UK-based private equity group Electra Partners has purchased a portfolio of second lien and mezzanine debt positions in five European companies for £30 million (€38 million; $49 million).
The price paid equates to a “significant discount to face value”, whilst the debt instruments have relatively short terms, with the majority maturing within the next three years.
“The portfolio provides a healthy yield and we expect that this, combined with purchase discount, will generate returns comparable to those achieved on equity investments,” the firm said in a statement.
One of the debt positions is in UK caravan park operator Park Resorts, a company in which Electra already has a significant position having invested £45.5 million in term debt facilities from Lloyds Banking Group in February (at a reported 50 percent discount) and RBS in July. Electra’s total investment in Park Resorts now stands at £69.8 million, it said.
Alex Fortescue, chief investment partner at Electra Partners, said in the statement: “This transaction is a good illustration of banks looking to deleverage their balance sheets and simplify their businesses. It’s a trend we have been anticipating for some time now believing that it will create fantastic opportunities for private equity firms who, like us, have the flexibility and firepower to acquire such stakes. Electra's last four investments have all been bank-related assets.”
A Numis analyst described the strategy as “opportunistic and sensible” in the light of regulatory pressures on banks resulting from Solvency II and Basel III.
An Investec analyst’s note in response to the deal argued the investment was a good one. “The bank deleveraging story has created opportunities for the likes of Electra – this debt portfolio should provide attractive equity like returns due to the discounts to par paid, while giving greater security due to the seniority in the company’s capital structure. The underlying debt in this portfolio is relatively short dated with maturities over the next three years,” the note said.
After the investment completes, Investec estimated Electra would have about £370 million of capital available to invest, meaning it is “well positioned for good portfolio exits and to take advantage of further attractive investment opportunities”.
“Electra’s realisations have consistently come at premia to carrying values leading to useful NAV accretion,” the note added.