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Financing floodgates crack open for private equity

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Feb 28, 2024
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Illustration: Sarah Grillo/Axios

Private equity is poised to take advantage of a friendlier financing environment, investors tell Axios.

Why it matters: Access to more financing options at better terms could help narrow the bid-ask spread that's gummed up the M&A works in recent years.

Driving the news: Two CVC-led consumer deals announced this month are being syndicated.

Zoom in: "In the doldrums, we might have found one vendor, or maybe none. And we had to alter our expectation on what we could get from the financing markets," says Gunnar Overstrom, a partner at Corsair Capital.

  • "As there's more capital [coming in], it will get more competitive," Overstrom says.

Yes, but: "The quantum of leverage that was available a couple of years ago, and today is vastly different," says Erol Uzumeri, a founding partner at Searchlight Capital Partners.

  • "It impacts valuations, it impacts companies that are already levered and needing to do a transaction. And as a result, that materializes itself in deal activity," Uzumeri says.

State of play: The direct lending market took a big bite of deal financing last year.

  • Private credit funds currently have around $1.6 trillion in assets under management, according to fintech firm Broadridge.

Between the lines: M&A is a relationship-driven business, and private equity's connection to lenders is no exception.

  • "You'll see private credit continue to play a meaningful role in our market because of their focus on relationships," MidOcean Partners' Dan Ryan says.
  • "They want to reward the banks who have brought them great ideas," says KeyBanc head of leveraged finance Doug Ingram.
  • "So the more ideas you bring a sponsor, the better off you're going to be in terms of leading those financings."
  • Then it's down to competition around terms: who has lower pricing, who has wider documents, etc., Ingram adds.

The big picture: The amount of PE capital deployed in the U.S. fell by 30% last year while exit values in the U.S. fell by 26.4%, according to PitchBook.

  • In the third quarter, exit value fell to its lowest quarterly level since the 2008 financial crisis, per PitchBook.
  • The median hold time for PE-owned companies was 6.4 years, a record.

The bottom line: "There should be enough capacity to fill both the private lender as well as the bank appetite on these deals," Nitin Gupta, a managing partner at Flexstone Partners, says.

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