Lending markets

Direct Lending Markets Help Smooth Private Equity Transactions

Data: Feedback and leveraged data, Refinitiv LPC; Graphic: Axios Visuals

Direct lenders are increasingly involved in the lending that fuels mergers and acquisitions and private equity buyouts – an area long dominated by banks. In fact, private equity buyouts, which have plunged this year compared to 2021, likely would have fallen even more had it not been for the private debt market.

The big picture: When interest rates rose rapidly at the start of the year, some investment banks were caught holding commitments for buyout loans that were suddenly not valued at prevailing rates.

  • As a result, it was difficult, if not impossible, to place them with investors without incurring heavy losses.
  • This causes a sort of bottleneck in the banks’ loan pipelines (more than flight).

Enter direct lenders… Even before the pandemic, private debt funds had migrated to larger and larger deals. And in today’s tumultuous environment, they are one more pocket of funding that private equity firms can turn to to fund deals when bank capital flows less freely.

  • “Private debt and direct lending absolutely play a significant role today in the buyout deal space,” said Brenda Rainey, executive vice president of Bain & Co’s global private equity practice.

State of play: Direct lending is part of the relatively new private debt market that has become a force in the last decade alone (Bloomberg has a large explanatory).

  • Direct lenders are often subsidiaries of asset managers. They hold loans to earn interest, while investment banks typically “syndicate” loans, reselling them in chunks to Wall Street investors while pocketing fees.
  • Private market heavyweights, like Apollo, Blackstone and Ares, have all raised their own direct loan funds.

By the numbers: Leveraged bank loan transactions concluded in the first half of 2022 were 49% lower than in the first half of last year.

  • Direct lenders, on the other hand, made 22% After in the first six months of 2022 (after an exceptionally busy fourth quarter of 2021).

How’s it going : Prominent private equity firm Vista Equity’s biggest deals this year tell the story.

  • Debt financing for its $16.5 billion purchase of cloud software company Citrix was announced in January with a group of banks led by Bank of America. Yet the debt has still not been placed with investors – and is one of the largest albatrosses on bank balance sheets, sources at Axios say.
  • Fast forward: Vista’s latest deal, the $8.5 billion takeover of tax software maker Avalara announced last week, already has a group of private lenders providing a $2.5 billion loan, a company said. source familiar to Axios (the private loan was first reported by Bloomberg).

The bottom line: Turns out it might be easier to get a loan deal when you don’t have to convince hundreds of other companies to join you.