LONDON, July 5 (Reuters) - Pemberton, the asset management group backed by Legal & General, has launched a strategic credit opportunities strategy that is set to raise around €1.2bn to invest in European mid-market companies, it said.
Unlike Pemberton’s existing funds that invest in senior secured paper, the latest strategy will invest down the credit spectrum, offering subordinated loans at higher returns.
It will target strongly performing mid-market companies as well as offer recovery capital to businesses that may have had difficulties but are gearing up for growth mode again.
Around 50% of the strategy will invest in senior and unitranche loans, 35%-40% will invest in second-lien loans and the rest will invest in mezzanine and deeply subordinated preferred pieces.
Taking advantage of Pemberton’s pan-European platform and people on the ground across the continent to originate deals, some 75%-80% of the loans will be to European companies, while the rest will be made to UK companies.
Non-sponsored corporates, family-owned businesses and small local sponsor-backed businesses with Ebitda ranging from €10m-€100m will be the focus.
Working closely with banks, Pemberton is seeking to fill a funding gap that has emerged with a reduction in cross-border lending as banks shy away from foreign SME lending, retreating to their home markets to support local businesses.
The asset manager will also take advantage of increasing regulation on banks, which has constrained more risky subordinated lending.
“Forty percent owned by L&G, there is a halo effect that comes from a large stable insurance company and Pemberton can leverage those relationships to fill the gap of foreign banks. A shift in regulatory pressures in how banks treat their capital means it is not as easy for them to do subordinated lending and there is a real need for a partner to not only fulfill final hold amounts but to also provide subordinated debt,” said Ben Gulliver, Strategic Credit Portfolio Manager at Pemberton.
Unitranche lenders typically offer loans at 7.5%-8% on companies that are leveraged between 5.5-6.0 times debt to Ebitda. Pemberton is seeking to lend at significantly higher returns on lower leveraged companies.
“Pemberton is giving LPs a different investment than other direct lending funds which are predominantly focused on the sponsor arena. It is a different collateral pool. The return profile of the strategy will be significantly higher than the current unitranche market for a significantly better risk profile,” said Gulliver.
Pemberton raised €1.2bn for its European Mid-Market Debt Fund, that started fundraising in 2015 and closed in November 2016. It provides senior debt financing to mid-market borrowers in Europe, focusing on companies with a turnover between €75m and €1bn. In September 2016 Pemberton launched a £500m UK Mid-Market Direct Lending Strategy. (Editing by Christopher Mangham)