However, those without a place at the table are left in the cold. “We were very interested in All4Labels,” said a private credit fund. “But with Goldman Sachs already there we couldn’t find an ‘in’.”

Goldman Sachs is in good company. Incumbent lender Blackstone Credit was pushing strongly to remain in the debt backing the sale of Swedish fire safety business Consilium, despite overtures from Ares and Hayfin. The business has since sold to Antin Infrastructure Partners. 

On the subject of Hayfin, the alternative asset manager has put together a €350m staple financing package in order to remain the incumbent lender in French digitalisation services provider, Sogelink. 

Meanwhile, private credit fund Barings held on as incumbent debt provider to legal listings business Chambers during its sale to Abry Partners. The deal was marketed off an EBITDA of £30m.

For the bidders, the advantage is clear. An incumbent lender offering a staple on reasonable terms removes the execution risk of finding and assembling new financing from a deal. The rise of portability clauses in new deals over the summer illustrated this. After all, as one source said, “it’s like buying a house with the mortgage already sorted and agreed.”

And should a sales process fail, such as BC Partners’ intended sale of asset VetPartners with an Ares staple, then that incumbent lender can always provide refinancing instead.

Consolidation and co-investment

The power of the incumbent lender is a theme that will only grow. Private credit globally is on a consolidation drive, as the highly fragmented market is bought by large players with deep reserves. Exacerbating this is a small pool of giant lenders attracting most of the investor attention, leaving low-to-mid-market firms to divvy up what scraps remain.

In Europe, for example, there are 11-15 players with pockets deep enough to speak for €1bn tickets. The US has more. In the VetPartners deal, Ares, the incumbent lender, was able to offer a staple of £1.6bn in senior debt, an amount with which not many other private credit funds can compete.

Then, there is the role of co-investment. The participation of an existing LP in the fund in the staple or the refinancing can increase the size of that financing without the need of a separate party. Using the example of All4Labels, Goldman Sachs is lining up not just its own capital but the capital of its LPs as co-investors in order to finance the €1bn plus debt package.

This allows the incumbent to support the growth of the company far past its original debt package investment, without the need to bring in a lender club.

“Let’s say we can speak for €150m. Well, a co-investor can bring that to €200m,” explained a middle market private credit fund. The co-investor is fronted by the fund in question, which often conceals that co-investment from the wider market. 

Looking further back, French cyber security services business PR0PH3CY (rebranded NeverHack), retained its existing lender Eurazeo following Carlyle’s investment, and financial services business Azets likewise retained lenders CDPQ, Hayfin, MV Credit and Permira following the entry of sponsor PAI Partners.

Dry powder 

For private credit funds, maintaining exposure to a good credit with whom they already have a strong sponsor relationship allows them to put capital to work at a time when much of that capital is available. 

According to Preqin figures from December 2022, global unallocated capital in private credit was at $411bn, or 28% of total assets under management.

Yet there are more funds raised all the time, albeit concentrating around strong names with a long track record. Market uncertainty has benefited well-established players like Eurazeo, which this week announced the €2.3bn close of its sixth private credit fund. 

In Europe, Eurazeo was the third most active lender on the continent, providing debt for nine deals, as per 9fin’s Private Credit Q3 Review.

Private credit and SRT

But there are multiple homes for private credit dry powder. As Excess Spread has pointed out, private credit has for some time been the risk-bearing capital of choice for the first-loss tranches of big banks’ significant risk transfer trades. 

There’s much more on this here and here, but essentially, banks continue to need capital relief, and the sheer size of these SRTs require minimum tickets which only private credit can now accommodate. 

JP Morgan’s current SRT securitisation deals on a portfolio of around $25bn, requiring minimum tickets of $250m a time, excludes nearly all the funds which have historically played in risk transfer transactions — except private credit. 

To paraphrase Excess Spread, private credit is eating the world, and several market participants — Blackstone, Ares, and KKR view these as strong opportunities. Although the deal sizes are huge, the participation of co-investors will continue to turbocharge the investments that private credit can make. 

European deal pipeline

There are 44 deals across the UK, Europe and the Nordics in 9fin’s pipeline, as well as a number of freshly closed situations. However this number will of course dwindle as we reach the end of the year, deals close, and new origination is pushed into 2024. Click here for the full named and detailed list of details, or subscribe to 9fin Private Credit by emailing subscriptions@9fin.com.