Creditflux - Direct lenders eye opportunities in Germany’s lower mid market

Klaus Petersen talks to Creditflux about how direct lending in Germany may be about to flourish, with regulatory changes encouraging fund managers to step into what had been considered an over-banked market.

Around 43% of Europe’s direct lending deals take place in the UK, with France contributing 25% to deal flow and Germany responsible for approximately 15%. Klaus Petersen, who 
co-founded Apera last year after leaving his post as BlueBay Asset Management’s head of German direct lending, says that out of these three nations, Germany has the most scope for growth.
“Under Basel III, banks have had to increase the risk capital for lending to small and mid-sized companies in comparison to large invest-ment grade companies,” he explains. “But the internal models that banks can use for the calculation of the risk capital requirements under Basel III can allow them to achieve lower capital underpinning than intended. For Basel IV, changes are now being discussed that would limit the flexibility of the models.”

Petersen adds that the European Central Bank’s new lending guidelines will also have an impact. He believes banks will reduce lending to small and medium-sized companies as they tend to have higher volatility in their earnings than large com-panies, and a loan to an SME is therefore more likely to breach the six-times leverage limit. 

“We have already seen German banks focusing their attentions on higher quality borrowers in the upper mid-market sector, and this is creating an opportunity for fund managers willing to lend to smaller companies,” says Petersen. While opportunities are expected to present themselves in Germany, direct lenders looking to tap into this market for the first time will face obstacles. “It takes years to build up a network of private equity contacts,” says Petersen.

Park Square Capital boosts its deal origination capabilities through a joint venture with Sumitomo Mitsui Banking Corporation. Head of mid-market direct lending Howard Sharp expects to see more deal flow in Germany, including in transactions with companies that don’t have a sponsor.

“German banks have bid aggressively for leveraged loans, but are not able to provide a bespoke financing package, which a direct lender can,” he says.