DIRECT LENDING OF FUNDS IN EUROPE 27 January 2019

For smaller firms, they offer an alternative to bank lending

WHEN Caronte & Tourist, a Sicilian ferry company, needs a new ship, it is cheap and easy to borrow from a bank. But in 2016, when Carontes controlling families wanted to buy back the minority stake held by a private-equity firm, banks balked at the loans unusual purpose. Edoardo Bonanno, the chief financial officer, also worried that the 30m ($33m) in extra bank debt might make shipping loans harder to obtain from them in future. So he turned instead to a direct-lending fund run by Muzinich & Co, an asset manager.

Such funds are only about a decade old in Europe (and not much older in America, where they started). Assets under management at Europe-focused funds increased from a mere $330m at the end of 2006 to $73.3bn by mid-2017, which includes $27.9bn of dry powder, or funds yet to be lent out (see chart). In 2017 alone 24 direct-lending funds raised a record $22.2bn. Such funds do what they say on the tin: lend directly to firms, usually in the form of big, multi-year loans. The borrowers are often either companies that are too small to raise equity or debt on capital markets, or private-equity funds buying such firms.

1)Refer to Direct Lending of Funds in Europe from January 2019 issue of The Economist. Answer the following questions: (a) Who is the borrower? b) who is the lender? c) what is the purpose of the loan? d) is the lender a bank? e) how do you think the lender is financing the loan? f) do you think the funds financing the loan are insured by a public agency?