The second of the providers agreed, saying the “deluge” began almost immediately after the story was published. “I’ve never seen anything like it,” they said.

As reported by 9fin, data providers focused on illuminating the opaque world of private credit have been getting an increased number of requests to verify company valuations over the last year. Investors have expressed concerns at their inability to trust company valuations in a market where dealmaking activity has been slow.

Have your cake and EBIT

A particular area of concern has been companies held by multiple funds at differing valuations, a discrepancy that can be explained away by modelling differences but which rings investor alarm bells. 

“They want to know if they can trust their fund manager,” the second data provider said, “in such an illiquid market they need to know if they’re being told the truth.”

Now the UK FCA is opening a review into private market valuations, the processes that managers use to value their investments is going to come under microscopic scrutiny.

“Historically, the FCA hasn’t looked too closely at private company valuations, but with interest rates rising, and debt becoming more expensive, that looks set to change,” said Nathan Lightman, senior associate at law firm Charles Russell Speechlys.

“Fund managers which hold off-market assets will need to have robust valuation processes in place, to avoid the embarrassment of any FCA interventions where it doesn’t think processes are good enough. The usual practice of valuations on a quarterly basis may no longer be sufficient,” Lightman said.

The shape of the review is yet to be decided, the FT reported, and number and type of asset management firms included in its scope has not yet been determined. 

One person familiar with the matter told the FT that the FCA will examine asset managers' "disciplines and governance" over valuations.

Private to public

An FCA review does not mean that individual managers will necessarily be named and shamed, more that company practices and processes will come under the spotlight.

But some in the industry would prefer a more personal approach, according to the first data manager. “There are people out there who feel they’ve been burned and they have axes to grind,” they said.

These people are the ones who found discrepancies and challenged fund managers on it, the provider said, but didn’t receive a good explanation as to why. 

Due to the illiquid nature of private credit it’s hard to retaliate against what’s seen as bad practice, aside from not working with that fund manager again.

It’s hoped the FCA will do what LPs couldn’t: publicly call out inflated valuations and punish those who deal with them, the providers agreed. A more standardised approach to valuations would be a start, both agreed, with potential punishments for noncompliance.

“It’s been coming for a while,” the second data provider said. “It should be fun.”

Portfolio customisation

The multiple vehicles that now exist within one private credit fund will make some standardisation on valuations even more important. For example, a different valuation sitting within a separately managed account (SMA) to that of the main fund does occur, and would be remarked upon should the same LP have positions in both vehicles.

This customisation of private credit funds is only growing. Last week, 9fin reported on how an increased demand for co-investment, particularly among banks, require a greater number of separately managed accounts (SMAs) within a credit fund. 

Now, this week, a survey from industry association the Alternative Credit Council and law firm Dechert found the same — almost all (95%) of the firms offer managed accounts for single investors, with 69% of all respondents expecting investor demand for co-investment to increase. Blimey.

Liquid strategies in hybrid or evergreen fund structures will complicate the matter further. The ACC found that 51% of respondents have funds that offer investors some right to redemption and 48% expect investor demand for liquidity to increase. Regular redemption, however, requires robust and harmonised valuation processes of the underlying credit — something that the industry presently lacks. 

The ACC research draws on survey data from 40 private credit fund managers representing an estimated $800bn in private credit assets under management, according to the paper.

Dual-track processes abound

9fin reported this week that Goldman Sachs private credit is pulling together a prospective €4bn private debt package to back Blackstone and Permira’s bid to take private Oslo-listed online marketplace specialist Adevinta. 

The bidding sponsors are running a dual-track process between private credit funds and traditional leveraged finance banks in order to get the best debt package in place. This strategy is in good company. IRIS Software is doing the same, and Pharmanovia was previously looking at a dual-track process, although that has gone quiet. 

“It’s a no-brainer. Essentially the sponsor wants to get the deal away, so why not run a dual-track process on deals that could be big enough to go either private credit or syndicated?” said a debt advisory source.

