Hermes Investment Management has launched a direct lending strategy with a view to launching a fund later this year.
The Hermes Direct Lending Strategy will provide access to the stable, low-correlated returns offered by predominantly senior-secured loans to small and medium enterprises with an EBITDA of between £5m and £75m.
Such loans provide security as they are at the top of the capital structure while floating rate exposure acts as a hedge against inflation and interest rate risk.
Hermes Investment Management's head of private debt and collateralised loan obligations Patrick Marshall said UK senior loans have generated stable returns in the last eight years, despite the financial crisis. Those extended to mid-market companies have offered about 55 basis points more yield than larger loans in recent years.
The strategy will initially focus on the UK as it has the strongest creditor rights in Europe, which provides downside protection for investors. However, there will be flexibility to invest across the continent.
UK senior-secured transactions will be originated through a partnership with Royal Bank of Scotland (RBS) - a major lender in this sector - which is an important differentiating point according to Marshall: "Through our partnership with RBS we will be able to offer access to loans they otherwise could not access. We will get sight of many opportunities which means we can chose the best available and so will not be forced lenders."
Origination across the continent will come from the Hermes team's network of contacts across private equity firms, banks and borrowing businesses.
Marshall continued: "The strategy is also highly diversified in terms of the loans we write. This gives downside risk mitigation as if any one loan goes bad it is only one small part of the overall arrangement."
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