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David Bell

9Questions is our Q&A series featuring key decision-makers in leveraged finance — get in touch if you know who we should be talking to!

Michael Moore is a managing director at Union Square Advisors, a technology-focused investment bank offering M&A and private capital financing services. He joined Union Square earlier this year after more than a decade at Citi.

We caught up with Michael to discuss the outlook for tech companies as the economy heads into a potential recession, as well as booming competition in the private credit market.

1. It was a strange summer for public leveraged finance markets, with a booming July rally that faded through August. What has activity been like on the private credit side?

Despite the volatility in the broader markets — both debt and equity — private credit demonstrated strength and resiliency relative to the public markets this past summer. The private credit market has continued to price risk during the most significant periods of volatility over the last six months.

While volumes were muted compared to recent historical norms, July and August remained active and we saw the return of jumbo transactions, including a $2.5bn financing for Avalara and a bespoke solution for retailer Bed Bath & Beyond, illustrating that the market has capacity to lend across a wide range of circumstances.

2. How has risk appetite among direct lenders and private credit funds been impacted by rising inflation and a potential recession? How is it changing their behavior?

We are seeing a shift in risk appetite and a recalibration of terms, but we expect the market to remain open and constructive with private credit lenders capable of financing more nuanced or challenged situations — albeit at a higher risk premiums.

We are seeing credit selection taking on a more dominant role as investors prioritize higher quality opportunities over lower quality, riskier situations. Lenders are being more discerning with a greater focus on the amount of leverage (and corresponding equity), price, and structure, requiring more downside protection and incremental yield to compensate for their increased cost of capital.

3. Tech has been one of the most fiercely competitive markets for private credit funds and direct lenders. What innovations has this driven in private M&A financing?

The increased competition has driven several innovations over the last few years. Most notably, the market has become accustomed to financing more nuanced situations including technology companies that are pre-EBITDA and [not] free cash flow positive.

We’ve seen structured solutions, including ARR-based lending facilities, or other enhancements like lending that is predicated on achieving key performance-based indicators that can be customized to a borrower’s specific situation and credit profile.

4. SaaS businesses with strong recurring revenues have been in high demand for some time. Are there any other sectors that could use a similar playbook to enhance their appeal to investors?

Software and more specifically SaaS businesses are highly sought-after given the predictability of their revenue and cash flow generation.

Businesses that can exhibit more durable and predictable cashflows through contractual obligations with their customers, the mission critical nature of their products or solutions, and/or those that serve a high-quality customer base, will be more appealing to prospective investors.

5. Investors are bracing for an increase in defaults in broadly syndicated loans and bonds, albeit from historically low levels. How healthy are tech companies in the private credit space heading into an economic downturn? What should lenders be wary of?

While most companies, tech companies included, have secured capital over the past 12 to 24 months on favorable terms given the strength of the market, the private credit market lends on a floating rate basis.

We believe this presents the greatest risk for borrowers and lenders alike, as borrowing costs have increased significantly since the beginning of the year with the increase in the federal funds rate.

While this is still in its infancy, we are starting to see borrowers look for solutions to proactively address their debt balances and evaluate alternative sources of capital to refinance their existing debt.

6. We’ve seen the gap between public and private credit markets become increasingly blurred in recent months, as underwriters scramble to clear underwritten LBO financings. How do you think the relationship between these pockets of capital will develop in the next year?

While private credit has been able to grab share from the public markets over the last few years, we think that the two markets will work in tandem, with the wallet share shifting between the two depending on the prevailing market conditions.

Private credit proved more resilient this summer, continuing to price risk and deploy capital across a variety of situations while the public markets were essentially shuttered. That said, with the public markets reopening this fall, we anticipate increased demand from the public markets, and borrowers to benefit from increased competition between the two markets.

7. How will the slump in tech stocks, the IPO markets, and the higher cost of debt financing impact exit strategies for financial sponsors?

While current valuations are depressed compared to recent highs, they are still very elevated when evaluated on a longer-term basis. As such, we anticipate increased capital market activity from financial sponsors, as they look to shore up the balance sheets of their portfolio companies to bridge them through a downturn, to an exit in a more normalized market environment.

8. In your previous role, you focused on originating deals mostly for public debt markets. What are the biggest differences in the M&A process on the private side?

The biggest difference is in the underwriting analysis and the ability to be creative around the financing structure.

Given the illiquidity of the private credit markets, the market underwrites with a long-term view to hold the credit through maturity. As such, diligence is more extensive, the process takes longer, and the financing structures are more bespoke and can be tailored to a specific financing situation or credit profile. The public markets, by contrast, tend to be more homogenous in structure and value liquidity.

9. Aside from Union Square, what is your favorite New York City square?

As the dad of three young children, I spend most of my weekends in city parks and playgrounds across the city and our favorite spot in New York is Central Park.

9Questions — Michael Moore, Union Square Advisors

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