According to a 9fin lawyer source, 70% of private credit debt structured in the past 18 months contains portability provisions. These are size agnostic — from a billion euros down to €50m — but their increasing presence is a symptom of sponsor effort to prep a business for sale. 

“Right now, I’d say 70% of facilities done in the past 18 months had a portability trigger,” said a lawyer practicing in private credit. 

“Exits are delayed, so sponsors are effectively refinancing existing facilities to bridge that exit. It’s effectively a staple. And what’s more, private credit funds are open to it.”

However, private credit funds are not open to portability on just any terms. And, as portability becomes an increasing feature, so they vary in the levels of aggressiveness. 

As 9fin wrote, the proposed whitelist in the Civica deal ahead of the Partners’ Group sale has put some prospective lenders off due to the inclusion of trade names as well as sponsors. 

And the number of parties on a whitelist can also raise eyebrows. According to the lawyer source, a whitelist could contain 10-15 names, but when it’s a sub-€10m EBITDA business, this has in one case stretched to 60 names. 

The fragmented nature of the private equity market for sub-€10m EBITDA businesses makes this somewhat necessary. But it does raise the question of how discerning a 60-plus name whitelist really can be.

Other elements of a portability provision can be equally palatable or unpalatable, depending on the view. Where the minimum equity cushion is set for any future sponsor, for example. Around 40% is considered comfortable, according to the lawyer source, but this can go down. 

The minimum beneficial hold requirement is another. This governs the minimum amount an incoming sponsor must hold in the underlying company, as it is preferable for the lender that any new business owner has control. 

The consent fee for portability (ranging from 25-150bps) is yet another area of negotiation, as is the time limit. Portability provisions tend to expire after 12-24 months, otherwise lenders are opening themselves up to the risk of changing market conditions. The longer the expiration date, the more aggressive the portability provision. 

But is it really needed?

The irony of all this effort is that portability provisions are very rarely enacted. 

“Not a single one has been exercised,” confessed the lawyer.

As Macquarie’s Patrick Ottersbach said in a recent 9fin 9Questions: “In reality, portability always exists as an option [even without the provision]. If all parties want it, they can choose to port or at least amend the existing financing structure.”

Two deals in the market are illustrative of portability without necessarily the portability provision: PR0PH3CY (NeverHack) and Azets.

Sponsor Carlyle announced this week that it had entered into exclusive negotiations to buy PR0PH3CY. Incumbent investors including IK Partners also reinvesting, according to a source close to the deal. 

Direct lending fund Eurazeo, which has an existing €50m senior secured piece of debt in PR0PH3CY, has also chosen to stay in the deal. However, in order to do this, Eurazeo has waived the change of control clause that would normally automatically trigger a repayment. This has effectively allowed Eurazeo to also reset the terms of the debt — something it would have been unable to do under a portability provision. 

“[They] waived the CoC,” a second source close to the deal told 9fin, “but pretty much reset everything so it’s basically a new financing.”

If it quacks like a duck…

Walks like portability, talks like portability, but not exactly portability. Sponsor PAI’s investment in financial services business Azets is another to retain the existing debt package. Incumbent sponsor HG Capital refinanced Azets’ debt stack in October 2022, bringing lenders CDPQ, Hayfin, MV Credit and Permira into the deal. This comprised a total debt package of €725m leveraged at 4.5x through the senior debt and 1.5x through the PIK, according to 9fin sources. 

Although PAI Capital has now taken a co-controlling stake in the business, the refinanced debt from October remains.

Was this portability? Or was PAI’s co-controlling stake deliberately small enough not to trigger the CoC clause? It’s not clear, but as many in the market have pointed out, a deal does not need a portability provision in order to be portable.

But what true portability does do is at least give incoming sponsors the portability option, without having to add negotiations with new financing partners to their already long transaction ‘to-do’ list. 

This can be a sweetener at a time when deals are falling through or being put on hold. Only this week, the sale of Media School in France by sponsor Florac was put on hold due to valuation issues, according to two sources familiar with the deal. The transaction had already struggled over the definition of its EBITDA, which was in the €20-25m range. 

Partners Group is shoving portability into its refinancing of software business Civica’s debt ahead of a planned auction of the group, the theory being that giving the incoming sponsor the option of taking the existing debt removes the execution risk of sale.

Carlyle, Eurazeo, PAI, HG Capital, and CDPQ all declined to comment, while Hayfin, MV Credit, Permira, Florac and Media School did not respond to requests for comment.

Private debt is complex, warns Bank of England

Most weeks it seems as though someone is cautioning against private debt, but this week it was a senior figure at the Bank of England. According to press reports, Nathanaël Benjamin, who is executive director for authorisations, regulatory technology, and international supervision, warned that with the rapid growth in private debt had come a significant increase in complexity.

"Overall, we see a risk that firms underestimate their aggregate direct and indirect exposures to underlying counterparties and connected collateral – not a good place to be should credit conditions begin to deteriorate, or should those counterparties be feeling the squeeze of the tighter monetary environment through tighter access to liquidity.”

Benjamin is referring in part to the growing number of sub-strategies under the private debt umbrella. This chart, from Preqin data and reproduced by Stepstone in its excellent secondaries report, is a good illustration of the growing areas into which private debt protrudes.

But it doesn’t seem to have stemmed appetite for diverse strategies. Blackrock only recently increased its exposure to venture debt with the acquisition of Kreos Capital. Since then hedge fund Man Group has bought a controlling stake in US middle market private credit manager Varagon. And no one forgets KKR’s big bet on ABL. 

Retail investors remain a hot topic. This week, Golub Capital announced that it had made its middle market direct lending franchise accessible to a broader client base across the private wealth market, joining others such as Blackstone, Apollo, Arcmont and Antares in entering the retail space. 

Following the APLMA private credit conference in Asia last week, there has been much noise about Asian private credit — particularly with asset manager Muzinich & Co having closed its first Asia private credit fund.

Meanwhile, Permira Credit has announced it has raised €4.2bn for its direct lending strategy, completing fundraising for its fifth direct lending fund, Permira Credit Solutions Fund V. 

But it is indeed complex. Bank of England is not wrong (on this). One such illustration is the ways in which private equity sponsors plan to strip valuable collateral from existing debt. As 9fin writes in its article Some private credit docs could circumvent J. Crew blockers — private equity sponsors could use securitisation baskets in private credit documents to securitise assets like intellectual property that are meant to be there as collateral for lenders. Ouch.

Whether LPs start to take a stricter look at this small print is unclear. However, if opening to retail investors, private credit should probably move away from the cosy story of a ‘Bank of Dave’ role in the economy to a complex asset class deserving of robust underwriting. 

There will be no Taking the Credit next week as I will be deep in the Scottish Highlands. See you in a fortnight!