August 19, 2019 / 10:28 AM / a year ago

Short-term strategies limit risk in private debt

LONDON, Aug 19 (LPC) - Smaller European direct lenders are raising funds and lending on a short-term basis in a bid to limit potential late cycle credit losses, as macroeconomic and political risks rise in more volatile markets.

Some smaller funds are raising short-duration open-ended funds with maturities of six months to three years and lend on a similar basis. Larger existing private debt funds typically raise closed end funds with maturities of seven to ten years, and make similar loans.

Higher volatility amid the US-China trade war and a potential no-deal Brexit is encouraging some smaller funds to offer short duration strategies to reduce risk and allow Limited Partners to access their capital more quickly.

“Short duration is better in this environment of uncertainty”, Louis Gargour, CIO at LNG Capital said.

Short-term strategies are provided by smaller private debt funds such as the UK’s Prestige Capital Management or direct lending fintech platforms such as Germany’s Creditshelf . The funds typically specialise in niche areas or sectors.

Shorter term loans are attractive for smaller and mid-sized companies, which often need capital at short notice and are reluctant to give away equity in exchange for a loan.

Short duration funds typically offer investors higher rates of up to 15% and onlend at similar rates. This is more expensive then longer-duration funds, which typically offer investors 8-12% in return for locking up their cash for longer, and onlend at 6-8%.

Funds managed by Prestige offer credit facilities, working capital and development finance to a diverse range of commercial sectors including food, farming and agriculture and infrastructure related opportunities including renewable energy and waste to energy.

“We provide short-term lending to strategically scale up businesses and to finance productivity”, Prestige founder Craig Reeves said.

The three funds managed by Prestige are open-ended to match their investment profile, and yield more than 8%, he said.

“Given our diverse pipeline of opportunities and their shorter-term investment horizon, we don’t see the need for our funds to be closed-ended”, Reeves added.

Investors in short-duration funds receive monthly payments and their investors appreciate the flexibility of regular payments and income. Longer duration funds offer quarterly and annual payments.

“The biggest advantage for investors is that the short-term credit strategy offers inherent cash flow”, Creditshelf CEO Daniel Bartsch said.

The German lending platform focuses on domestic small cap and lower mid-market Mittelstand companies with company Ebitda of less than €10m.

The firm lends to companies that are not owned by private equity firms that need working capital facilities of €100,000 to €1.5m with a maximum maturity of 60 months.

Although the segment has traditionally been covered by domestic banks, European SMEs are increasingly turning to private credit funds, which are already using fintech technology to streamline and accelerate decisions.

“Traditional lenders respond slowly and within a longer time frame to those applications as most of them are not fully digitised yet”, Bartsch said. (Editing by Tessa Walsh)

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