Tikehau Capital’s debt financing for privately-held French pharmaceutical company, Provepharm Life Solutions, is another example of the importance private debt plays in the financial markets – and in healthcare. Although in no way confined to the healthcare sector, the attraction of private lending to the industry has been amplified due to the stability of healthcare’s performance over the pandemic.
HMi caught up with Cécile Mayer-Lévi, head of private debt activity at Tikehau Capital, to discuss the Provepharm financing, the role of debt in private equity and the attraction of the healthcare sector.
The following transcript of HMi’s interview with Cecile Mayer-Levi has been edited for brevity and clarity.
Provepharm, which is focused on finding new applications for known molecules, is in the process of consolidating its position as an international and independent pharmaceutical laboratory through acquisitions, by hiring new staff in France and the United States, and increasing the size of its laboratories in Marseilles.
The appearance of an alternative asset manager alongside the traditional list of liquidity providers reflects the role of private debt in financing acquisitions. Private debt has gained in popularity at a time when interest rates remain at stubbornly low – or even negative – levels.
‘There is a secular shift towards private debt funds,’ said Mayer-Lévi.
These funds are typically financed by large institutions, pension funds, insurance groups, and family offices trying to diversify their asset allocation. Private debt provides access to a secure product with the additional benefit of delivering recurring income at an attractive level of interest.
Annual returns currently vary from between around 4% to as high as 10%, according to Mayer-Lévi.
Role of debt
Private debt plays a valuable part in, among other things, acquisition financing. It is an attractive proposition from the borrower’s perspective as it is, largely, non-dilutive to shareholders – although there is often some form of equity kicker involved in certain structures.
‘At Tikehau Capital, we have a range of financing solutions, mainly for acquisition financing,’ said Mayer-Lévi.
‘That could include senior debt alongside banks but, in terms of private debt, we mainly arrange transactions in the form of unitranche or mezzanine financing.’
Unitranche debt blends senior and subordinated debt into one loan, thereby lowering the overall cost of funds, and mezzanine structures, which lie between senior debt and equity, provide subordinated debt with an equity component attached, such as warrants.
Provepharm expansion solution
To further its development plans, Provepharm wanted a financing solution that was ready to hand and non-dilutive (which ruled out equity-style financing).
‘The financing solution we put in place enables the company to capture acquisition opportunities,’ said Mayer-Lévi. ‘
You have to be able to move quickly in the healthcare sector where there are many pools of capital.’
The company’s cash-flow generative status suggested the viability of a debt structure.
Tikehau Capital’s direct lending strategy for Provepharm comprised both unitranche and mezzanine structures. Financing totalled €120m, split between €60m in senior debt and €60m in mezzanine.
The mezzanine leg was split between two tranches: €20m which has already been drawn down and €40m which serves more as a Capex or acquisition line. There is also an equity kicker to the mezzanine financing.
‘The private debt solution means the equity dilution is not too high,’ said Mayer-Lévi. ‘The founder gets to benefit from future value creation, while Tikehau Capital, in becoming a long-term partner, capitalises on promising opportunities in high-growth markets.’
The financing includes a payment-in-kind (PIK) toggle, which gives Provepharm further flexibility when it comes to servicing its debt meaning it has the option to have interest capitalised.
The kicker comes in the form of warrants which are less dilutive than pure equity.
Savings can also be made on interest margins should ESG-related targets be reached. Targets and potential margin reductions are still be finalised.
Marseilles-based Provepharm’s focus on growth and diversification has been developing over a few years.
In April 2018, it teamed up with healthcare focused investor, Archimed, and Téthys Invest, a subsidiary of Tethys, which is the holding company of the Bettencourt-Meyers family, largest shareholder of L’Oréal. The investment companies became minority investors.
In September 2019, it obtained a €42.5m syndicated loan from several French banks, including Société Générale, BNP Paribas, Banque Populaire Méditerranée and Crédit Agricole Alpes Provence, which was raised to accelerate Provepahrm’s development through acquisitions.
The financing rounds were followed by Provepharm’s acquisition of Apollo Pharmaceuticals, a company based in the United States that specialises in the commercialisation of sterile injectable products for hospital use.
Healthcare’s stable future
Mayer-Lévi believes the outlook for private debt remains promising, both in general and for healthcare. Interest in the sector is increasing.
‘Healthcare is a growing space for private debt,’ said Mayer-Lévi. ‘The attraction has been amplified by the pandemic and that’s made it more and more competitive.’
The competition is coming from both private equity firms and mainstream banks. The addition of new players is putting pressure on prices.
‘Right now, implied valuations are extremely high in the healthcare industry,’ said Mayer-Lévi. ‘They might reach a peak and stabilise, but the outlook for healthcare looks pretty secure.’
Not even the threat of higher interest rates, which is destabilising stock and bond markets around the world, is likely to put an end to the growth in private lending: interest rates remain low from an historical perspective; loans are referenced to floating benchmarks, which mitigates the threat of interest rate rises; traditional lenders are under increasing balance sheet constraints and institutional investors are looking to generate additional returns from debt through trusted PE funds.