Five takeaways from DealCatalyst


Market Wrap

Five takeaways from DealCatalyst

Peter Benson's avatar
David Brooke's avatar
  1. Peter Benson
  2. +David Brooke
4 min read

Hola! It’s David and Peter back from an eventful two days in the sunshine state where we attended the DealCatalyst direct lending and middle market finance event.

We schmoozed with industry players and oversaw a panel each on the Friday morning — all fueled by caffeine and prosecco.

Now that we’ve had a moment to decipher the scribbles in our notebooks and replay the echoes of conversations, here are five things that we learned were at the top of everyone’s mind while we were in Fort Lauderdale:

1. Manager selection is getting easier

For years the key question for many institutional investors was how to differentiate between managers. Many invested largely during a time of high leveraged buyout volume. An accommodative Fed had perhaps helped juice up the track record of some. Plenty of deals and few defaults.

But that task of picking managers is set to get easier for LPs, said some of the more experienced lenders in the market. Higher for longer rates are now creating some separation.

“There is now a pretty significant dispersion among managers,” said Ken Kencel, president and CEO at Churchill. “You can view the BDCs as a proxy.”

Indeed, as some of the key players made the rounds in Fort Lauderdale, back home others were reporting their BDC results. Some were prettier than others: FS/KKR reported non-accruals were at 4.2%, while Ares BDC was at 0.7%. Those are some numbers for investors to chew on.

2. AI and labor costs add to rate burden

Inflation remains stubbornly above 3%, meaning the Fed is unlikely to shift soon on its rates stance. In turn, floating rate loans are set to stay costly to private equity-backed borrowers.

“The math doesn’t work,” said Kencel, nothing that a 12% loan cost means many companies cannot sustain a 1:1 to interest coverage.

It’s not just rates that is resulting in higher costs; it’s also a tightening in labor markets. Also, panelists noted that the AI revolution means many companies, especially in those in the tech sector, will have no choice but to invest. Capex are increasing, warned James Keenan, global head of private debt at BlackRock.

“The AI cycle is forcing capex to go up,” he said.

3. The potential impact of the election

In a year where more than half the world goes to the polls — including the US — and where tensions are heightening, that is bound to make its way into credit underwriting.

“Any time we talk about geopolitical risk, we think about how it’s affecting our companies,” Tanner Powell, CIO of Apollo Investment Management, said on Thursday’s panel.

These risks manifest themselves in myriad ways, whether in pricing and interest rate decisions, or more granularly at the supply chain level or in redundancy in the portfolio company’s product or service.

The US election is top of mind, David Golub, president of Golub Capital, said. “The policy implications are enormous,” he said.

The possible outcomes with regards to protectionism, immigration and taxes all play a role. Trump’s tax bill expires in 2025, for example. With no certainty of results, managers and companies need to plan for multiple possibilities.

4. Asset lending enters the mainstream

If this is the golden age of private credit, the golden age of asset-based lending is coming (as we wrote about here in our coverage of the Milken conference).

Apollo’s Powell said that the total addressable market in private credit is somewhere between $1.5trn and $2trn currently. The market for private credit could someday be $40trn.

“We look at the market much more broadly,” Powell said. “It’s anything that’s on the balance sheet of a bank.”

This means a lot of things, most prominently real estate loans and other asset-backed loans that exist on bank balance sheets. More granularly, Powell highlighted Apollo had bought PK AirFinance, an aircraft and aircraft engine lending platform, one of many examples of this kind of specialty and equipment financing that private lenders are looking to expand into.

In the wake of the financial crisis in 2008, Basel III regulations pushed banks towards asset-based loans and away from corporate loans. The “endgame” of the regulations changes the supply side of the market, BlackRock’s Keenan, said.

Once the capital requirements change, the assets on bank’s balance sheets will become private credit’s hunting ground again: “It will provide an opportunity for those assets to become available,” Keenan said. “There’s a growing demand for structural reasons.”

5. Industry relations are positive

Liability management exercises are in fashion today (again, we covered this in our Milken wrap), but not everyone is on board with the trend. David Golub described it as a “BSL disease” and decried the practice, which he says is “bad for the industry and bad for everyone…except for the investment banks and lawyers.”

There is perhaps a reason why Golub and his peers like to emphasize the private nature of the direct lending model: a small group of lenders will arguably be more likely to keep the dreaded ‘lender on lender violence’ away from the courtroom, and importantly, the public eye.

The low recorded default rates in private credit reflect the bilateral conversations lenders have with sponsors. Waivers, amendments, extensions, or PIK-ing the debt are just some of the tools in the toolbox to help a sponsor and a company get back on their feet.

But as the cordiality of the discussions on the stage suggested, relations are good behind the scenes.

As Kencel put it: “It’s because we like each other.”

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