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Wall Street returns to the private equity game

Feb 14, 2024
Illustration of a game piece in the shape of the Wall St. bull among other game pieces.

Illustration: Gabriella Turrisi/Axios

After sitting on the bench for most of last year, Wall Street lenders are taking the field.

Why it matters: The return will play a critical role in kickstarting private equity deals and other types of M&A, and put banks back in a starring role for acquisition financing.

The big picture: Direct lending and other kinds of private credit have seized a significant share of the financing pie from banks. Starting in 2022 and through to this year, non-bank loans provided deal funding that was historically the realm of Wall Street.

  • In Q4 2023, direct lending volume made up half of all U.S. sponsored loan volume, compared with 39% in the same 2021 period, per LSEG data.

Yes, but: Wall Street is making a comeback. The move comes as traditional banks get more comfortable with the economic environment, with interest rates stabilizing, and with recession fears off the table, according to Ted Swimmer, head of corporate finance and capital markets at Citizens Financial Group.

  • "Banks have plenty of capacity on their balance sheets to lend again," Swimmer says.

Driving the news: The corporate bond and loan markets just saw one of their busiest months in recent memory, amid increased demand from high-yield and leveraged loan investors.

  • The uptick comes amid the expectation that the private equity deal climate, and broader M&A activity, is set for an upswing after a steady decline during the past two years.

Zoom out: The pull of private credit for companies and acquirers is its availability and the speed to transact. The knock: it's more expensive than traditional bank loans. With Wall Street returning to the market, bankers are making the case that their financing is not only available, it's cheaper than non-bank loans.

  • "Every bank on Wall Street is going back and looking at all the overpriced direct lending deals from last year or the year before and seeing if they can go refinance it," says Doug Ingram, head of syndicated and leveraged finance at KeyBanc Capital Markets.
  • In one example, banks led by Bank of America swooped in on direct lenders and repriced Veritas Capital's $3.1 billion buyout of Wood Mackenzie, the energy research firm (BofA didn't respond to a request for comment).
  • Ingram says competition is an advantage for private equity buyers who can play the two types of lenders off each other and drive better terms.

Zoom in: Banks are repricing terms and getting more aggressive, a sign of how badly they want to get back on top of the leveraged buyout business.

  • An example of the move can be seen with the pricing of unitranche loans, a blend of senior and subordinated debt, that non-bank lenders have increasingly offered to borrowers.
  • The average premium for unitranche loans over broadly syndicated loans was 212 basis points last month, according to KBRA Direct Lending Deals data. That was up from 116 basis points in November.
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