Aug 15, 2022 - Economy & Business

Direct lending market helps keep private equity deals flowing

Data: Leveraged Commentary & Data, Refinitiv LPC; Chart: Axios Visuals

Direct lenders are increasingly muscling in on the loan-making that fuels M&A and private equity buyouts — an area long dominated by banks. In fact, PE buyouts, which have plunged this year compared to 2021, likely would have declined even more if not for the private debt market.

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

  • As a result, they were difficult or impossible to place with investors without taking steep losses.
  • That’s causing something of a traffic jam in banks’ lending pipelines (more from the FT).

Enter the direct lenders ... Even before the pandemic, private debt funds had been migrating into increasingly larger deals. And in today's tumultuous environment, they're one more pocket of funding that PE firms can turn to for deal financing when capital from banks is flowing less freely.

  • "Private debt and direct lending absolutely play a meaningful role today in the buyout deal space," says Brenda Rainey, executive VP of Bain & Co.'s global private equity practice.

State of play: Direct lending is part of the relatively new private debt market that’s become a force just in the last decade (Bloomberg has a great explainer).

  • Direct lenders are often arms of asset managers. They hold onto loans to collect interest, whereas investment banks typically “syndicate” loans — selling them off in pieces to investors across Wall Street while pocketing a fee.
  • Heavyweights in the private markets, like Apollo, Blackstone and Ares, have all raised their own direct lending funds.

By the numbers: Leveraged bank loan deals completed in the first half of 2022 were a whopping 49% lower than those in the first half of last year.

  • Direct lenders, on the other hand, completed 22% more in the first six months of 2022 (after an unusually busy Q4 2021).

How it's playing: Prominent PE firm Vista Equity's biggest deals this year tell the story.

  • The debt financing for its $16.5 billion purchase of cloud software company Citrix was announced back in January with a Bank of America-led group of banks. Yet the debt still hasn't been placed with investors — and is one of the largest albatrosses on bank balance sheets, sources tell Axios.
  • Fast forward: Vista's latest deal, the $8.5 billion buyout of tax software maker Avalara announced last week, already has a group of private lenders providing a $2.5 billion loan, a source familiar tells Axios (the private loan was first reported by Bloomberg).

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

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