The monumental demand for debt elements like payment-in-kind (PIK) are driving the demand for private credit, as well as the certainty of costs and execution. “With private credit, the costs are known from day one,” said the adviser.

They are referring to the ‘flex’ element of syndication, whereby a ‘flex’ margin is added into the underwriting agreement, should the bank struggle to sell the deal down at the opening pricing. Flexes at the moment vary from 100-125bps, and, along with the OID, are a hidden cost in syndication that can bring the all-in pricing up to levels similar to private credit.

“Banks are jittery, they are writing in flexes,” said the debt advisor. “But this makes private credit all the more attractive.”

However there is a natural cap to flexes. Anything above 200bps in a fluctuating macro-economic environment with high base rates is “madness,” according to the source.

“All this stuff was easier when base rates were 0-100bps. Now, a flex of 200bps kicking in on a relatively highly leveraged position and you’re in trouble with cash costs,” said the source.

If Adevinta’s debt falls into the jaws of private credit, it will be Europe’s largest private credit deal by quite some way. Access Group, at £3.5bn total debt, currently holds that crown. However, Access Group was done in 2022, in markedly different market conditions from 2023 (not least from a base rates perspective). The length of time it took for the private credit market to absorb its £500m add-on only seven months later was a sign of the changed conditions.

Deal pipeline 

Swiss oil and gas testing business Rosen Group has four sponsors interested: Partners Group, Goldman Sachs, Brookfield and TH Lee are all circling the asset, the sources confirmed. As previously reported by 9fin, direct lenders are putting together $1.2bn debt packages to support the buyout. The deal would be leveraged at 4-5x off roughly $250m EBITDA.

European Digital Group, an investment platform, is up for sale by sponsor Montefiore Investment. Lazard is advising on the sell side, and EBITDA is marketed at €50m. 

Excellence Imagerie, a medical imaging company, is up for sale with Rothschild on the sellside, according to two sources familiar with the matter. Excellence Imagerie has €20m EBITDA, the sources said.

“It’s a good business in a great sector, with exposure to a desirable geography,” one of the sources said, “I think whoever gets in on the debt will be getting a steal,” they added. As the sale process progressed the sources said the preferred bidder may have been found but the debt is not yet over the line.

IRIS Software is circled by a handful of private equity firms as it mulls its sale. These include EQT, KKR, Nordic Capital, Thoma Bravo, and Vista Equity Partners. None of these are sponsors necessarily associated with a strong preference for accessing capital markets funding, which leaves the way open to direct lenders.

The carve-out of consumer insights company WGSN from Ascential is back on after a summer lull, according to two sources. Initial deal pricing had placed WGSN at a £45-50m EBITDA valuation with 6x leverage, but talks had supposedly hit a standstill over valuation issues. JP Morgan is advising on the deal.

Harvest, a French wealth manager, is readying for sale at €25m EBITDA via Rothschild Five Arrows, as reported by 9fin.

Sogelink, a tech asset through Raymond James, is marketed at €50m EBITDA, as reported by 9fin.

Eurazeo has put its portfolio company, the Dutch Ophthalmic Research Center (DORC) up for sale through Rothschild at €50m EBITDA, according to 9fin sources.

Nordic Capital-owned Swedish fire and gas safety business Consilium is up for sale, marketed off €50m EBITDA, according to 9fin sources.

Pure Cremation, a no-frills UK cremation chain, may still have up to £80m debt put into the business after sponsor Epiris made the acquisition as an all-equity buyout, as reported by 9fin.

Options Technology rumbles on, marketed off close to €70m EBITDA. As reported by 9fin, private equity sponsors are readying debt packages of around $200m as they compete to bid for the UK IT services provider. The Abry Partners’-owned business has attracted interest from Cinven and Permira.

There will be no Taking the Credit in the next two weeks thanks to a much-awaited October break. See you on the 20th!