sure that that we can remain um having capital to deploy to the borrowers uh that we know best um will be kind of key performance indicator one for for next year and we you know we're very keen to to defend our incumbency um and try and stay with those portfolio companies. I think the other side of the coin is that you're also going to see the ones that have not performed so well out of that vintage become current. And so making sure that your team is set up and your process is set up to act early and intervene um to recover value in the names that haven't gone so well out of that crop.

So I think you're going to you're going to see real ability for managers to um overperform versus peers next year. more so than you have in any of the last five. And and so we we feel, you know, good about that. We think we're well set up for that, but it's going to be a a really important year next year as we try to retain the assets that that we want to um as well as kind of manage through underperformance as as those um boom year crops become current.

Got it. So it's no longer a situation of the tide lifts all ship ships. This is quality of of the manager, expertise, skill is really ready to perform. Miguel, you've got the last word.

Yeah, absolutely. Thanks, Jack. So, look, we're positive fundamentally on direct lending in Europe. You know, we think as as rates come off, there should be an increase in M&A. If there's an increase in M&A, it should bolster uh the ability to do direct lending into those acquisition finance structures.

Uh I would say also you know I I look after and I focus on our capital solutions funds within CBC and we're very bullish on that uh as a theme for 2026 in particular. You know we think that we know that you know Prequin has done some analysis and there's $1.3 trillion of value locked up in the portfolio companies of private equity GPS in Europe today. And so that money needs to be returned to investors such as yourselves. And we think that uh capital solutions in the form of structured equity, preferred equity, uh pay if you can loans, second lean will be vital to creating that DPI to investors uh on a very selective basis.

Brilliant. Um well, gentlemen, thank you very much for joining me um this afternoon. Well done for um uh closing out or being the final panel of the day. Um ladies and gentlemen, please um show your appreciation um for Jerry Miguel. Thank you.