Direct lenders are also offering to back dividend recaps, as sponsors feel the pressure to pay out to investors. For example, Big Truck Rental Company is looking to raise debt to refinance an existing subordinated debt facility and fund a distribution to shareholders, as 9fin has reported.

Those returns are especially important now as private equity firms face more pressure to return money to investors after holding onto assets for longer because of a slow M&A market.

"We've heard situations where LPs are saying ‘hey sponsor, if you want me to commit to your new fund, you’d better return capital from my existing investments first before I'm going to allocate to you,’” said a managing director at an investment management firm.

Private credit firms are also pushing outside their comfort zone on new originations.

While banks appear in pole position to win the financing mandate for KKR’s proposed LBO of Cotiviti, private credit firms have fought hard, offering pricing of SOFR+475bps. This time last year, it was rare for direct lenders to pitch pricing lower than SOFR+600bps.

Quid pro quo

Not everyone in the private credit world is happy about this dynamic. “It sucks,” said a fund executive that 9fin spoke to for this article.

To be fair, they’re also not taking it completely lying down. In return for stretching lower on pricing, direct lenders are often asking for another one or two years of call protection, to deter borrowers from refinancing their loans with competitors, sources said.

They’re also pushing for portability language in credit agreements, which can help lenders retain their relationship with a borrower even if it is sold to a new owner, sources added.

Portability has the added benefit of making a sale process more seamless, because the incoming owner doesn’t have to refinance the debt. That’s one of the reasons it has become more attractive over recent years, as interest rates have risen.

That said, if interest rates get lower over the next couple of years, incoming sponsors might be more incentivized to put a new capital structure in place — if doing so would materially reduce their interest burden.

One of the more recent examples of portability in the private credit market was Bain Capital’s acquisition of GuidehouseGuidehouse last year. In that deal, incumbent lender Blackstone was carried forward as a lender after a previous financing it did to fund Guidehouse’s acquisition of The Dovel Group.

Against this competitive backdrop, the future of new private credit origination may depend on where the M&A market goes from here.

Towards the end of 2023, market participants were predicting a wave of new M&A activity in the months ahead. But while dealmaking has picked up in recent weeks, the rise has been more modest than anticipated, sources said.

“If you're in an environment with very little or no new loan supply, then the BSL market is a threat,” said the head of credit investing at a large asset manager. “If M&A comes back, then there will be a lot to go around, but the market hasn't normalized yet.”

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