An old chapter closes as a new one begins: Patrimonium is reluctantly ending its long-standing cooperation with Credit Suisse.

The Swiss asset manager plans to start fundraising for its fifth direct lending fund at the beginning of next year, and also intends to launch a real estate loan fund for the first time. Co-founder Daniel Heine announced the plans to the Börsen-Zeitung in the latest episode of the private markets podcast „Betting Billions“.

Patrimonium defines direct lending as bank-independent lending to companies with (sponsored) or without (non-sponsored) private equity investors backing them. According to Heine, Patrimonium aims for a 50-50 ratio in its portfolio. However, over the past twelve to eighteen months, deal flow outside the private equity cosmos has been more consistent. „As far as deployment is concerned, we are overall satisfied, and we plan to go to market with the next direct lending fund in the first quarter“, he states.

The new credit fund is expected to be have a volume between 600 and 800 million euros, and would therefore be at least as large as its predecessor and the co-operation fund with Credit Suisse combined. The collaboration with the Swiss bank was intended to provide a so-called one-stop-shop solution for private equity investors seeking external financing for a corporate acquisition. The package included amortizing financing components (Term Loan A) as well as bullet financing components (Term Loan B), along with a working capital line (Revolving Credit Facility, RCF).

„Credit Suisse was certainly one of the very popular houses where major sponsors went to ask for financing“, says Heine. However, he does not believe that the segment of direct lending is part of UBS's DNA outside the Swiss home market. UBS is still integrating Credit Suisse after buying its competititor, therefore Patrimonium has no plans to create a new fund with Credit Suisse.

Looking back, Heine still considers the cooperation a great success, and would make such an arrrangement again at any time. He is also open to cooperation with another bank. However, he has mixed feelings about the end of the partnership: On the one hand, it is a pity not to be able to offer a one-stop-shop solution anymore. Debt funds continue to struggle with providing working capital lines. On the other hand, Patrimonium had to share returns with Credit Suisse. Heine hopes to cover a large portion of future deals from the new and larger direct lending fund himself.

From a financial perspective, this is certainly more interesting for Patrimonium, believes Heine, noting that the market has changed significantly over the past four to six years. „My observation is that typical bank LBO financiers have pulled back quite significantly, giving us debt funds simply more space.", he says. He cites BayernLB as an example, which has withdrawn from leveraged finance. Overall, this is a positive development for the funds.

Heine does not intend to change the investment strategy in direct lending. Despite the larger fund, he does not necessarily want to engage in larger deals, but instead continue to focus on the smaller mid-market. Patrimonium defines this as companies with an operational profit (EBITDA) between 10 million and 20 million euros. With an average leverage ratio of three to four times the operational profit, average financing sizes would be around 40 million euros.

Heine describes the current fundraising environment as a major challenge. „It has already been extremely difficult for the last twelve months," he says. ".I would be lying if I said it was easy for us.“

Direct lending financing is usually variable interest-based. It consists of a risk-based margin, plus the variable Euribor. According to Heine, the margins – and thus the risk costs – have fortunately remained constant due to the interest rate turnaround, averaging between 600 and 800 basis points.

Due to the increase of the Euribor from 0% to 4%, the gross return has risen from 6-8% to 10-12% – without any change in the risk costs. At first glance, the higher returns are certainly good for credit funds. But Heine had significant concerns that healthy companies would eventually be unwilling to pay such market prices. This price cap would likely have resulted in margins being compressed. „And then the next consequence would have been that the same risk would have been priced lower [and thus worse] than before the interest rate increase“, says Heine. Fortunately, this scenario did not occur as interest rates did not rise further.

In the past, Heine states, real estate loans – especially mezzanine financing – were completely mispriced in Germany. These are loans that, depending on their structure, are considered debt but exhibit an equity-like risk profile. „We never touched this area in the past because we always believed that the achievable returns at a risk-adjusted level were simply completely unattractive“, he says.

For years, the price for mezzanine financing in Germany lay in the single-digit percentage range. In the UK or the US, however, mezzanine capital has always cost between 14% and 16%. In addition to the price, Heine was also disturbed by the risk that a mezzanine investor in Germany would have faced. „The situation was even more dramatic there“, he says, referring to the so-called loan-to-value (LTV) ratios of financed properties.

In international comparison, mezzanine financing had LTVs of 65% to 75%, perhaps 80%. Beyond these levels, in the UK, one speaks of so-called preferred equity, which according to Heine is even riskier than mezzanine capital and consequently priced at 20% or even more. In Germany, by comparison, LTVs for mezzanine financing often laid at 85% to 90%, with a price of 8% or 9%.

And it gets worse, as many of these project financings were factually fully debt-financed. „In Germany, equity often existed only on paper, i.e., it was not provided in cash beforehand but rather brought in later in the project development“, criticizes Heine. The missing equity is the reason many development projects have stalled. Heine attributes the mispricing in Germany to the intense competition among banks. „The banks financed everything that was real estate-secured, at extremely high loan-to-value ratios.“ According to Heine, this did not happen in Switzerland or the UK.

However, this could now be coming to an end. Heine is confident that the German market will adjust to international standards due to the crisis. This means that the lending values for mezzanine financing are likely to drop significantly, while prices will correspondingly rise significantly. For German market participants, this is certainly tough. „Many will have to get used to the fact that this will be the new normal. But for us, this is incredibly attractive because a market gap that we have long hoped for is finally opening up", states Heine.

Patrimonium wants to take advantage of the momentum ,and launch its first real estate loan fund. The target volume, according to Heine, is 500 million euros. He intends to invest primarily in Germany and the Netherlands. The focus will initially be on new financings and refinancing of existing properties.

Heine does not want to categorically exclude project financing. Compared to financing existing properties, these are always more challenging and consequently significantly more expensive. He also does not rule out individual real estate sectors, not even the commercially troubled real estate market post-Covid. After all, there are also exciting cases in difficult areas.

For further insights into the German mezzanine disaster, cooperation with the Credit Suisse, and Patrimonium's real estate debt plans, Heine has more to say in the current episode of „Betting Billions“.