It would appear the ill-fated lender might have been better off keeping the dry powder for deals in 2023, as now, private credit funds can expect at least 100-150bps uplift on margins, with tighter documentation including covenants plural and keen oversight on EBITDA definitions.

However, its this very transition to generous pricing and tighter documents that is holding up primary deal flow. The major deals of 2023 are still floating about - VetPartners, Ambassador Theatre Group, ParkDean, and Access Group, as funds leverage their new, more powerful position, and sponsors try to catch up.

“It’s not just covenants,” said a second direct lender of the deals in the market. “The whole of the documents need rewriting.” Ouch. It’s a nicer time to be a new lender than an existing one. 

While the gap between lender and sponsor remains on valuations, terms and pricing, opportunities still remain in take privates. Ares last year completed five take-privates: payments solutions provider TAS Group, media company Ocean Outdoor Ltd, vehicle glass replacement provider Cary Group Holding, care provider Caretech Holdings and media outlet Euromoney Institutional Investor plc. 

The benefit is clear. The public market sell-off is a corner of the market in which sponsors have found value. Once the target company has been identified, then private credit remains one of the most efficient ways in which to do the take-private, privately.

“There’s a huge premium on confidentiality during a take-private, as if the information leaks out the share price pops and there’s volatility on stock prices,” explained the second source.

“As a sponsor looking at public-to-private, you don’t have the luxury of talking to many providers.”

Conditions in the public markets remain good value for sponsors looking to carry out a take private. However they require a depth of capital and a speed of execution that is only enjoyed by a fistful of European private credit providers. 

Secondary entrants

News this week that investment banks are increasingly participating in the private debt secondary market won’t come as much of a surprise to those structuring the the special managed accounts (SMAs) that provide both banks and credit fund GPs with liquidity solutions. 

For a bank, it makes better pricing sense to roll the exposure in their main lending business into an SMA from which they can draw fees, rather than to keep it on their balance sheet. 

“Banks have been acting like private debt GPs generally. They would rather earn the fees [from an SMA] than keep their lending business on balance sheet,” said a secondary markets solutions provider.

According to secondary market adviser Campbell Lutyens, pricing for GP-led secondary transactions in 2022 was stronger than LP-led, with nearly 80% of the transactions reporting a discount to NAV of 10% or less, versus 93% in 2021. 

The Campbell Lutyens report explained that stronger GP-led pricing is a function of more customised portfolios or high-quality trophy assets trading hands where greater conviction can be established in the underlying assets.

And, as with a take-private, the process is more secretive. In GP-led secondaries, the process can be entirely bilateral; with a GP direct, an LP direct, or with a bank. In contrast, LP-led secondaries, where a piece of a fund is sold to another LP, can be highly intermediated, using a broker and forming a mosaic or jigsaw of investors who will pay the most for the largest slice of the funds.

“A bank might be overweight in some credits, and as they are in general moving towards a fee-driven rather than a balance-sheet driven model, rather than underwrite, they will partner with a secondary markets solutions provider to get it off their balance sheet and instead create an SMA,” said the secondary markets source. 

Elsewhere in the market, private debt fund Kartesia has provided a unitranche financing package to support Avedon Capital Partners in the acquisition of workplace services providers Detron and Zetacom.