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Private Credit 

Josie Shillito

Private credit’s ardour for the healthcare, IT and financial services sectors shows no sign of dimming as we straddle the boundary between H1 and H2. Not only are these businesses generative in recurring revenue, but they require flexible pools of capital to pursue their acquisitive strategies: the type only private credit can provide.

At least two €1bn plus private credit deals are floating about the market ahead of summer: a dual-track process (banks and private credit funds) on the acquisition financing of the buy-and-build heavy, Triton-owned UK specialty pharma business Pharmanovia, and a €1bn refinancing of Astorg-owned investor services business IQ-EQ, also an acquisitive business. 

At the smaller end of the market, wealth manager Moore Kingston Smith has received an investment from private equity Waterland “with a view to funding an ambitious growth and expansion plan,” according to the press release. Consolidation in the wealth management sector has made them investments ripe for buy-and-build strategies for some time, with Lightyear Capital-owned Wrenn Sterling’s acquisition spree being one example. 

However, market participants observe that buy-and-build strategies in the middle market (tickets of €20m-120m) can max out a lender’s exposure to one credit, requiring lenders to get creative.

Pressure mounts the longer the sponsor holds onto the credit. “In this current environment, making an exit is more challenging, so sponsors are holding onto the credit for longer and instead pursuing buy-and-build,” a middle market fund manager told 9fin. 

One way of assembling the necessary firepower to take a company through a buy-and-build is bringing in one of the fund’s LPs as a co-investor. Nothing unusual in doing this, it’s been going on for years, but the recent growth in size of private credit deals and the growth in buy-and-build strategies is making it more of a necessity. 

“Committed lines are no longer enough. Any [ticket] over €150m and it will need to be a co-investment [now],” said the middle market fund.

The advantage of bringing in the co-investor is that it negates the entry of another direct lending fund into the deal. This can be a point of contention between lender and sponsor, the latter of whom might prefer a small club.

“Some private equity funds prefer to have two private credit funds on a deal so as not to give too much power to the lender,” pointed out the source.

“However, being the only lender is exactly what private credit funds want.”

Turbocharging the buy-and-build strategy is the focus on sectors that have historically grown this way and the role of AI. 

Private equity is increasingly making use of AI for target identification in the M&A process. And, once this is done, AI analysis has much to offer M&A, as PWC’s 2022 AI in Business report observes, “… for example, potentially automating parts of due diligence, predicting likely regulatory responses and projecting a combined company’s results under various conditions.”

The Financial Times wrote this week about private credit’s new target: investment grade loans. Again, another example of private credit increasingly widening its reach into any area of credit currently failed by its existing financiers.

However, just as with high yield bonds and investment grade bonds, investment grade loans are an entirely different product, which is not attempting to realise the same returns as non-investment grade debt, according to another 9fin source. 

“It’s an interesting area,” commented the source. “One of the interesting points is the entry into investment grade debt on behalf of some of private credit’s most important LPs: insurance funds. We increasingly manage funds on behalf of insurance companies who want exposure to investment grade. It’s one of the new frontiers for private debt.”

9fin wrote about some of the strategies private credit uses to attract insurance LPs here. 

Moody’s this week has heaped scrutiny on interest cover ratios in private debt. In its report, it found that the interest coverage ratios on the Ares and Owl Rock funds’ loans — the earnings available to make interest payments — would eventually fall by about half, according to the FT.

Although only two funds were identified by Moody’s, the rising rates are likely to crunch on many more private credit funds. Two months ago, 9fin pointed out that interest cover ratios hugging a healthy 2x were now at 1.59x.

Morgan Stanley is firmly in promotion drive on its European private credit offering with the publication of its perspectives — will there be an announcement of a first close on its planned fund?

White & Case has written about the M&A slowdown in Spain.

While Blackstone joins forces with Unicredit in Italy to broaden access to its European retail investor offering.

There is a bit of noise on private credit in Asia thanks to the APLMA private credit conference this week, here and here.

And Tikehau Capital provided €50m HoldCo financing to support Ardian’s portfolio company Jakala’s acquisition of FFW, an international digital consultancy based in Denmark.

Missing something? Want your deal in here? Contact josie@9fin.com

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Taking the Credit — Buy-and-build, investment grade offer, and much bother over interest cover

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