Guest: Alexander Schröder, Managing Director & Head of Leveraged Finance at Commerzbank
Topic: Mid-Market LBOs & the Blurring Line Between Funds and Banks
About Commerzbank, your role & the market
1. You’ve been heading Leveraged Finance at Commerzbank for about 8 months now, after previously running the German and small-cap teams. How do you see the leveraged finance mid-market developing?
We had a good start to the year, but I think overall activity is still a little muted. There’s reluctance from buyers given the macroeconomic uncertainty and the lack of tailwinds from the economy. We’ve seen consolidation in the mid-market and weaker financials, which is driving that uncertainty.
So, we see muted M&A activity overall, and for the strong credits that do come to market – which is what we and private equity are focusing on – everyone ends up chasing the same names. That leads to increasing competition for mid-market assets, especially given the massive dry powder on the private debt side and the lack of their favourite sector, software, which has become a tainted industry since the AI disruption.
Now everyone is chasing the same assets in industrial tech, business services, healthcare, medtech and so on. That drives competition and ever-decreasing standards on documentation. Pricing on the unitranche has also come down massively. Banks, to be fair, have stayed quite disciplined on margins – you can see that best in the super senior structures we’re doing right now.
For strong assets we can no longer compete with the unitranche, but we’re still getting better upfront fees and very decent margins on a very low-risk product. The market needs to pick up for us to deploy more into classical senior structures.
2. Commerzbank has built co-investment partnerships with StepStone and Apollo. What are you doing together, and what was the thinking behind it?
We recognized that debt funds are here to stay. I’ve been in the industry for more than 20 years, and I saw them coming – I had my doubts, but they are clearly here to stay and now a dominant part of the market, owning 60–70% market share.
So, we looked at what makes them so attractive to clients, given they’re usually higher priced and don’t always require 6x leverage. What distinguishes them from banks is the ability to hold larger transactions and enable bigger deals without taking on market risk.
For banks, the only way to do a €100m deal in Germany is still to underwrite it yourself – we see that from players like UniCredit here and there. We chose a different path: partnering with private credit managers who hold pockets of liquidity, through two vehicles we set up with StepStone and Apollo.
Bank vs. debt fund
3. How is it working in practice – In front of a sponsor, how does having StepStone or Apollo as partners change the conversation?
Both vehicles are managed by Commerzbank – that’s the important part, so we have a good steer on their ability to deliver alongside us. That lets us provide €100m of volume out of one hand, almost like a small unitranche.
We remain the only client-facing entity – the client only talks to Commerzbank. Sponsors and management teams trust us, and StepStone and Apollo stay in the background, providing the liquidity. We have ongoing pipeline discussions with them so they’re aware of what’s coming and can plan their liquidity and funding, but we run the ICs, do the credit work, and they fund on request.
The conversations with private equity and debt advisors have definitely changed as a result. Our strategy has paid off – we’re seeing a strong pull effect, because they know we’re now an alternative, especially in the lower mid-market, to the classical unitranche players. Although we do see some funds, under increased competition, pushing further down into the lower-cap segment – even €10m-EBITDA deals are heavily contested these days.
We can be a real alternative to unitranche where leverage doesn’t need to be maximized and where cheaper pricing matters. We’re pricing at bank pricing.
4. While banks are partnering with funds, funds have increasingly moved into territory that used to be exclusively banks’ – senior debt, club-style structures. What’s your take on this development?
Let me be a little cynical here – they’re asset managers, they want to earn management fees, which is why they keep coming up with new structures like senior debt funds.
I haven’t seen one that’s actually successful, at least not in the German mid-market – might be different in other jurisdictions. I’ve never seen them partner with us, because they’re too expensive. No German mid-market PE client or management team will pay 500bps for a 4x-leverage senior credit when they can get it from us at 400, 425bps at most. So, senior debt funds are, I think, just another product to increase management fees.
Club-style structures are a result of the ever-increasing competition, and clients make use of that by having various debt funds competing in the same club. We first saw that on larger caps, especially when the market was dislocated and you needed to bring together different direct lenders. But now we’re seeing it even on a €150m transaction – three debt funds, each with a €50m ticket.
You can guess the result on documentation and structure: the client gets what they want because the debt advisor plays them off against each other and gets an even better deal – the same thing that happened with the banks back when you were with us.
The market was booming, there was massive competition, banks were in clubs, and you always ended up with the lowest common denominator. We’re seeing the same now in the more mature private debt market, where competition is overburdening and there needs to be a correction or consolidation at some point.
5. Where do you see limitations to the bank-fund partnership model? Could you end up competing with the same funds you partner with on other deals, or could Commerzbank end up partnering more than competing over time?
There has to be consolidation among private credit players, I think. Consolidation among banks has already happened – all the players you knew from back in your time, like IKB, BayernLB have gone off the market; others are on-and-off or at least less active. We’ll see the same on private credit – as we go through a cycle you’ll see churn among teams, which will eventually result in consolidation.
On whether bank partnership models could end up competing with them – we touched on that with them very early. They want to deploy in Germany but know they won’t have an edge in the mid-market; they have no people on the ground. I know their originators for their larger-cap private credit business well – they told me they’re totally agnostic: if we bring them a deal through the vehicle, they have the same incentive as if they’d done it themselves.
So we are their way into the mid-market. If it moves into the larger caps, yes, there might be some overlap – Apollo could compete with us on a project where we provide a syndicated structure and they provide the one-stop-shop unitranche. But their focus is a bit different, so my gut feel is we’d only compete with Apollo on the larger caps.
6. Based on all this, what are the next steps for your team?
We have ambition to grow.
Clearly the new circumstances – the potential new owner, the merger with UniCredit – could have a bearing on the strategic direction. UniCredit has a different focus, less on the mid-market and more on the underwritten business, whereas our partnerships are our way of tackling the lower mid-market. I’m actually looking forward to the merger, because I know a lot of the people there – some are former colleagues – and I’m relaxed about it because I see limited overlap.
At the same time, we have ambition to grow the book – we’re running a roughly €4.5bn portfolio, and that’s supposed to grow further. We want to keep growing our co-investment vehicles, especially with Apollo, which has almost endless firepower.
Closer
7. Hot take: Looking ahead, what’s one view you have on the leveraged finance market that most of your peers would disagree with?
Given that a lot of my peers are now in private credit, I think there will be a correction at some point – on valuations, with more realism and more pressure from LPs to really look into how good their portfolios actually are.
That will bring consolidation, and there’ll be churn among senior people. The big players are here to stay, but there has to be a correction among the smaller, less active managers – there’s a massive number of them out there.