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Fin Strathern

For large-cap lenders, the current market feels like rush hour on the London Underground in summer — overcrowded, sweaty, and with not a lot pretty to look at.

Just as you jostle your way onto the train, the last seat gets taken by a barrel-chested oaf in a garish suit and you’re left stood up with sore feet, struggling for balance.

“We are crammed in this space between traditional mid-market assets at one end and the biggest assets that make for obvious syndicated deals at the other,” one private credit manager said. “Everything in-between has become a jumble.”

“Public and private lenders are fighting over the same assets,” they continued. “And given the strength of the syndicated side, three out of every four situations are going to the banks right now.”

This year’s flurry of private credit deals getting refinanced in BSL markets is one embodiment of this wider trend.

But just as rush hour trains return to normal within an hour or two — lenders operating in the €70m-€100m EBITDA range are expecting their claustrophobic market to make a shift soon.

Sources said it’s a positive sign that large-cap deals are highly competitive at the moment, given the dampened M&A pipeline.

“It shows the market has the appetite to take on more deals, which will be coming over the next few years as M&A makes a strong comeback,” one source said.

“It may look like a bit of a scramble at first glance,” another lender said. “But really I’d say it’s a very fluid, congealed market at the moment, which is how things should be.”

Last week’s £845m-equivalent refinancing of Phenna Group, which saw the £250m sterling TLB privately placed among direct lenders, serves as a posterchild for the melding of public and private markets.

“Phenna was as pure of a hybrid deal as you can get,” a source close to the deal said. “Bankers were asking if it was a syndicated or private deal on the sterling tranche and it was hard to say — there was very little to differentiate the private pockets.”

Amid the current competition, many private credit funds are willing to take E+500bps pricing like that of Phenna’s sterling tranche.

“When both markets are indistinguishable from the other, that’s when you can start to say private credit is operating in a truly mature environment. I think we are approaching that point,” the source close added.

For large-cap M&A deals taking the direct lending route, the squeeze is just beginning…

Several sources 9fin spoke to said that large-cap sale processes have become much shorter since the start of the year.

“By the time you hear about a deal, it’s already done,” one head of origination said.

That’s because sponsors, still hesitant to sell their assets given the enduring valuation gap and challenging macro environment, are cautious around launching formal auction processes, sources said.

“A lot of sales this year are being discussed through side chats and informal meetings for months in advance,” a direct lender said. “So when the process does formally launch, everything is already decided.”

And as sale timeframes become shorter, so too they are becoming more exclusive. Owners have started to invite fewer lenders in to look at large-cap processes or often run no lender education at all, sources said.

“With how competitive the market is, sponsors don’t want processes getting out of control,” an advisor said. “They’re putting more effort into ensuring information flow is under control and that the auction runs as a tight process — it’s really not a good look if your sale falls through."

The effect on lenders? For one, time constraints and increased exclusivity make it harder to reverse in on already launched processes and put forward a competing bid.

More broadly, lenders are having to pass on or outright miss opportunities as they are given less time to assess deals before deciding on financing. And for those deals that do get financed following a rushed process, the potential for overlooking issues and mispricing risk may well be greater.

With so many (apart from the most established private credit players) afflicted by the challenges of fundraising, it felt apt that the two new fund announcements that peaked our interest this week came from heavy hitters Arcmontand Macquarie.

For every new player backtracking on its foray into direct lending, it seems there is always an established firm ready to consolidate and expand.

On Tuesday, Arcmont announced it had received regulatory approval for the UK’s first long-term asset fund (LTAF) focused on private debt.

Launched by the Financial Conduct Authority in 2021, LTAFs are fund vehicles designed to give certain retail investors, like defined contribution pensions schemes, access to illiquid private market assets.

Arcmont’s LTAF will be open-ended, providing an element of liquidity to investors and exposure to European direct lending opportunities through a Luxembourg fund.

“This new structure… presents a solution for UK defined contribution pension scheme investors, who were previously restricted in their ability to access direct lending strategies,” said Arcmont’s CEO Anthony Fobel.

The fund marks the latest move towards the retailisation of private credit, as asset managers look for alternative avenues to tap additional sources of capital.

Elsewhere, Macquarie is preparing to launch its first European fund focused solely on direct lending, as 9fin dove into this week.

Although no stranger to private credit — Macquarie has been an active lender in the space through its Principal Finance strategy for many years — the move signifies the appetite among established players to hone in on direct lending and expand their strategies.

“The timing feels right on this from Macquarie,” one market source said. “The Principal Finance team has proven capable and well-positioned on deals over the past few years, it makes sense to keep building on that with a dedicated fund.”

In recent months, 9fin has reported on Macquarie’s involvement in the refinancing of Dutch insurer Yellow Hive, a dividend recap for French car classifieds platform La Centrale, and the refinancing of German remote office business eGroup after a sale process fell through.

9fin reported on an array of lower-mid-market processes across Europe this week, including deals in the UK, Germany, and Norway. In the large-cap space, our ongoing coverage of one of the hottest private credit deals of the year, Aareon Group, spotlighted the lenders working on a €1bn staple financing for the German software sale.

For the full run down on all the in-market deals in our pipeline, please email subscriptions@9fin.com.

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Taking the Credit — Crammed in at rush hour, large-cap lenders feel the squeeze

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