The COVID-19 pandemic is causing widespread disruption to the economy and financial markets worldwide. Many companies, particularly small- and medium-sized firms, are experiencing cash flow difficulties that they cannot solve with traditional sources of funding, such as bank loans. At times of crisis like this, the role of private debt funds becomes ever more relevant. It is in this environment that Golding Capital Partners has held a successful first closing of its fund Golding Private Debt 2020 at a volume of nearly €200 million. It represents an important contribution by Golding to the financing of companies in various industries and of different sizes, but especially of medium-sized firms.
Many companies are currently suffering from constrained access to capital, which is often required in a shorter timeframe. This is particularly apparent where businesses seek more traditional sources of funding – such as bank lending or the broadly syndicated credit markets. Consequently, small- and medium-sized companies in particular are facing cash flow bottlenecks that can jeopardise their existence. Private debt funds become even more important in a crisis like this. They can close the funding gap in many situations, including acquisitions and organic growth initiatives, refinancings, as well as temporary liquidity constraints – with the objective of providing sustainable financing solutions.
Founder and Managing Partner Jeremy Golding: “The COVID-19 crisis has shown that companies need a quick, straightforward response to their liquidity needs. It is the only way for them to keep their businesses going and save jobs. Increasing regulations and capital adequacy requirements mean that banks are often not the right financial partner for them. Private debt funds on the other hand can offer direct, alternative financing solutions and provide companies with capital, often on a long-term basis, with a much better risk-return profile.”
The investment strategy of the Golding Private Debt 2020 fund focuses on building a broadly diversified portfolio with an emphasis on corporate direct lending, i.e. bilateral loans that are directly negotiated with medium-sized companies in Europe and North America. It will primarily target first lien senior secured loans, although the fund may also selectively invest in subordinated debt strategies. Depending on the market environment, Golding will also invest in special situations funds that could aim to acquire loans opportunistically in the secondary market, for example, or provide capital to companies in specific complex conditions. The intention is to make commitments to 15-20 funds through primary and secondary investments, with an additional allocation dedicated to co-investments. To date, the fund has already completed one co-investment and entered into primary commitments with a limited number of funds.
The private debt market demonstrated its superior resilience compared with other asset classes both during and after the global financial crisis in 2008/2009. Loan impairments in the broader market recovered entirely from trough levels after around nine months, for instance. This relative stability at times of crisis is one of the main reasons for the increasing interest in this segment. Current market studies confirm this clear growth trend – around a third of the international institutional investors surveyed intend to increase their allocations to private debt as a result of the COVID-19 crisis.
“Investments in private debt funds are certainly attractive for our investors. Not only because our programmes are particularly stable and dependable, which is thanks to our broad diversification across some 600 to 800 transactions worldwide. But also because we earn attractive risk-adjusted returns and can demonstrate an excellent performance, with an average net IRR of 7 to 8 per cent. In the ongoing low interest rate environment, this presents institutional investors with an attractive investment opportunity”, said Managing Partner and CIO Dr Matthias Reicherter.
Golding was one of the pioneers in this asset class with a track record that dates back to 2003. Its success and investment expertise was built over many years and across multiple fund generations. Golding currently manages some €3.5 billion in this asset class for institutional investors. The capital is currently held in 17 investment programmes (including funds-of-funds, co-investment funds and managed accounts).