Private credit booms as deal activity slows

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Marc Lipschultz, co-founder and co-chairman of New York-based Blue Owl Capital Inc., said during the alternative investment firm’s Feb. 17 earnings call that the $2 trillion dry powder of private equity cited by Preqin will be invested with “private lenders clearly picking up a substantial share” of the business. However, he acknowledged that “when there is volatility in the markets, it sometimes causes slight pauses.” Blue Owl had $94.5 billion in assets under management, including $39.2 billion in private credit, as of December 31.

Trevor Clark, Chicago-based founder and managing partner of Twin Brook Capital Partners, the middle-market direct lending arm of $48 billion alternative investment firm Angelo, Gordon & Co. LP, said the flow trading had been halted in the first quarter as a deal-makers waited “to have a line of sight” on macroeconomic events, including the war in Ukraine and supply chain issues before investing their money.

Clark said he doesn’t expect deal activity to fall to a 2020 low or rebound to the high level of deal activity investors saw in the second half of 2021. Even so, not all managers will benefit from deal flow. The second half of 2021 has been such an active year for private equity-backed mergers and acquisitions that most private credit managers have done well.

The investment environment is changing and not all private credit managers will continue to perform well, Clark said. “We will see more pressure exerted” by higher interest rates and supply chain problems, he added.

There will be “a delineation” between winners and losers from the private credit manager, Mr Clark said.

“In times of broader economic crisis, you are seeing renewed interest from investors and borrowers alike in partnering with groups (private credit managers) that are known and trusted and are a proven commodity,” he said. -he declares.

Current macroeconomic factors such as inflation, interest rate increases, supply chain issues and rising human capital costs do not work in isolation, Clark said. This environment could lead to a pause in some “edge” private equity transactions and could cause some holding companies to find themselves unable to pass on rising costs to customers, making it more difficult for these companies to pay the debt service on their loans. , he said.

As for public market volatility, there is little correlation between public bond markets and private credit markets, Clark said. Fixed-income market volatility could make private credit, especially direct lending, more attractive to investors, he added.

So far, the private credit market, which tends to lag liquid markets, has been “relatively stable and open to new issuance,” said New York-based partner and head of credit Bill Sacher. private at funds of alternative investment funds. and direct investment manager Adams Street Partners LLC. Borrowers who struggle to issue debt in public markets because of its volatility are turning to private markets, Sacher said.

“Perhaps, in part, due to increased deal flow, we also saw a moderate widening in credit spreads,” Sacher said in an email.

So far, private equity transactions have not been greatly affected by the rise in interest rates, as they are still relatively low compared to historical levels, he said. “Going forward, interest rate increases could have a dampening effect on current LBO leverage multiples simply because the underlying companies will no longer be able to repay that level of debt.”

Mr. Sacher added that several factors likely led to fewer transactions in the first quarter. Last year was an exceptionally busy year due to a record amount of private equity dry powder, pent-up demand from buyers who had paused their investments during the pandemic-related shutdown, record corporate valuations motivating sellers and an expected increase in capital gains tax that has driven business owners to sell their businesses by the end of 2021, Sacher said. “All of this likely drove deal flow from 2022 into 2021 and contributed to a relatively slow first quarter this year.”

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