But the success of no-frills cremations shows just how squeezed disposable income is becoming, and the business opportunities inherent in this sorry state of affairs. This is perhaps why Epiris felt confident enough to buy Pure Cremation with pure equity and then think about the debt at a later stage. 

The company reported a gross profit of £7.6m as of December 2021, according to a Companies’ House filing, placing it firmly in the territory of many middle market private debt funds. 

“I think they [Epiris] might have been in a hurry [to beat off competition from other sponsors],” said a direct lending fund. “And fortunately, there are quite a few funds out there approaching Epiris at the moment with debt offers.”

Perhaps Epiris was not just in a hurry. Maybe it instead wanted to avoid raising any new debt at all with base rates this ugly. In this sense, the all-equity deal has echoes of Blackstone’s dividend recap deal on Esdec Solar Group, in which Blackstone acquired Esdec without issuing any new LBO financing on the original 1.9x leveraged debt package, then chose to relever to 3.3x post acquisition and to hand its shareholders a dividend recap in the process.

“This transaction can be viewed as a delayed LBO, with shareholders choosing to recapitalise the business in much improved debt market conditions vs at entry,” a source close to the deal told 9fin at the time. 

Are conditions ripe for more ‘delayed LBOs’? It’s well-known that both private equity and private debt are sitting on multiple tinder boxes’ worth of dry powder. This means that while once private equity may have not have been able to separate the debt from the equity, now it may just have enough dry powder to take the entire equity — and then wait for the right timing to insert debt.

Similarly, private credit’s dry powder reserves mean that private equity can be confident that someone, somewhere, may take that debt (at least on the aforementioned defensive businesses).

An all-equity deal. It’s a no-frills ‘no’-LBO!

Epiris did not respond to a request for comment at the time of publishing.

Into the quirks of portfolio work

Which brings us onto this year’s ‘portfolio work.’ In the absence of a consistent primary deal flow — a mismatch in valuations on the parts of sponsors — everyone’s getting their debt in order for an eventual deal boom.

This involves refinancing existing debt, often with a hopeful portability clause in it, in anticipation of an eventual sale. These portability clauses are very rarely enacted due to relatively short expiry dates (12-24 months, according to legal sources), but perhaps provide some comfort to an incoming sponsor that they will not face the cost and complication of raising LBO debt in an uncertain market.

If Pure Cremation is a delayed LBO then perhaps the early refinancing is a pre-emptive LBO. Either way, the debt and the equity part of an LBO is separated, again.

Then there is the work on ‘buy-and-build’ strategies. In the absence of a sale, the sponsor can ensure its portfolio companies are at least getting acquisitive and building their value through hoovering up their competitors. In these cases, sponsors don’t always need to raise add-on debt. The incumbent lender will often offer up one of its own LPs as a co-investor to enlarge its original ticket. 

As another direct lending fund recently told 9fin, “To go over €150m total debt, we need [an LP co-investment].” The advantage, of course, is that the incumbent lender gets to stay in the deal, with no risk of being taken out by a competitor during a refinancing process. 

All useful ways of doing portfolio work while waiting for something to happen.

Liquidity, liquidity, liquidity

This week’s news that Apollo is lending out $4bn of NAV loans is very interesting, as that’s a sizeable bit of fund financing — and a reflection of the intense demand for liquidity at a fund level for both private equity firms and even the occasional private credit fund.

Private credit providers, like Apollo, like HPS, participating in this space, is becoming increasingly frequent. What will be interesting is the catalytic effect of the big names in this area. Banks are already retrenching from NAV financing. Insurance funds do the investment grade NAV lending. This leaves a lot of space for private capital. 

Signal is targeting €1bn for a direct lending-focused special situations fund. The fund will be able to lend across any part of a company’s capital structure, which is interesting, as if what we hear is correct, private credit funds are increasingly taking advantage of LP mandates to lend across all parts of the capital structure, and are taking equity co-investments alongside the sponsor in order to get deals over the line and to juice their returns. 

Seeing the flight to defensive sectors — not only funeral services but the beloved healthcare sectors — in private credit, the issue of portfolio concentration rears again its ugly head, as recent BDC results from the US show. According to a 9fin analysis, many of the largest BDCs have placed a material number of healthcare loans on non-accrual status, meaning the borrower has not paid its contracted interest payment in over 90-days, or written that debt off as companies enter bankruptcy.

Elsewhere, KKR is taking German space tech firm OHB, private. Value remains in public companies, who have reached attractive under-valuations thanks to the equity market hammering. 

Hayfin has attracted capital commitments in excess of its €6bn target for Hayfin Direct Lending Fund IV. This is the firm’s largest capital raise to date.

And, M&G’s head of direct lending, James Pearce, is leaving the company for pastures new, with Rebecca O’Dwyerleading the direct lending business on an interim basis.

M&G declined to comment.