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Private Credit 

Josie Shillito

During one of the toughest years for M&A, Ares spotted a value opportunity for private credit in the public to private space. However, it’s not for everyone. Mike Dennis, head of direct lending at Ares, explains to 9fin’s Private credit editor, Josie Shillito how private credit might be the best financier out there to take that company off of the public stock markets, privately.

You completed five take-private transactions in 2022. Is this normal? 

2022 was a particularly active year for public-to-private transactions (P2P). We’ve been one of the most active private credit providers funding for P2Ps. Overall, there has been a recent positive trend in the number of P2Ps given the public equity market sell off and financial sponsors looking for value. 

There’s been a general frustration with the public markets that is only growing. It’s not been easy to raise capital, the reporting requirements are pretty onerous and the markets are sentiment-based and not always rational. The 2022 public equities sell off created momentum for companies to explore the option of going private. 

Why choose private credit to finance a take private? 

A P2P process is by its very nature highly confidential. In the UK, the process is governed by a Takeover Code, which, among other things, aims to keep deals confidential ahead of their announcements so as to minimise market volatility. One of the aspects of this code is a ‘rule of six.’ This essentially stipulates that any offeror, or in the case of a private credit-backed take private, sponsor, can only talk to a maximum of six parties ahead of making an offer. Partnering with a credit provider who has the scale to provide the complete financing solution and can do so confidentially is important when undertaking a P2P. 

What other qualities make private credit suitable for a take private? 

The sponsor needs someone they can trust, ideally someone they have gone to before, who understands the process. Why? Because once you have made the offer on a public company, it is binding, it has to be delivered. 

The bar for delivery on the part of the private credit provider is set high. As part of the UK Takeover Code there’s a 2.7 announcement, that is, a public announcement of a firm intention on the part of the offeror to make an offer for the shares of the target. Again, to minimise market volatility and speculation, this offer has to be cash confirmed and with certain funds. Therefore, you need a fund with deep pockets of capital who can speak for all of the debt financing. In the European market, these kinds of large funds with deep reserves are few in number. 

Does this put you in a strong position? 

There are a few other funds in Europe that can do it too. But not as many as in the US. 

What you have to remember is that a P2P is not for everyone. It’s not a straightforward process. You have to do more of the due diligence outside in and sometimes it can be hard to access the required information. 

Given the muted M&A activity so far this year, do you see more opportunity for P2P as a way to put capital to work in 2023? 

While the M&A market has been a little slower during Q1 2023, there’s a great deal of deal preparation taking place for Q3 and Q4 of this year. There’s also continued demand for capital from portfolio companies. We also expect a steady stream of P2Ps to accompany this deal flow.

What’s the most unexpected thing that you’ve done?

A few year's back I rode the Skeleton Bob at Lillehammer in Norway. It's an olympic bobsleigh and luge track, used in the winter olympics in 1994. It's a pretty fantastic experience!

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